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




                   THE SECURITIES INVESTOR PROTECTION
                 CORPORATION: PAST, PRESENT, AND FUTURE

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 7, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-105




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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

           James H. Clinger, Staff Director and Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois
















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 7, 2012................................................     1
Appendix:
    March 7, 2012................................................    57

                               WITNESSES
                        Wednesday, March 7, 2012

Borg, Joseph P., Director, Alabama Securities Commission.........    39
Bowen, Sharon Y., Acting Chair, Securities Investor Protection 
  Corporation (SIPC).............................................    12
Caruso, Steven B., Partner, Maddox Hargett & Caruso, P.C.........    42
Hammerman, Ira, Senior Managing Director and General Counsel, 
  Securities Industry and Financial Markets Association (SIFMA)..    43
Harbeck, Stephen P., President and Chief Executive Officer, the 
  Securities Investor Protection Corporation (SIPC)..............    10
Stein, Ron, CFP, President, The Network for Investor Action and 
  Protection (NIAP)..............................................    45
Vitter, Hon. David, a United States Senator from the State of 
  Louisiana......................................................     7

                                APPENDIX

Prepared statements:
    Borg, Joseph P...............................................    58
    Bowen, Sharon Y..............................................    87
    Caruso, Steven B.............................................   160
    Hammerman, Ira...............................................   165
    Harbeck, Stephen P...........................................   172
    Stein, Ron...................................................   211
    Vitter, Hon. David...........................................   225

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of the Bond Dealers of America (BDA).......   229
    Written statement of the Financial Services Institute........   232
Perlmutter, Hon. Ed:
    Written statement of Peter J. Leveton, Co-Chairman, Agile 
      Funds Investor Committee...................................   237

 
                   THE SECURITIES INVESTOR PROTECTION
                 CORPORATION: PAST, PRESENT, AND FUTURE

                              ----------                              


                        Wednesday, March 7, 2012

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:37 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, King, Royce, 
Pearce, Fitzpatrick, Hayworth, Hurt, Grimm, Stivers, Dold; 
Waters, Sherman, Maloney, Perlmutter, Donnelly, Peters, and 
Green.
    Also present: Representative Cassidy.
    Chairman Garrett. Good morning. The Subcommittee on Capital 
Markets and Government Sponsored Enterprises is called to 
order. Today's hearing is entitled, ``The Securities Investor 
Protection Corporation: Past, Present, and Future.'' This 
hearing will now come to order, and I recognize myself for 4 
minutes to give an opening statement.
    Today's hearing is a broad oversight hearing on the 
Securities Investor Protection Corporation (SIPC.) It is not 
meant entirely to be focused solely on the particular aspects 
of SIPC's work. But to me, the failure of SIPC in relation to 
the Madoff liquidation is so fundamental relative to the 
protections that SIPC is supposed to provide to investors, and 
so antithetical to the goals that SIPC and Congress set out to 
achieve at the very beginning, that I would like to focus much 
of my time, and my thoughts, and my energy, and my comments on 
the circumstances surrounding that particular case.
    I also think that it is worthwhile to hear today about 
SIPC's work in regard to the Lehman bankruptcy, and also to 
examine the long-awaited and recently-released report of SIPC's 
Modernization Task Force, as well. In going through that Task 
Force and looking at it, unfortunately, is that it is somewhat 
of a missed opportunity, if you will, to seriously study some 
of the shortcomings of SIPC exposed by the recent failures of 
the broker-dealers.
    So let us return now to the failures of the Madoff firm. 
Once examined, the facts of that case--as we are all probably 
too familiar--the Madoff firm was regulated by both FINRA and 
the SEC. And it repeatedly received government stamps of 
approval that it was operating, basically, legally.
    The firm proudly displayed the SIPC logo which, again, 
implies government backing, since SIPC is backed by the U.S. 
Treasury. Madoff investors paid taxes to the IRS, the U.S. 
Government, for years. Again, another government agency saying 
that its investments and profits were, well, real.
    Since around the same time that SIPC was enacted, investors 
no longer held stock certificates, so the only proof of 
ownership they have, or had, was a statement that they received 
from a government-regulated broker-dealer. So what does this 
mean? The Federal Government both provided a stamp of approval 
and relied upon that stamp of approval, and yet innocent 
private citizens now, as investors, are being held to a higher 
standard than them.
    So instead of being provided protection by SIPC, as 
Congress did intend in order to increase confidence in 
investment and our markets, innocent investors, in this case, 
are being sued by the very same trustee chosen by SIPC. Now, am 
I the only one--when you go down that whole litany of facts 
here--to say that something is simply not right here.
    An additional irony is that if the trustee is successful in 
suing individual investors, who will the money go to? It will 
largely go to pay off institutional investors. Now, this is the 
same class of investors that the trustee has repeatedly tried 
to sue because he believes that they should have known better. 
But they will be paid.
    It is because of my concerns over these issues that I have 
introduced H.R. 757, the Equitable Treatment of Investors Act. 
This legislation would reaffirm and clarify key protections for 
ordinary investors that were put in place when Congress passed, 
and amended, the SIPC. In particular, the bill aims to shield 
innocent individual investors who have already been defrauded 
and financially devastated by the Madoff situation from further 
clawbacks by the SIPC trustee.
    In addition, the bill clarifies that for purposes of SIPC 
protection, customers of registered brokers are legally 
entitled to rely on their broker's statements as evidence of 
what the broker owes them. Indeed, in a world where customers 
no longer hold the physical stock certificates, how can it be 
done any other way?
    Finally, H.R. 757 would end an ongoing conflict of interest 
by having the SEC rather than SIPC select trustees for the SIPC 
liquidation. Now, several of my colleagues have already joined 
me in co-sponsoring this legislation, and I encourage my other 
colleagues to look at it and consider it, as well.
    I look forward to today's testimony from our witnesses on 
all the panels that we have, and a hearty discussion on SIPC 
activities and roles in the past, in the present, and in the 
future.
    With that, I yield back, and I yield to the gentlelady from 
New York for 3 minutes.
    Mrs. Maloney. Okay. thank you. Thank you, Mr. Chairman. I 
thank you for your deep concern on this issue, which is a major 
concern for many of us on this committee. And I welcome Senator 
Vitter. You honor us with your presence, and we look forward to 
your testimony.
    As a representative of New York City, the financial 
industry is a very important part of our economy. The massive 
fraud that was put forth by Bernard Madoff is very personal to 
me, and it hurt many of my constituents, and certainly violated 
the trust of the public for the industry.
    So it was a tremendous blow to many people on an individual 
basis, and to the industry at large. For my constituents, many 
of whom are victims of this fraud--from union workers who lost 
their pensions, to charities that lost their operating funds, 
to investors large and small who lost their life savings, 
literally lost their homes, lost absolutely everything--the 
experience has been absolutely devastating and they are 
devastated.
    Even worse, the confidence of investors around the world, 
and the system of regulation and law enforcement of our 
financial markets, was visibility shaken by this scandal. Just 
yesterday, Mr. Stanford, another perpetrator of a Ponzi scheme 
who cheated his investors out of over $7 billion, was convicted 
on 13 out of 14 counts that he faced.
    This should be some comfort for the people he defrauded, 
but we want to make sure that if this ever happens again, there 
are tools in place so that victims can be made whole and SIPC 
can do its job. I believe that markets run as much on 
confidence as they do on capital, and this is a serious blow to 
investors' confidence at a critical time.
    We still see that many people are holding their money back 
from investing and going forward with our financial system. The 
reason we are here today is to look at the Securities Investor 
Protection Corporation, SIPC, and to shed light on the reform 
proposals that are out there, including several pieces of 
legislation that are pending before the House.
    I know this committee is looking closely at the SIPC 
Modernization Task Force report, which was released at the end 
of last month, so this hearing is very timely. I know that my 
colleague, Mr. Ackerman, and the chairman, have put forward 
thoughtful bills. I am interested in seeing how their bills 
coincide, or reflect, go further or not as far as the SIPC 
Modernization Task Force report's recommendations.
    And I look forward to working with them on these bills. I 
hope we can explore both of these legislative proposals, and 
hear from the witnesses what they believe is the better 
approach, or the right approach we should be taking. I look 
forward to the hearing. It is one that is very important to our 
country.
    And I thank the chairman for calling this important 
hearing, and for his work on his legislation. I also compliment 
Mr. Ackerman for his hard work.
    I yield back the balance of my time.
    Chairman Garrett. Okay. The gentlelady yields back.
    The gentleman from New York is recognized now for 3 
minutes.
    Mr. King. Thank you, Mr. Chairman. Thank you for calling 
today's hearing. It is very timely for the representatives from 
SIPC to come before the subcommittee. After several years, they 
finally produced the recommendations of their Modernization 
Task Force.
    And this hearing and report come against the backdrop of 
the Madoff liquidation, which you have referenced and which Ms. 
Maloney has referenced. This was unearthed 3 years ago, and 
during the last 3 years that process, run by SIPC, has gone 
profoundly amok.
    This is tragic, this is wrong. From my perspective, there 
are at least four takeaways from this liquidation. One, the 
trustee, Irving Picard, is out of control. He interprets SIPC 
as he desires, not as intended by the courts, and on several 
occasions has been slapped down by the courts. He intimidates 
innocent victims, brings spurious clawback suits against them, 
maligning their reputations in the process, and leaking 
furiously to the media.
    Even Chairwoman Mary Shapiro expressed surprise at the 
initiation of the baseless lawsuits. Just the other day, in an 
order dated March 5th, in the southern district of New York, 
Judge Rakoff, in the case Irving H. Picard v Saul B. Katz et 
al. made a finding: ``The court remains skeptical that the 
trustee can ultimately rebut the defendant's showing of good 
faith, let alone impute bad faith to the defendants.''
    ``More generally, the court is concerned that much of the 
evidence that the party's profit on summary judgment did not 
comport with the Federal rules of evidence. Conclusions are no 
substitute for facts, and too much of what the parties 
characterize as bombshells proved to be nothing but bombast.'' 
And that is what that lawsuit has been from beginning to end--
bombast.
    Two, the victims are being treated unfairly. Very few 
victims have received the statutory-mandated SIPC advances. The 
trustee has hatched an accounting mechanism that disregards 
real-world customer expectations and broker-dealer protocol, it 
is lawyer-intensive, and it has run up the fees of $300 million 
paid to Mr. McCarter--$300 million. He has an open piggybank 
here for himself. It is not an exaggeration to say the victims 
have been victimized twice: once by Bernie Madoff; and now by 
Irving Picard.
    Three, the trustee is not being properly supervised. Where 
were the regulatory bodies tasked with oversight over the 
trustee, SIPC directly, and the SEC indirectly? Moreover, where 
is the statutory-mandated report on the liquidation required of 
the trustee? The trustee in the Lehman liquidation has 
completed and filed such a report. The broker-dealer failure is 
arguably much more complex and complicated than the Madoff 
debacle.
    And four, this miscarriage of justice endured by the Madoff 
victims could happen to any investor whose broker deal fails 
for any reason. We need to restore some reason and some 
rationality to the unwinding of failed brokerage firms, and 
that is why I am proud to sponsor, with Chairman Garrett, H.R. 
757, a proposal that enjoys bipartisan support.
    Mr. Chairman, thank you for you leadership on H.R. 757, and 
thank you for holding this hearing. I look forward to hearing 
from the witnesses. I yield back.
    Chairman Garrett. And again, I thank the gentleman from New 
York. Thank you for your work on this legislation, as well, and 
for your leadership on this issue.
    Mr. Green is recognized for 2 minutes.
    Mr. Green. Thank you, Mr. Chairman. I would like to thank 
my colleague and friend from Louisiana, my home State. While I 
represent Texas, I was born in Louisiana. It is an honor to 
have you with us today.
    Mr. Chairman, I, too, am concerned about investor 
confidence. I think it is exceedingly important that investors 
understand that we desire to impose proper protection for their 
investments. As I weigh this issue of whether we are going to 
base our payments on account statements or actual net cash 
investments, my concern is the actual statements.
    Because as you know, in the Madoff case his statements were 
misrepresentations and they were actually fraudulent in and of 
themselves. So that causes a degree of concern. I am eager to 
look at the legislation and make some decisions. My thoughts 
are rather ambivalent right now.
    I do want the investors to be protected, and I stand for 
investor protection. I would like to peruse the legislation to 
ascertain how we manage these statements that are fraudulent, 
that themselves are misrepresentations. And we are talking 
about tax dollars, to a limited extent.
    So for this reason, I thank you, and I look forward to 
hearing more so that I can come to a final conclusion.
    Chairman Garrett. And thank you. The gentleman yields back.
    Mr. Dold, for 2 minutes.
    Mr. Dold. Thank you, Mr. Chairman. I certainly appreciate 
you holding this hearing, and for your leadership. And I want 
to thank Senator Vitter for being here, as well, and the other 
witnesses.
    We all have tremendous sympathy for all of the direct and 
indirect Madoff victims, and all other Ponzi scheme victims, as 
well. Which is why we are all here, to see how we can improve 
available protections in a balanced way, without creating 
unsustainable, unfair, and otherwise negative, unintended 
consequences.
    The fundamental reality of the Madoff Ponzi scheme, and 
every other Ponzi scheme, is that money is stolen from many 
innocent people and there isn't enough money to make everyone 
whole. That is a difficult and complicated situation, and there 
aren't any perfect answers or perfect solutions.
    People suffer in those circumstances, and we need to find 
the most balanced way to minimize the losses and the suffering 
among a large group of innocent victims. But all innocent 
victims aren't in the same position. Many innocent victims have 
great conflicts of interest with many other innocent victims.
    Some victims ended up getting more money than they put in, 
in some cases, much more money than they put in. Their profits 
were, I would argue, all fake, were fraudulent, stolen by the 
Ponzi schemer from other innocent victims. Those other innocent 
victims received absolutely nothing, and instead lost 
everything. And their stolen money has gone to pay for those 
fraudulent profits to others.
    What do we do in that situation? There is no perfect or 
even good answer. But historically, we recover the fake profits 
from the innocent victims who received them to partially repay 
the actual losses of other innocent victims. In that way, 
nobody gets to profit from the Ponzi scheme.
    There might be a better way or a more fair way, or a less 
unfair way to handle this difficult situation, and I hope that 
we hear one today. And if no investor should profit from a 
Ponzi scheme, the Federal Government should also never profit 
from the Ponzi scheme. For decades, innocent people paid very 
real taxes on totally fake profits.
    When the fraud is exposed, the IRS says that the innocent 
victims can only get refunds for the taxes paid during the last 
5 years. So ironically, the Federal Government benefits more 
and more from a long-term Ponzi scheme the longer it continues. 
Why shouldn't the innocent investors be able to recover all the 
taxes that were wrongly paid on totally fake or fraudulent 
profits?
    I have a number of other questions, and I see my time has 
expired. But I do hope we have an opportunity to ask them 
during the question-and-answer period. I certainly want to 
thank those who are coming here today to testify.
    And again, Mr. Chairman, I thank you for your work.
    Chairman Garrett. Thank you. Thank you for your comments.
    The gentlelady from California for the remaining time on 
her side, I believe?
    Ms. Waters. Thank you very much, Mr. Chairman, and thank 
you for holding this hearing on the Securities Investor 
Protection Corporation.
    The past few years have been very challenging for SIPC. 
During the height of the financial crisis, the Corporation was 
forced to liquidate Lehman Brothers, one of the world's largest 
brokerage firms. Shortly thereafter, the Madoff Ponzi scheme 
was uncovered. In the years since Madoff, we have also seen the 
case of the Stanford Group Company and the failure of MF 
Global.
    Following the liquidation of Lehman Brothers and the 
discovery of the Madoff Ponzi scheme in 2008, SIPC's board of 
directors created the SIPC Modernization Task Force to review 
whether any changes to the law or to SIPC's operations were 
needed. Today, we are considering the report published by this 
Task Force.
    Their recommendations include both items that require an 
Act of Congress, and items that can be pursued 
administratively. I am interested to hear from the Corporation 
on the rationale behind these recommendations, as well as any 
areas where certain Task Force members may have alternatives to 
what was presented in the consensus report.
    It is also important to know how we can increase investor 
understanding of SIPC, and make certain that investors realize 
that it does not offer the same protection as FDIC insurance. I 
am also interested in exploring how we can ensure the most 
equitable outcomes for investors who have put their savings 
into Madoff, Stanford, and MF Global.
    I understand that Chairman Garrett and Representative 
Ackerman have legislation that would attempt to provide 
additional assistance to certain victims of the Madoff fraud. I 
am very curious to hear more about these bills, while also 
being mindful that Congress should be very careful in this area 
since any changes to how customer claims are calculated will 
inevitably make certain investors winners, and others losers.
    Finally, I am very curious to hear more about SIPC's 
rationale for not paying out claims under the Stanford Group 
company fraud, a decision that the SEC has contested. The 
timing of this hearing is all the more apt in light of Allen 
Stanford's conviction yesterday on 13 counts related to his $7 
billion Ponzi scheme.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman Garrett. I thank the gentlelady. And that is an 
interesting point, the last one you raised there.
    And we have one other member, Dr. Cassidy, who, without 
objection, would like to sit on the panel later on today, once 
we get into the panels. Without objection, it is so ordered.
    So we will now go to our first panel, and we welcome a 
gentleman from the other side of the Capitol, a former House 
Member, Senator Vitter. I know you serve on the Senate Banking 
Committee, and I know also that coming from where you do down 
south, a number of your constituents were more than adversely 
affected by the--some maybe by the Madoff case, but more by the 
Stanford case, and that you have been a leader in trying to 
bring an equitable solution to that situation.
    So we thank you to coming and joining us, and commenting. 
Senator?

   STATEMENT OF THE HONORABLE DAVID VITTER, A UNITED STATES 
              SENATOR FROM THE STATE OF LOUISIANA

    Senator Vitter. Thank you very much, Chairman Garrett, 
Ranking Member Waters, and all of you, for the invitation. I 
really appreciate it. And even more importantly, thank you for 
your important work and partnership on all sorts of issues--
this, as well as a lot of challenges that have confronted 
Louisiana--Hurricanes Katrina and Rita, and the BP oil 
disaster.
    All of you have been wonderful and generous in terms of our 
working partnership. Thank you for that. And it is great to be 
back on the House side. I remain a House Member in spirit. I 
brought a healthy House skepticism to the Senate. In fact, I 
still don't drink from the water fountains over there, and that 
is not going to change any time soon.
    So it is great to be here. I am here, of course, because 
this is a very important issue, and I have been particularly 
involved in the case you mentioned, the Stanford case. I will 
submit my full comments for the record, and I will summarize 
here. And because of that focus, of course, my comments are 
going to be very informed by the Stanford case in particular; 
although I certainly acknowledge the importance of many other 
cases and share all of your concerns, including, in particular, 
about the Madoff case.
    I am very involved in the Stanford case because, 
unfortunately, there are thousands of victims nationwide and 
many of them--many retired oil and gas workers and executives--
are in Louisiana. So I am talking personally to dozens and 
dozens of them. Like in the Madoff situation, many lost their 
entire life savings. Many have literally had to sell their 
homes, go back to work well after normal retirement, and things 
like that.
    There are real victims who have been taken advantage of. In 
the Stanford case, as you know, SIPC has denied coverage 
completely. And that is the fundamental problem. SIPC has 
basically taken the position that these were valid CDs that 
were lowered in value, lost value, and we don't cover market 
losses.
    I think that position is just flat-out wrong. And through 
the Stanford experience, I have come to the conclusion that 
there is a need for major SIPC reform. It isn't to change their 
coverage, it isn't to change the parameters of the statute. I 
am not here to argue that should be broadened.
    Again, I think there is clearly coverage in the Stanford 
case under the present statute, and I don't propose that SIPC 
should cover market losses or every evil or bad situation under 
the sun. Rather, I think reform is needed in a different way 
and, in some ways, a much more fundamental way.
    I have reached the conclusion that SIPC, if it were a true 
regulator, would--in the parlance that is used--be a situation 
of complete regulatory capture. I do not think SIPC is focused 
enough on following the law and executing the law. I think it 
is far too focused on serving the industry and its member 
companies, and looking after their interests.
    And my experience in the Stanford in particular has led me 
to that unfortunate conclusion. First of all, let me talk 
briefly about why there is coverage. As was mentioned, Allen 
Stanford was found guilty just yesterday of 13 criminal counts. 
He was found guilty of basically fraud, stealing customer 
funds.
    Instead of purchasing Stanford International Bank CDs, the 
Stanford Group company, which was a SIPC member, acquired 
control of its customer funds and the funds were stolen by 
Allen Stanford. The SEC and the courts have taken a position in 
litigation that the Stanford companies operated a Ponzi scheme. 
And, ``A Ponzi scheme is, as a matter of law, insolvent from 
its inception.''
    So it is not a matter of real CDs losing value. It is a 
matter of a Ponzi scheme, a fraud, and Allen Stanford stealing 
those funds. There are several other precedents in law, and 
other cases, that back up this point of coverage. They are in 
my written testimony, so I won't go into it exhaustively.
    But my first point is that there is coverage. Now, people 
can disagree about legal points, but what I have really been 
crestfallen about isn't simply that SIPC has disagreed, but the 
way they have acted again has led me to conclude that they are 
not primarily focused in the right spirit on executing the law 
and protecting people properly covered under the law. But they 
are really focused on protecting their fund and their member 
companies.
    Let me give you some examples. The very first meeting I 
ever had with SIPC, the chairman was there, the top staff were 
there. The first concern mentioned about the Stanford case was 
the amount of money it would drain from the fund and the 
reaction of member companies to the need to replenish the fund 
through other assessments.
    That was the first thing that came out of their mouths, 
quite frankly, before we talked about what is the right thing 
to do, what the law says. Later, after they had dug in their 
heels for months and months denying all coverage, after the SEC 
finally acted and did the right thing, they entered into 
settlement negotiations and were willing to settle, albeit for 
far less than 100 cents on the dollar.
    So apparently, their view of the law changed if it was 
going to preserve more of their fund. When they couldn't reach 
a settlement, they went back to court and are presently, in my 
opinion, dragging their feet and prolonging court action as 
much as possible. This includes spending $200,000 of what is 
there for ultimate recovery by the victims on certain 
discovery. This includes, presently, asking for more prolonged 
discovery rather than getting to the heart of the issue in the 
legal proceeding.
    You put all of that together, Mr. Chairman, and in my 
opinion, that is not a picture of an agency or an entity trying 
to meet its responsibility to covered victims under the law. It 
is more of a picture of what would be akin to an industry trade 
group or association, an active party litigant, if you will, 
just trying to preserve as much as they can of their resources 
and their fund.
    I believe that is the fundamental problem, and that is the 
most fundamental need for reform. So, Mr. Chairman, again thank 
you for this hearing, and for calling attention to this 
important matter, including the Madoff case, including the 
Stanford case. I think this discussion will promote important 
reform.
    I hope in the meantime, SIPC still does the right thing in 
the Stanford case and that it doesn't prolong the court 
activity and the litigation, and we get to that bottom line as 
quickly as possible for the good of all of the victims. And I 
really appreciate the invitation to be here, and all of your 
partnership, on this important issue and other important 
issues.
    Thank you very much.
    [The prepared statement of Senator Vitter can be found on 
page 225 of the appendix.]
    Chairman Garrett. Senator, I thank you for coming to join 
us today and speak on the first panel. I thank you also for 
your concern for your constituents, and other constituents 
around the country as well, with this matter. I appreciate 
also, and thank you for you work and leadership in the Senate 
on this matter.
    As you see from the questions in the opening statements, I 
think we--it is a bipartisan concern on this issue, in general. 
And as you can see with the legislation, that we--that is here 
partly to be considered--you also see that it is a bipartisan 
initiative, as well.
    There are still open questions as to the finality of some 
of these things, but I think we are going to try to do it in a 
bipartisan manner. I understand that we are already at the top 
of the hour, and I was told by staff that you have, as always 
for Senators, a commitment back on the other side of the 
Capitol.
    So I would just say I appreciate your coming over, and I 
appreciate your accepting our invitation, and I look forward to 
working with you and the other side of the house, as well, on 
this issue.
    Senator Vitter. Thank you very much.
    Chairman Garrett. Thank you, Senator.
    Senator Vitter. I appreciate it.
    Chairman Garrett. With that, then, we will move on to panel 
two, and they can come to the table. At the table, we will have 
the president and CEO of what we have just been talking about, 
the Securities Investor Protection Corporation, Mr. Harbeck. 
And we also have Ms. Bowen, the acting chairman of the board of 
the Securities Investor Protection Corporation, as well.
    I will let you get situated there. And welcome, again, to 
the committee hearing today. I appreciate both of you coming 
and joining us to talk about this very important topic. Your 
complete written testimony, of course, as always, will be made 
a part of the record. But we will recognize each of you, I 
understand, for opening statements for 5 minutes each.
    Mr. Harbeck, we usually go from left to right.

STATEMENT OF STEPHEN P. HARBECK, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, THE SECURITIES INVESTOR PROTECTION CORPORATION (SIPC)

    Mr. Harbeck. If you wish, I will begin. Chairman Garrett, 
Ranking Member Waters, members of the subcommittee, thank you 
for this opportunity today. My name is Steve Harbeck, and I am 
the president and CEO of SIPC.
    Since the collapse of Lehman Brothers Entities--as 
mentioned by Ranking Member Waters--in 2008, SIPC has been at 
the center of the financial crisis. I would like to give you an 
overview of what SIPC has done between 2008 and the present 
day.
    First, the guiding principle SIPC has used in this period 
is the greatest good for the greatest number, consistent with 
the law. I would like to briefly highlight some of the matters 
in Madoff, Lehman, MF Global, and Stanford. The Madoff case is 
the largest Ponzi scheme in history. The people who have not 
received funds from SIPC are those people who have either 
received 100 percent of their investment back, or people who 
must repay a portion of what they received before receiving 
funds.
    The courts have uniformly confirmed that SIPC's method of 
computing what is owed to customers is, in fact, correct, and 
in accordance with previous precedent. I am pleased to note 
that the GAO report that was just issued within the last day, 
indicates on page 31 that the driver of administrative expenses 
in the Madoff case is asset collection for those people who 
have not received 100 percent of their investment back.
    The trustee has used the so-called ``avoiding powers'' 
wisely, judiciously, and effectively. The avoiding powers are 
precisely what makes the trustee's distribution in that case 
among innocent investors truly an equitable one. The Task Force 
on SIPC Modernization agreed, and Exhibit D to my written 
statement demonstrates, that SIPC doesn't benefit from the 
avoiding powers, but those people who are most damaged are the 
people who benefit.
    The trustee has also adopted a hardship program to 
discontinue any avoidance suit that should be dropped, given 
the nature of a defendant's circumstances. It is very important 
to note that no customer money is used for administrative 
expenses, and there has been an incredible benefit to 
investors.
    I first appeared before this body in January of 2009. And 
if I had told you then that the trustee would recover $9 
billion to $10 billion for the Madoff investors, you would not 
have believed me. But that is already what has been 
accomplished to date. And the driver of the $300 million of 
administrative expenses is the recovery of that $9 billion.
    Those who would expand the distributions to net winners in 
the Madoff game should recall that the distribution in a Ponzi 
scheme is a zero sum game, and the trustee's plan distributes 
benefits to those who have been most damaged by Mr. Madoff's 
theft.
    If other victims, and they are victims, but people who are 
net winners, who have received 100 percent of their assets 
back, share in that fund, it is mathematically ineluctable that 
the people who are most damaged will suffer on a dollar-for-
dollar basis.
    Turning to Lehman, Lehman is the largest bankruptcy in 
history. And in the early days of Lehman, under SIPC's 
initiation of a liquidation proceeding, 110,000 customers 
received $92 billion in 10 days. The trustee in that case has 
been extremely successful in lawsuits. He has won $2.3 billion 
from Barclays Bank, and settled a suit for over $700 million 
with JP Morgan Chase.
    And last week, the trustee scored a major victory in the 
Supreme Court of the United Kingdom that will benefit American 
investors directly. The impartial observer closest to the case, 
the bankruptcy judge, states that the case has been an 
extraordinary success and it is coming to a successful 
conclusion.
    In the MF Global case, SIPC acted to protect investors and 
did so, demonstrating that we can act quickly and decisively. 
SIPC placed a fiduciary in charge of the firm less than 12 
hours after being notified that customer protection was 
warranted. As I outline in my written statement, significant 
distributions to both commodity investors and securities 
investors have been made.
    And that brings us to the most difficult subject, and that 
is the Stanford case. SIPC protects the custody function that 
brokerage firms perform. Let me say that again. SIPC protects 
the custody function that brokerage firms perform. The 
investors in the Stanford case, unlike the investors in the 
Madoff case, knowingly sent their money away from the brokerage 
firm to an offshore bank.
    They were specifically told, in writing, that SIPC does not 
protect their investments. They each opened a bank account in a 
bank of Antigua, and they now see recision of that investment 
and to have SIPC pay the original purchase price of their 
investments using SIPC and, if necessary, taxpayer funds.
    Simply put, Congress never intended, and the statute has 
never been held, to refund the purchase price of a bad 
investment. That is absolutely not what the law mandates. And 
while there were other legal reasons as well, that is why SIPC 
has not initiated a customer protection proceeding for the 
firm.
    SIPC has acted to protect and benefit investors in those 
three cases, but SIPC's protections are not available to 
restore the purchase price of a bad investment on a CD issued 
in an overseas bank.
    Mr. Chairman, if I could respond to one of your comments, 
at the beginning of the case you mentioned that institutional 
investors would receive most of the money in the Madoff case. 
This is a point made by Mr. Stein in his written communique, 
and I think we are failing to connect some dots here that very, 
very much need to be connected.
    Mr. Stein mentions that a number of investors received zero 
in the Madoff case, and that is quite true. So there are 
thousands of investors who did not receive money. But then when 
you say 75 percent to 90 percent of the assets in Madoff are 
going to institutional investors, you must connect the dots by 
saying the thousands of people who did not receive anything are 
the people who own those institutions, and they will be 
satisfied by distributions to the institutions.
    So I wanted to make that clear so that we realize that when 
the indirect claimants are not paid, they will receive their 
proportionate share of the distribution when the funds they 
owned receive a distribution from the trustee. And another 
point made in the written comments concerning SIPC's actions in 
this case is that the distribution was not prompt.
    The trustee stands ready to make a $9 billion distribution 
as soon as he can. But the people who have initiated litigation 
to allow net winners to share in that money have delayed that 
distribution. And if you don't connect those dots, you don't 
get the complete picture.
    SIPC has done a great deal. We have advanced $800 million 
for the investors in Madoff. And we think, in that sense, the 
process is coming to a sound conclusion. I would be pleased to 
take any other questions you have.
    Thank you very much.
    [The prepared statement of Mr. Harbeck can be found on page 
172 of the appendix.]
    Chairman Garrett. I thank you for your statement.
    Ms. Bowen is recognized for 5 minutes. And welcome to the 
panel.

STATEMENT OF SHARON Y. BOWEN, ACTING CHAIR, SECURITIES INVESTOR 
                 PROTECTION CORPORATION (SIPC)

    Ms. Bowen. Thank you.
    Chairman Garrett. Thank you.
    Ms. Bowen. Chairman Garrett, Ranking Member Waters, and 
members of the subcommittee, thank you for the opportunity to 
appear before you today to discuss the important work of the 
Securities Investor Protection Corporation. My name is Sharon 
Bowen, and I am the acting Chair of SIPC. Because I also served 
as Vice Chair of the SIPC Modernization Task Force, I will 
focus on the four issues raised by that report.
    SIPC was created in 1970. With some narrow exceptions, 
every registered broker or dealer is a member of SIPC. 
Membership in SIPC is automatic upon registration as a broker 
or a dealer. SIPC is not a government agency. Its policies are 
set by its seven-member board of directors, five of whom are 
appointed by the President and confirmed by the Senate.
    SIPC administers a fund which is comprised of assessments 
paid by its members. The fund is used to support SIPC's mission 
of customer protection, and to finance SIPC's operations. 
Should the fund become inadequate for any purpose, SIPC may 
borrow against a $2.5 billion line of credit from the Treasury.
    In its nearly 40-year history, SIPC has never drawn on that 
line of credit. Every customer of SIPC is protected up to 
$500,000 against loss or missing cash or securities deposited 
with the broker-dealer for that customer's account. Of the 
$500,000, up to $250,000 may be used to satisfy claims for cash 
only.
    To date, SIPC has overseen the administration of 324 
customer protection proceedings, which have involved the 
distribution, through 2010, of roughly $109 billion of assets 
for those customers. Of that sum, $108 billion has come from 
the debtors estate, and $1.1 billion has come from the SIPC 
fund.
    Former SIPC chairman Orlan Johnson promised Congress at his 
confirmation hearing that he would form a Task Force to conduct 
the first comprehensive review of the Securities Investor 
Protection Act and SIPC's operation since the amendments of 
1978. The SIPC Modernization Task Force has completed its work, 
and the report and recommendations of the Task Force are 
attached.
    The Task Force reached out to obtain broad input. It 
conducted a live forum in New York City to receive the personal 
views of individual investors. It held an Internet question-
and-answer forum with investors, as well. A Web site was 
established to advise the public of the issues being considered 
and to solicit input from investors.
    In particular, the Task Force reviewed issues raised by 
recent complex litigation. In some instances, the Task Force 
recommendations will require legislation, and others will 
require rule changes. And some of the recommendations can be 
implemented directly by SIPC.
    We also considered areas where we decided there should be 
no change. Let me quickly cover some of the key 
recommendations. First, the Task Force concluded that SIPC 
should be amended to allow for inflation since 1980. In that 
year, the maximum was set at $500,000. In inflation adjustment 
dollars today, that level of protection would be $1.3 million. 
And the Task Force has concluded that sum should be used and 
should be adjusted for inflation periodically.
    Second, the Task Force was presented with numerous cases 
where cash was being caught at a moment just before securities 
purchase or subsequent to a securities sale. And that was 
subject to a lower protection. Because these results are 
somewhat arbitrary, the Task Force has recommended that we 
eliminate the treatment of cash and securities.
    Third, since smaller investors often have so much of their 
wealth in pension plans, the Task Force has recommended that we 
extend pass-through protection for pension plan participants 
that currently does not exist today.
    Fourth, in what we believe was an unintentional consequence 
of an amendment to SIPA, some SIPC members actually had their 
assessments reduced. We recommend correcting this oversight.
    Fifth, the Task Force recommended that SIPC assist in 
creating an international association of investor protection 
entities. While SIPC has a memorandum of understanding with a 
number of these organizations, the Lehman and MF Global cases 
show that international issues will only increase in the 
future.
    And finally, the Task Force advocated that SIPC could 
change the developed programs to fully educate investors about 
SIPC protections and limitations on those protections.
    These are a few of the recommendations. I would like to 
take the opportunity to thank the members of the Task Force for 
their work. And I would be happy to take any questions.
    [The prepared statement of Ms. Bowen can be found on page 
87 of the appendix.]
    Chairman Garrett. And I thank you for your testimony. I 
will now recognize myself to begin with just a couple of 
questions.
    And maybe I will throw it out to Mr. Harbeck, but it sort 
of goes with the last comment that Ms. Bowen was making as far 
as educating the investors and the like. So Mr. Harbeck, you 
made a comment which was an interesting one with regard--and I 
will bring this all around--to the Stanford case; that in that 
case, there was actually written notice.
    Your first comment was to the effect that the coverage and 
insurance, if you will, is--protection is for the securities 
that are held by the broker. And you--in that particular case, 
I think you made a comment just now saying that actually 
written notice was made to the investors that they were 
investing and the money was going, as you put it, offshore. 
Correct?
    Mr. Harbeck. In the Stanford case, as a part of the 
investor package that each investor received from the Stanford 
International Bank in Antigua, the investors--most of whom 
never gave money to the SIPC member firm at all, but some did--
when they gave their money to the brokerage firm, the money 
went to the Stanford International Bank in Antigua. And that 
bank issued a statement saying that the brokerage firm is not 
liable and that SIPC does not protect the investment.
    Chairman Garrett. Right. Okay. That is good to know, on 
that particular case. In all other cases, the average situation 
is, when the investor goes into the broker's office, there is 
the SIPC logo there. And the implication comes with that, as 
well. I remember when we met for the first time, I guess, the 
comment was made is that there is a perception that you were 
covered, or insured if you will, up to $500,000.
    I remember you saying at that time no, not in all cases. 
And I think that is the message that you are delivering today, 
as well, from your testimony. No, you are not covered for 
$500,000 in all cases. So I guess a very seminal question here 
is, should we go back to the days of allowing, or requiring, 
that people actually have the stock certificate in their hand 
so that they can be guaranteed that this is actually what they 
have if, without that, you are not really sure what you have?
    Mr. Harbeck. Congressman, that would solve the problem. 
That is just not going to happen. It is not the way the world 
works. Transactions are done instantaneously at this juncture. 
And to take physical possession of securities, I think is an 
impractical--
    Chairman Garrett. Right. I would agree with you. But if 
that is the case, that we can't really be sure of what I have 
in my hand as I used to in the old days, then I have to be 
guaranteed of something, assured of something. And in this 
case, the IRS was. Or in certain of these cases, the IRS is 
insured of something because they see the statement--I guess it 
is a 1099 or what have you--that goes to them saying this is 
what the dividends, or payments out.
    So they are assured of it. I, as an investor, 
hypothetically--or an investor would say--I have the 
certificate, or I have the statement saying this. If the 
investor can't rely on the statement, what should he rely upon 
then?
    Mr. Harbeck. One of the problems here, of course, is that 
the investors in Madoff gave discretion as to what to buy to 
Mr. Madoff.
    Chairman Garrett. In any case, if I can't rely on the 
statement, what should I be able to rely on?
    Mr. Harbeck. In the overwhelming majority of instances, you 
can. But what you cannot rely on is that when you give 
discretion to someone to buy securities, and he backdates a 
statement and generates fictitious profits again and again, 
month after month after month, it is--
    Chairman Garrett. Yes, but the investor wouldn't know about 
the backdating. I only have a minute left already. As far as 
discretion--I am going to get right to the point on this one--
the discretion right now, as far as the situation when you have 
a situation like this in the appointing of a trustee, that 
selection or the nomination of that process is by SIPC. 
Correct?
    Mr. Harbeck. Correct.
    Chairman Garrett. Would it be a better process to take that 
step away from SIPC, and give it to a so-called neutral party, 
which would be the SEC? Let them make the nomination of it so 
you would avert any idea whatsoever, real or otherwise, of any 
conflict that SIPC would have? If not, why would that be bad?
    Mr. Harbeck. I think SIPC has an extended body of knowledge 
concerning who has expertise on this, number one. And number 
two, that knowledge and expertise has to be applied on about an 
hour's notice. The MF Global case is a perfect example of that. 
I received--
    Chairman Garrett. So if we could set up something within 
SEC that they would: one, get the knowledge; and two, have a 
mechanism to be able to make these things quickly, could that 
address both of the situations?
    Mr. Harbeck. I am not sure it could, but there is a further 
reason. And the further reason is that the people who are 
saying that these trustees are not comporting with the law are 
being unsuccessful in that position in courts. It would be 
different if these trustees were advancing positions in courts 
and the courts were saying no, you are incorrect.
    But in Lehman and in Madoff, consistently, the trustee has 
upheld the law as Congress has written it. And the courts have 
said that is the case. So I don't think there is anything 
broken about the process. Experts are being put in place, and 
they are doing a good job.
    Chairman Garrett. My time has expired. I am always mindful 
of my colleagues. I guess the question is not necessarily 
whether they are breaking the law, but whether the intention of 
Congress is being fulfilled as far as how the trustees are 
managing the case. With that--
    Mr. Harbeck. In 1978, Congressman, the Congress 
investigated that precise point, and chose to strengthen SIPC's 
ability to designate trustees.
    Chairman Garrett. Thank you.
    The gentlelady from California is recognized.
    Ms. Waters. Thank you very much, Mr. Chairman. And let me 
thank our witnesses who have appeared here today to help us 
better understand some of the discussions about SIPC and these 
cases that have been mentioned here today that have played out 
in the press.
    I want to understand. Can I get a summary of the areas 
where SIPC and SEC disagree about how to resolve, first, the 
Robert Allen Stanford case?
    Mr. Harbeck. Certainly. The essential dispute is that the 
SEC's position is a change in the 40-year interpretation of the 
statute. For the first time, the SEC is saying that SIPC should 
pay recision damages to people who are in physical possession 
of the security that they purchased.
    That has never been the law, and it is not the law. And the 
reason that SIPC has not been involved for 2 years is because 
the SEC staff looked for instances where individuals left 
assets at the SIPC-member brokerage firm and did not receive 
those assets. There is no such investor.
    The investors who lost money knowingly and willingly sent 
their money to an offshore bank. And saying that there is some 
vague connection between--it is not a vague connection. To say 
that there--you can just sort of smush everything together, and 
say therefore the brokerage firm must have had custody of the 
investor's assets is factually incorrect.
    The fact is, the investors got what they paid for and they 
were defrauded. But SIPC does not pay that as a damage claim. 
These are victims, but they are not covered by the statutory 
program.
    Ms. Waters. I must say, Mr. Harbeck, you make a very good 
case. What is the current status of SEC's effort to force SIPC 
to initiate a claims procedure for Stanford's victims?
    Mr. Harbeck. The SEC delivered a letter to SIPC on June 
15th of last year. Our board examined the issue very, very 
carefully. The board did not take the staff's recommendation 
without hiring outside counsel to make sure that the staff 
recommendation not to start a liquidation proceeding under 
these circumstances comported with law.
    We did attempt to resolve the problem. We were unsuccessful 
in resolving the problem with the SEC. And as a result, the SEC 
filed suit to compel SIPC to take action. But we have yet to 
have been presented with someone who left custody of their 
assets with the SIPC-member brokerage firm. And that is why we 
feel we must go forward with the lawsuit.
    Ms. Waters. Thank you very much. Let me just ask about the 
Madoff case. Can you discuss how clawbacks have been treated by 
SIPC as it relates to Madoff's fraud?
    Mr. Harbeck. Yes, I would be happy to. Ever since Charles 
Ponzi enacted his own Ponzi scheme, there have been avoidance 
powers that allow a trustee to reach back to people who have 
already received assets out of the fraudulent scheme and bring 
them back into a common pool.
    That is exactly what the trustee has done, and it is 
exactly what the Task Force has looked at with respect to that 
should continue under the Securities Investor Protection Act. 
And the Task Force concluded that if any bankruptcy trustee has 
that authority and right, then a SIPA trustee, under the 
Securities Investor Protection Act, should have that right.
    And the reason is, the common pool is expanded and we don't 
let the luck of the draw, by getting out the day before or 
withdrawing profits and even your principal just before the 
collapse of the scheme gives you an advantage over people who 
are stuck. And so, the trustee has used those avoiding powers.
    And by starting one particular lawsuit, he has brought back 
billions and billions of dollars into this estate for 
distribution to the people who need it the most.
    Ms. Waters. Mr. Chairman, I yield back.
    Chairman Garrett. The gentlelady yields back.
    Mr. Dold is recognized.
    Mr. Dold. Thank you, Mr. Chairman.
    Ms. Bowen, even though almost 11,000 indirect investors 
lost their money in the Madoff fraud, not one single indirect 
investor was invited to be on the Modernization Task Force. Why 
is that?
    Ms. Bowen. The Task Force actually was comprised of a broad 
group of people of expertise, including two lawyers who 
represent investors such as the ones that you have mentioned. 
So we felt that their voice was being heard at the table. In 
addition, we created a Web site and we had the Internet forum, 
if you will.
    And we had a live presentation, where we had an open forum 
in New York City. I was there at that forum. Investors showed 
up, and they did speak to the Task Force. And we heard their 
words and we took their comments to heart.
    Mr. Dold. Mr. Harbeck, do you believe that President Nixon 
and Senator Muskie and the other supporters led the 1970 
passage of SIPA to provide financial relief for all investors?
    Mr. Harbeck. That is a statement of extraordinary breadth. 
The fact is, the statute, as originally drafted in 1970, was 
intended to protect the custody function performed by brokerage 
firms. And we have been following that mission for 40 years.
    Mr. Dold. Do you believe that it is fair and equitable to 
differentiate between direct and indirect investors?
    Mr. Harbeck. The indirect investors that you are referring 
to are people to whom I was referring with respect to comments 
to Chairman Garrett. The trustee did not pay them, but the 
reason he did not pay them is he will pay the institution that 
they own, the feeder funds that they own.
    So if five people own a feeder fund, they will each get 
whatever portion they get in terms of their ownership.
    Mr. Dold. And will that be considered a single entity? 
Because I know we are talking about each individual entity has 
certain abilities to receive resources back. Will that fund 
that has five individuals be counted as one, or will that be 
counted as five?
    Mr. Harbeck. It would be counted as one. And 2-point--
    Mr. Dold. Do you think that is fair and equitable?
    Mr. Harbeck. Yes I do, and here is why. There are two 
points on that. First of all, the Task Force considered that 
and considered the fact that small investors in pension funds 
might well be considered the small investors who are supposed 
to be protected by this statute.
    But moreover, the big protection is not the advance from 
SIPC. The big protection is the share of customer property. And 
in the Madoff case, this is precisely what Trustee Picard is 
trying to expand using the avoiding powers. And those funds, if 
numbers hold, will receive 50 cents on the dollar, which was an 
unthinkable result, an unthinkably positive result, in 2008.
    Mr. Dold. I understand what you are talking about. But I 
think my concern is that the assumption is that these are going 
to be smaller investors. Could you not see a situation where a 
group actually were the large investors coming in, and would 
not be treated as one?
    Mr. Harbeck. The size of the individual investor--
    Mr. Dold. Obviously varies.
    Mr. Harbeck. --is not relevant. What is relevant is whether 
they had a direct relationship with the brokerage firm.
    Mr. Dold. Are you then taking--
    Mr. Harbeck. And many of the indirect people had no direct 
investment.
    Mr. Dold. Are you then trying to pick winners and losers in 
terms of determining direct or indirect?
    Mr. Harbeck. Absolutely not.
    Mr. Dold. You don't believe that there is any difference 
there?
    Mr. Harbeck. No. No, if a large investor owns a share of a 
feeder fund, he will get a proportionate share.
    Mr. Dold. Capped at what, $500,000? Is that correct?
    Mr. Harbeck. No, sir. The fund itself will get $500,000 
plus its pro rata share of the fund. And the pro rata share of 
the fund is the lion's share of what any investor will receive.
    Mr. Dold. Mr. Harbeck, let me just move on then a little 
bit. How does the net equity, or the cash-in minus cash-out 
computation, protect all customers of a failed broker-dealer?
    Mr. Harbeck. This is the methodology that has been used in 
every single case under the Securities Investor Protection Act 
dating back to the 1970s where fictional statements have been 
involved; S.J. Salmon in 1973, Adler Coleman in the 1990s, and 
many cases in between. The money-in, money-out methodology is 
not new to Madoff. It is historically what has always been used 
when brokers enter fictional transactions to benefit customers.
    Mr. Dold. Thank you. I realize my time has expired, Mr. 
Chairman. But I do--hopefully, we will have another round to 
talk about some clawbacks, which I think is important when we 
talk about some of these Ponzi schemes.
    And I yield back.
    Chairman Garrett. The gentlelady from New York is 
recognized for 5 minutes.
    Mrs. Maloney. First, I would like to thank you for your 
testimony, and voice my support for the Task Force's 
recommendation that the $500,000 be raised, with inflation, to 
$1.3 million, and to provide pass-through protection to some 
indirect investors. I think that was a thoughtful 
recommendation, and I support it.
    I would like to ask a question on H.R. 757. It is one of 
the bills that we are debating and is before this committee. 
And in that bill, the last statement would be used when 
determining a customer's eligible claim. As was stated, courts 
have recently ruled that this standard in a Ponzi scheme is not 
appropriate and that the standard that SIPC is using--net 
investment money in, money out--is more appropriate.
    I do see that there could be some problems with this, and I 
ask you to comment on it. And one example that came in to me 
was, investors that most used--in this case, basically, the 
claim could be based on fraudulent information to begin with.
    So if you are using the last statement, it could be based 
on fraudulent information and it could be a fraud in the first 
place. And for example, if you invested $1 million 10 years 
ago, and your statement says you now have a fictitious earning 
and that you now have $10 million, you would be treated the 
same as someone who invested $10 million yesterday.
    So the former has $9 million in fictitious earnings; the 
latter had no fictitious earnings. However, both are treated 
the same. So if the pot of money actually in the Ponzi scheme 
was $5 million, each would get $2.5 million. And that doesn't 
seem fair because it doesn't reflect the reality of what is 
behind that.
    I ask you to comment on that, and other ideas of why you 
think your recommendation of money-in, money-out is better. And 
that, of course, is what the courts are saying. But I also 
would like to ask, how do you or Trustee Picard determine when 
it would be a hardship to claw back funds?
    Mr. Harbeck. I would like to speak to your first issue 
first, if I may, Congresswoman. Exhibit D to my written 
testimony goes through examples of why the avoidance powers 
resolved the problems and actually do equity, and that H.R. 
757, while well-intentioned, actually creates inequitable 
results.
    Mrs. Maloney. Thank you, we will read that. But for now, 
could you answer how do you and Trustee--or how does Trustee 
Picard determine when it would be a hardship to claw back 
funds?
    Mr. Harbeck. The hardship program is one where anyone who 
has been sued under the avoiding powers can demonstrate 
financial hardship. And those are as unique as the number of 
individuals involved. And I think the trustee, first of all, 
made a decision not to sue certain of the people who received 
relatively small amounts, although they are, in absolute terms 
to me, somewhat sizeable.
    He didn't sue everyone who received more than they put in. 
But when he did, he was more than willing to listen and apply a 
rule of reason--that is the only way you can really describe 
it--to a situation. It makes no sense to sue someone when they 
have no assets or they are extremely--
    Mrs. Maloney. And my time is almost up. Can you discuss the 
Task Force's recommendation to provide pass-through protection 
to indirect investors in certain ERISA-qualified plans but not 
investors in other funds?
    Ms. Bowen. Oh, sure. Making that determination, we thought 
at least with the ERISA plans that those trustees have a 
fiduciary obligation to those retirement funds. We also thought 
that the whole purpose of SIPC is to protect the small retail 
investor. And given how people invest money today, most 
people's savings are tied up, frankly, in their retirement 
accounts.
    So we were attempting to address that by really limiting it 
to that circle of people, frankly, and not to extend it to 
large institutional investors.
    Mrs. Maloney. Okay, thank you. My time has expired.
    Chairman Garrett. Thank you. The gentlelady yields back.
    Mr. Hurt is recognized for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. I want to thank you all 
for being here today as we try to understand and deal with 
these important issues. I had three things I wanted to cover, 
and maybe each of you could address it, as appropriate.
    The first is, can you give us some concrete idea of what 
the financial solvency is of the fund? Especially with the 
pressures that you face in wanting to raise the maximum 
reimbursement or the maximum claim amount and, I hope, also 
considering the fact that you want to keep these assessments as 
low as possible.
    The second question deals with the assessments themselves. 
How are you dealing with the fact that a lot of these broker-
dealers are a part of smaller outfits, smaller firms? And how 
do you account for the pressures that they face as small 
businesspeople?
    And then finally, just a general question. Are these 
reforms things that will require congressional action, or are 
these things that you all, from your standpoint, would prefer 
to be able to do from within?
    Mr. Harbeck. Let me make an attempt to answer that. First 
of all, in terms of SIPC's financial solvency, prior to the 
start of the Lehman Brothers case, SIPC had $1.7 billion. Even 
after paying $800 million to Madoff investors and paying 
administrative expenses of $300 million to $400 million that 
have brought in $9 billion for the Madoff estate, because we, 
in effect, turned the spigot back on of assessments we now have 
a fund of $1.5 billion.
    And that is adequate to perform the statutory functions 
that Congress has assigned--
    Mr. Hurt. Has anything been drawn down from the Treasury?
    Mr. Harbeck. No. We have never used Treasury funds. But I 
hasten to add that if SIPC is to be tasked with some new and 
radically different level of protection for rescinding bad 
investments, as in the Stanford case, I would anticipate that 
the Treasury line of credit may or may not be sufficient and we 
would have to assess the industry.
    To your second point about assessing the smaller 
independent members, I have met--and other SIPC staff members 
have met--with the National Association of Independent Broker-
Dealers to brief them on these issues. And we understand the 
nature of the problem. They are currently being assessed at 
one-quarter of 1 percent of their net operating revenues.
    Mr. Hurt. And if I could just interrupt. Before, it was at 
$150 per member, $150 annually for each member. Is that right?
    Mr. Harbeck. We assessed on net operating revenues through 
the 1990s. When we reached a target of $1 billion, we cut back 
to a very nominal sum. But with the onset of the Lehman and 
Madoff cases, with reestablished a higher target of $2.5 
billion that we would like to have on hand.
    Mr. Hurt. So what does that mean? Is there a way to 
characterize that as it relates to the smaller firms?
    Mr. Harbeck. Yes. If we were to continue--
    Mr. Hurt. In a cash number?
    Mr. Harbeck. Oh, in a cash number? It is very difficult 
because, frankly, the large brokers--
    Mr. Hurt. Is it $500, $1,000?
    Mr. Harbeck. Oh, it varies dramatically. And as Ms. Bowen 
has said, some of the very smallest brokers have now actually, 
inadvertently, had their assessments reduced to zero.
    Mr. Hurt. Okay. All right, go ahead.
    Mr. Harbeck. But the basic point is that we will be 
assessing, if we continued at the current rate of one-quarter 
of 1 percent of net operating revenues, we would reach our 
target of $2.5 billion between the years 2015 and 2016.
    Mr. Hurt. And then the last question deals with 
congressional action. Are these things that you all are 
inviting congressional action, or are these things that you 
feel like you can handle in-house?
    Mr. Harbeck. I think some of the things can be done in-
house. But most changes concerning the limits of protection 
require congressional action. And when former Chairman Johnson 
issued the Task Force Report, he requested--and raised at the 
board meetings--that we do some empirical studies as to the 
effect on the industry and on investors before we go to 
Congress and ask for those changes.
    Mr. Hurt. Thank you. my time is about to expire.
    Ms. Bowen, do you have anything to add to that?
    Ms. Bowen. The only other thing I would add with respect to 
the assessments is that obviously that number is determined 
based on litigation, when and if it happens, at the time. And 
so we can't predict, necessarily, if there is going to be 
another big failure tomorrow.
    So the concept of assessments really depends on the 
likelihood of litigation, the outcome. Stanford, obviously, 
would definitely be a huge problem.
    Mr. Hurt. Thank you.
    Chairman Garrett. The gentleman yields back?
    Mr. Hurt. Thank you.
    Chairman Garrett. Mr. Green is recognized. I think you are 
next.
    Mr. Green. Thank you, Mr. Chairman. I thank these witnesses 
for appearing, as well. And I do concur and believe that we 
should raise the amounts to investors that they may acquire if 
there is some scheme that is uncovered.
    Now, let us focus specifically on Mr. Madoff. And I would 
like to speak to you, if I may, Mr. Harbeck. Sir, is it true 
that Mr. Madoff had, with malice aforethought, statements 
issued that were misrepresentations?
    Mr. Harbeck. Absolutely.
    Mr. Green. And is it true that these statements--and I am 
not sure that you have added them up, but if you did add them 
up, that they would total probably billions and billions more 
than you are capable of paying if you pay based upon the 
statements?
    Mr. Harbeck. On a money-in, money-out basis, the customers 
of the Madoff brokerage firm deposited between $17 billion and 
$20 billion. The final statements totaled about $63 billion. He 
had on hand virtually nothing.
    Mr. Green. Before going on, let me make it very clear that 
I really am in sympathy with people who have been defrauded. 
This is a dastardly deed perpetrated by a criminal mind, 
without question. The question, however, becomes how do you 
compensate these victims?
    And this is why I have said my thoughts are somewhat 
ambivalent. Because I am trying to do equity. I want to make 
sure that people can have some confidence in capital markets 
and confidence that when they go to these brokers, they are 
going to get some degree of equity.
    Just address it, please, given the wide chasm between the 
statements and the money-in, money-out methodology.
    Mr. Harbeck. The difficult answer, but the correct answer 
which the courts came to, is that to base the payments on the 
last statement is to allow the fraudulent actor--the dastardly 
criminal who you correctly characterized--the final say as to 
who wins and who loses.
    And further, if you go by the last statement, the 
unintended consequence of that is you make Ponzi scheme 
participation a good thing. You make it profitable. So in one 
of the comments that I made to one of the bills, it was to 
create a dialogue between a fraudulent salesman and someone who 
was questioning, ``Well, if this is a fraud, will I get money 
back?''
    And the answer was, ``Don't worry about that. SIPC will pay 
for it even if it goes down, even if it's fraudulent.'' So it 
is a difficult question. But the courts that considered it--the 
trial court, the bankruptcy court and the 2nd Circuit Court of 
Appeals--came to the conclusion--and these are not my words, 
these are the words of the four judges who have considered 
this--that it would be absurd to let the thief determine who 
wins and who loses.
    And consequently, you can't use the last statement.
    Mr. Green. Now, I concur with the chairman with reference 
to the statement. And to this extent, I want the person 
receiving a statement, the investor, to have some belief in 
that statement and to rely on that statement. Is there any 
means by which we can use technology, or somehow cross-
reference, or give that person receiving the statement the 
opportunity to--as an aside, are all or most of these persons 
sophisticated investors?
    Mr. Harbeck. We make the assumption that they are not.
    Mr. Green. Okay. Now, they are not sophisticated investors. 
How can we, perhaps with technology or some other means, give 
them a greater degree of confidence in that statement? Because 
the chairman makes a good point. I have my statement, I am 
relying on my statement. To a certain extent, there are other 
entities that rely on the statement.
    How can we strengthen the statement?
    Mr. Harbeck. I think you have put your finger on it. I 
think technology is the answer. In this case, Bernard Madoff, 
acting as an investment advisor, used his own firm as the 
custodian of the securities supposedly held for his clients. If 
you divorce the custody function from the investment advisor 
function, as is done by most investment advisors, then the 
problem solves itself.
    Then the brokerage firm with custody has the securities. It 
is a check on the system. And I think the SEC has located that 
as one of the problems in the Madoff case.
    Mr. Green. Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. And I thank you.
    The gentleman from New Mexico is recognized for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Ms. Bowen, as I am reading through Senator Vitter's 
testimony, he alleges that SIPC is dragging its feet on solving 
the cases. Do you have a rebuttal to his testimony?
    Ms. Bowen. Obviously, I think you are referring to the 
Stanford case.
    Mr. Pearce. He is talking also, saying--he says you are 
dragging your feet on the Madoff case also.
    Ms. Bowen. I would say, just given the outcome with the 
Madoff case, that we haven't been dragging our feet, and we 
have been maximizing the return to the investing public. With 
respect to Stanford, it is a really complicated issue. We 
decided that we did not have the authority to change the law, 
to change the statute.
    And our reading of the statute is such that we felt we had 
to go to court. I believe the court has decided to be as 
expeditious as possible in reaching a resolution. And actually, 
we will follow the law.
    Mr. Pearce. Does the SEC agree with your position, or does 
the SEC oppose your position?
    Ms. Bowen. It opposes our position as to whether or not 
they are--
    Mr. Pearce. So they feel like it is not required to change 
any law?
    Ms. Bowen. I believe--again, I haven't really read their 
filings. But I believe they think that there is, there may be a 
customer who is entitled to recovery. We don't see a customer 
at a broker-dealer.
    Mr. Pearce. Do you all get involved at all in the 
notifications up front that investors are worried about their 
investment? Are you all notified at all? You just come in later 
as the insurers?
    Mr. Harbeck. First of all, we are not a regulator in any 
way, shape, or form. And unlike the FDIC--one of the questions 
earlier concerned the FDIC. We are not an insurer, and that is 
not in our name. We do come in--and you are correct--only after 
the firm has failed.
    Mr. Pearce. So are you involved in the MF Global case at 
all?
    Mr. Harbeck. Yes, sir. I was notified at 5:20 a.m. on 
Halloween day that MF Global's customers were in need of 
protection. And one of the gentleman in this room, who is on 
the legal staff of SIPC, was in court and had a trustee 
appointed that afternoon.
    Mr. Pearce. Who notified you at 5:20 a.m.?
    Mr. Harbeck. A member of the trading and market staff of 
the Securities and Exchange Commission.
    Mr. Pearce. Do you remember the name?
    Mr. Harbeck. Yes. His name was Mike Macchiaroli.
    Mr. Pearce. You received the SEC's e-mail at 7:29 on 
October 31st, and that e-mail set forth the basis that they 
thought that a settlement was going to be reached? Is that 
correct?
    Mr. Harbeck. I think you are conflating two cases, sir. Oh, 
a settlement in the MF Global case.
    Mr. Pearce. Okay.
    Mr. Harbeck. Yes, yes. At 7:29 on October 31st of last 
year, that was a written confirmation that MF Global had failed 
and was in need of protection.
    Mr. Pearce. Okay.
    Mr. Harbeck. Subsequent to my--the 5:20 call from the 
Securities and Exchange Commission, Mr. Macchiaroli in New 
York, we put an attorney on a plane that day. And that day, we 
took over the firm and placed a trustee in position.
    I think that demonstrates that we don't drag our feet. We 
had no idea whether we had billions of dollars worth of 
exposure in that situation, and we did it because that was the 
right thing to do.
    Mr. Pearce. You are discussing, in another circumstance, 
about the professionals that you all contacted. Who are the 
professionals that you all contacted? Can you get us a list of 
that, and what were their positions?
    Mr. Harbeck. We contacted attorneys from Weil, Gotshal & 
Manges, we contacted attorneys from several other law firms, 
the name of which escapes me. Several of them had conflicts of 
interest. And we felt that, as it turned out that MF Global was 
the 8th largest bankruptcy of any kind in history, it would be 
a poor time to put in someone who had no previous experience in 
this case.
    Mr. Pearce. Let me get one question in before my time is 
up. I am sorry to interrupt, but you talked about going and 
getting settlements from--say people had received a payment, 
they had cashed in their account. And you go back, and you are 
not going to let them succeed just because they got paid out 
the day before the bankruptcy.
    Do you ever go after the personal assets of the people, the 
principles, involved in these decisions? In other words, Mr. 
Corzine?
    Mr. Harbeck. Since no lawsuit has been started against Mr. 
Corzine, I would rather speak to either past cases or--
    Mr. Pearce. That was an example.
    Mr. Harbeck. --or theoretically.
    Mr. Pearce. You do go after--
    Mr. Harbeck. We go--the SIPC trustees are financed by SIPC 
to take every--we think it is a good lesson for people who 
steal money to be held accountable for it. And we will finance 
litigation to do that, and take those people down to their last 
cent.
    Mr. Pearce. All right. Thank you, Mr. Chairman. I 
appreciate it.
    Mr. Harbeck. Thank you.
    Chairman Garrett. Mr. Royce? You are recognized.
    Mr. Royce. Thank you, Mr. Chairman. I guess what has caught 
our attention, among other things, is the report of the Office 
of Inspector General Office of Audits, where they have some 
very pointed things to say about the oversight. They say, ``We 
found that significant criticism and concern have been 
expressed about the amount of trustee fees awarded in the two 
largest liquidations in SIPC's history, Lehman and Madoff.''
    And here is what they say about that. We will have a 
comparison up on the board in terms of the way Lehman, in the 
U.K., has been handled versus the U.S. up there. But here is 
the observation from the report: ``For the Lehman liquidation, 
SIPC's trustee fee chart combined both the trustees and the 
council's time, and the hourly rate ranged from $437 to $527 an 
hour.''
    ``Moreover, the fees paid to date for both the Lehman and 
Madoff liquidations are a mere fraction of the amounts that 
will be eventually sought.'' The fees paid to date I think are 
in the order of $600 million. And I guess my question is the 
same question that the Office of Inspector General is getting 
to, and that is, do you believe the $600 million-plus in legal 
fees is reasonable?
    Mr. Harbeck. Yes, sir, I do.
    Mr. Royce. Then let me ask you, if this is reasonable, what 
would you deem reasonable for a completed Lehman liquidation? 
Because as they point out, again, ``It is a mere fraction of 
the amounts that will eventually be sought. Significant work 
relating to customer claims with pending litigation remains to 
be done.''
    Now, this is after 3-plus years. And, of course, they point 
out that they would like additional oversight, that they would 
like SIPC to negotiate with outside court-appointed trustees 
more vigorously to retain a reduction in these fees. So they 
have a little different take on this than you do.
    What do you think the final cost will be?
    Mr. Harbeck. The cost estimation for the Madoff case in the 
administrative expenses is $1 billion. To date, I believe 
somewhere in the vicinity of $400 million has been expended of 
legal fees. Two important things to note. One, not one penny of 
that came from customers, or diminished customer assets. SIPC 
paid for it all.
    So SIPC paid for the litigation, which the GAO report which 
was issued yesterday, or today, indicates brought in billions 
and billions of dollars in the Madoff case. Customers haven't 
been diminished in any way, shape or form by that.
    Mr. Royce. I understand.
    Mr. Harbeck. As to the Lehman Brothers case, this is the 
largest bankruptcy of any kind in history. And what I would 
refer you to in terms of the person closest to the facts on the 
legal fees is Bankruptcy Judge Peck in New York.
    And I have included in my written statement his comments at 
the Chapter 11 confirmation hearings, where he says the case is 
coming to an unbelievably successful conclusion and that he 
congratulates all of the professionals involved. So my God, the 
hourly rates these people charge are staggering. Everybody 
knows that.
    But in that one instance, and I am familiar with that, the 
SIPA trustee did an outstanding job, and I think the fees are 
reasonable.
    Mr. Royce. But one of the unique situations here is that we 
can compare and contrast with the situation in the U.K. And in 
terms of return of customer assets, you have a situation in the 
U.K. where of the $21.8 billion of client assets, $20 billion 
was returned. In terms of settlements with foreign affiliates, 
in terms of the U.K., you have a situation where they have 
settled with U.S. affiliates, with Lehman Hong Kong, with 
affiliates around the world.
    That process hasn't gotten under way here. In terms of 
general unsecured estate, in the U.K., they have resolved the 
majority of its unsecured claims, whereas in the United States, 
they have yet to review unsecured claims. But most importantly 
is the fees.
    Look at the difference, and you look at the timeframe--3-
plus years versus what has occurred in the U.K.--and it truly 
grabs one's attention in terms of the cost, but also the 
criticism of the Office of Inspector General brought to the 
process about the oversight and the way in which we are 
conducting this.
    And especially the way in which you are down to two firms 
doing some pretty major work. or one firm handling MF Global 
and Lehman simultaneously. Reportedly, in the financial press, 
that is causing some backlog in terms of the ability to push 
this through. If I get your response.
    Mr. Harbeck. [Off mike.].
    Mr. Royce. Yes.
    Mr. Harbeck. If I could respond, actually, the fact that 
the trustee in the Lehman Brothers case and the MF Global case 
has leveraged their work incredibly well. The Lehman Brothers 
trustee just won a case for American investors over Lehman 
Brothers, Inc. Europe before the Supreme Court of the United 
Kingdom last week.
    And the exact same issue arises in the MF Global case. This 
is an example of picking a veteran staff and a veteran trustee 
who knows what they are doing and does it well.
    Mr. Royce. I will close with this. Reportedly, part of the 
problem in terms of making progress is that you have people 
pulled off of one case to work on the other case because you 
have one firm. But my time has expired.
    Mr. Harbeck. I can speak to that. I asked that exact same 
question on the morning of October 31st to make sure that the 
trustee staff would not affect either case. I was assured that 
it would not, and our supervision of the case indicates that it 
has not.
    Chairman Garrett. Thank you.
    The gentleman from Colorado?
    Mr. Perlmutter. [Off mike.]
    Chairman Garrett. And then you will--would like to come 
back to you? Sure.
    Then, the gentlelady from New York.
    Dr. Hayworth. Thank you, Mr. Chairman. If we can just leave 
that slide up for a moment, Mr. Harbeck or Ms. Bowen, I am 
intrigued by the difference between the two columns.
    To what do you attribute--is there a matter of the laws 
being different in the U.K., or they--
    Mr. Harbeck. It is apples and artichokes. They are just not 
comparable. The size and scope of the operations aren't 
comparable, the laws are different, the administration of 
bankruptcies are different. The fact that they both have the 
name Lehman Brothers is the reason they are both on the same 
chart.
    Dr. Hayworth. Understood. Is there something that we can 
use from the U.K.--although two different entities, obviously 
the Lehman Brothers applies to two different entities. But is 
there something we can take home from that as legislators in 
terms of our approach to these kinds of problems?
    Mr. Harbeck. Let us think about Lehman Brothers and MF 
Global, and the Dodd-Frank Act. I think the 8th largest 
bankruptcy in history was not a Dodd-Frank event. And that is a 
good thing. So the fact is, I think the system works. It is an 
expensive system. Bankruptcy is an expensive process in 
financial institutions.
    But by and large, the system is working in the United 
States. Again, the Lehman Brothers Holding bankruptcy judge 
comments on this case really do strike home for those of us who 
have been living with that situation for several years.
    Dr. Hayworth. In terms of Madoff, I have met a couple of 
folks who have been directly affected by the Madoff situation. 
Is there any shred of hope we can offer people who trusted 
their Madoff accounts, and--
    Mr. Harbeck. One thing that the trustee has run across when 
he has sued financial institutions--saying that those financial 
institutions knew, or should have known, of Madoff's problems--
he has been running into a defense that he does not stand in 
the shoes of all of the individual customers.
    I think he does. Under the law, some courts have held to 
the contrary. If we get some clarity on that, then SIPC could 
use its funds to prosecute lawsuits against entities that 
should be held financially responsible. And that would benefit 
customers at no expense to them.
    So if the courts do not see it our way, perhaps legislation 
to give the trustee an overruling of an old, old case called 
Kaplan v Marine Midland would be a tool in the trustee's quiver 
that he could use to benefit investors.
    Dr. Hayworth. Okay.
    Ms. Bowen, any--
    Ms. Bowen. No, nothing to add to that. No.
    Dr. Hayworth. Thank you.
    Mr. Chairman, I yield back.
    Chairman Garrett. If the gentlelady will yield to me, just 
a couple of quick points.
    On the point that Mr. Royce and Dr. Hayworth were raising 
as far as the two entities, the United Kingdom and the United 
States. If you convert these to dollars, are the size of the 
assets of the book of these companies apples and artichokes? 
What are the relative sizes?
    Mr. Harbeck. I think the answer to your question is, the 
overwhelming majority of assets were in the United States. For 
example, SIPC--the trustee--transferred $92 billion in the 
first week. And the wind-down of the other assets, the non-
liquid assets, is being conducted in the Chapter 11 proceeding 
of Lehman Brothers Holding.
    Chairman Garrett. I understand that.
    Mr. Harbeck. Not the liquidation of the SIPC-member firm.
    Chairman Garrett. Yes, but--
    Mr. Harbeck. But I think the American entity is larger by a 
factor. I don't know the factor sitting here, no.
    Chairman Garrett. All right. And as long as we have the 
time, part of your position is that SIPC has done such a 
tremendous job--your point of saying, well, $9 trillion now, I 
guess, at about a cost of a billion dollars in fees in this 
particular case, ballpark figures. But--
    Mr. Harbeck. That is projected out into the future, sure.
    Chairman Garrett. Right.
    Mr. Harbeck. Yes.
    Chairman Garrett. But out of that $9 billion, isn't the 
bulk of that just through one case? It is a very great case--
the Jeff Picower matter--there was net equity in that case, if 
I--my understanding, on Madoff's books, basically saying, hey, 
you really owe this money back to us, meaning Madoff from 
Picower.
    So 99 percent of that net equity in the book was from the 
Picower case. And that was around, a little over $7 billion. Is 
that right?
    Mr. Harbeck. The overwhelming majority of it was, 
absolutely.
    Chairman Garrett. So--
    Mr. Harbeck. But the trustee is not done yet, sir.
    Chairman Garrett. Right. But when you--yes, you add $200 
million on top of that, I guess, from the kids of the Picower 
family, which is all good, but to come and say, we spent a 
billion bucks--which, as you agree, is amazing fees, $500 or so 
an hour--that is good work if you can get it.
    I used to be an attorney. I billed out, I guess, a tenth of 
that or so, or a little more than that. But, yes, out of the $9 
billion when you came here, first I thought that is great. But 
$7 billion-plus of that is one case, and the other--so a little 
over a billion dollars comes from all the rest.
    So I guess you really have to put that into perspective as 
to exactly what the trustee has accomplished. But for that 
case, you would be spending $1 billion to get about $2 billion.
    Mr. Harbeck. And the answer to your point is, we are not 
done yet. The trustee--
    Chairman Garrett. I guess that is part of the--
    Mr. Harbeck. The trustee hopes to get back 100 cents on the 
dollar. Will he do that? I don't know.
    Chairman Garrett. And that is the concern.
    Mr. Harbeck. But if you say--I think if you said to anyone 
from any source that you were going to get back $9 billion--
    Chairman Garrett. Right. We keep going back to that. Yes, 
but we never knew the Picowers were out there, and the negative 
equity out there the one individual had. But when you say they 
are not done yet--and there is the rub, or there is the 
concern, is that they are not done yet--there are probably not 
that many more Picowers, if I am saying the names correctly, 
out there anymore.
    So the rest are going to be the smaller ones. The rest are 
going to be people that we are concerned about in this panel--
or some of us concerned on this panel--of going back to those 
people who, as Mr. Green was saying and shares with me the 
concern, all they did was rely upon what was sent to them.
    And to your comment that it makes Ponzi schemes a good 
thing, only if there is the intention, or knowing that it is a 
Ponzi scheme. But I am going over my time.
    If the gentleman from Colorado is not ready yet, then Mr. 
Stivers is recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    My first question is for--I think it is probably for Mr. 
Harbeck, although maybe both of you can answer this one. What 
would the impact on the SIPC fund be if every indirect investor 
expected to receive SIPA coverage?
    Mr. Harbeck. At the start of the Madoff case, we made an 
effort to tell every person who thought they even remotely were 
damaged by the Madoff case to file a claim. Thousands of people 
did so who didn't even know that they were invested in Madoff.
    Some of the people who have testified in front of this body 
bought a feeder fund that bought a feeder fund that bought a 
feeder fund that bought Madoff, and said that they were an 
indirect investor. So that is like throwing a ping pong ball 
into a bunch of mouse traps loaded with ping pong balls.
    I couldn't possibly tell you what the cost would be because 
the cost would be capped at the net equity of $17 billion, 
assuming that they were all owed by feeder funds. But the 
relationship between broker and customer, that is the one part 
about this that isn't rocket science.
    Did you open an account? Yes? Okay. If you didn't open an 
account, you are not going to be a customer.
    Mr. Stivers. Ms. Bowen, do you have anything to add to 
that?
    Ms. Bowen. No, I don't.
    Mr. Stivers. Do either of you think that SIPC has a 
responsibility to warn customers about possible signs of fraud, 
or conduct that might indicate fraud?
    Mr. Harbeck. Whether we have an obligation to do so or not, 
it is a good thing to do. Ms. Bowen has recommended, and 
championed on the Task Force, an investor education program. I 
have been doing what I would call ``dog and pony shows'' with 
members of the North American Securities Administrators 
Association on fraud.
    And I have, in the back of my mind, a program that I want 
to use at Walter Reed Hospital. Because you would be surprised 
at the fact that people will steal money from amputees. And I 
have seen enough different kinds of these schemes.
    I have been doing this for 35 years, and I have seen enough 
of these things to put together a program where we could say 
these are some red flags that you should have. And actually, I 
enjoy doing that.
    Mr. Stivers. Great.
    Ms. Bowen. I would add to that, too, that with the Task 
Force, we did have some securities regulators who were part of 
our Task Force. And we talked about--
    Mr. Stivers. Was that the SEC or FINRA? Or who was that?
    Ms. Bowen. Mr. Borg is here from Alabama.
    Mr. Stivers. Oh, some State regulators. Sorry. Thank you, 
great.
    Ms. Bowen. Yes, State regulators. And so we talked about 
having forums maybe throughout the country, to get the word 
out. And also, frankly, if there is a way for us to work with 
the SEC and FINRA to maybe change the language that is in the 
broker's statement; although we know, frankly, that may not 
solve the problem in terms of education.
    And then I think, following the Task Force, to recommend 
that we have a person dedicated to investor education who would 
work with us to get the word out much more effectively.
    Mr. Stivers. Great. Do either of you think that SIPC should 
be empowered to conduct spot audits to ensure that cash and 
securities are really in the custody of broker-dealers?
    Mr. Harbeck. The one-word answer is no, but I would really 
like to explain why.
    Mr. Stivers. You have 1 minute and 6 seconds.
    Mr. Harbeck. There are five levels of review of that issue. 
The internal auditor of the brokerage firm, let us assume he is 
corrupt. The outside auditor, let us assume that auditor is 
either corrupt or incompetent. A State audit, a self-regulatory 
organization audit, and the SEC. If you added SIPC as a sixth, 
SIPC would have to hire the experts who are already doing it.
    And I am not sure that we--
    Mr. Stivers. Can I do a quick follow up on that? Like in 
Madoff's case, he was not covered by FINRA so he wouldn't have 
had an SRO. He would have only had an SEC, and they actually do 
it once every 10 years for firms of his size?
    Mr. Harbeck. I don't believe you are correct, sir.
    Mr. Stivers. Okay.
    Mr. Harbeck. I believe he was--every brokerage firm is a 
member of a self-regulatory organization. It is required.
    Mr. Stivers. Okay.
    Mr. Harbeck. So, yes, FINRA did not find this, nor did the 
SEC.
    Mr. Stivers. I yield back the balance of my time, Mr. 
Chairman. Thank you.
    Chairman Garrett. The gentleman yields back.
    The gentleman from Colorado is ready and recognized.
    Mr. Perlmutter. Thanks, Mr. Chairman, and thanks to the 
panel.
    I guess let us just sort of--and I know you have broken it 
down into two categories. You have the situation where it is a 
fraud from the outset, or more or less a fraud. It is insolvent 
is a result of just being a fraud, and then it is insolvent as 
a result of things falling apart. It wasn't a sham to begin 
with.
    So let us deal with the fraud one first--the Madoff, the 
Stanford, the Peters or Peder, whatever they are called. In 
Colorado, we had a number of investors who invested in 
``company A'' that invested in ``company B'' that then invested 
in Madoff or Stanford or some other Ponzi artist.
    As I am looking at the recommendations of the Task Force, 
those--everybody calls them indirect investors--are sort of out 
of luck, based on the law today, the SIPC law today, or the 
Task Force recommendations, except for those that might be 
pension plans. Am I right? Wrong?
    Ms. Bowen. No, that--
    Mr. Perlmutter. And I am asking both of you, so--
    Ms. Bowen. No, that is correct. That is the recommendation.
    Mr. Harbeck. Sir, if I could elaborate, though. The 
indirect investors will share--and I believe in my written 
comments I speak to this specifically because I know this is of 
particular concern to you. If you take a look at exhibit B to 
my written comments, it is a letter that I wrote to you and to 
Congressman Ackerman to make sure that when we settle with one 
of those feeder funds on a preference or a fraudulent transfer, 
that the money flows directly through to the indirect holders.
    Mr. Perlmutter. Okay. But I guess I am just trying, from a 
policy standpoint, to understand why the pensioners--and they 
are obviously a sympathetic group. I think the firefighters 
lost some money, or their pension initially was in the Madoff 
mess.
    So why--the pensioners, I guess I am happy if they get it. 
But I would like to see others, indirect investors, be entitled 
to some recovery directly from the fund. What is the policy 
distinction you all make?
    Ms. Bowen. I think one of the things we considered is the 
fact that, with the pension plans that we suggested with the 
pass-through, there is already a level of fiduciary obligation 
under ERISA, so we felt that level of protection, if you will, 
gave us some comfort.
    If we are talking about people who may invest in a hedge 
fund, for example, we wouldn't be privy to what their 
arrangement is in terms of, they may have invested in a huge 
fund in Connecticut.
    Mr. Perlmutter. And I guess what I am saying--and Mr. 
Harbeck, I understand your sort of black-and-white position 
that you know who has opened an account with Madoff--you can go 
back, so-and-so, so-and-so, and so-and-so. But the reality of 
how the system works these days is that you are going to have--
or at least in that instance, and I think in many you have--a 
number of different investors who invest in ``company A'' who 
then conglomerate into ``company B,'' and then ``company B'' 
invests with the Madoff--with the broker-dealer.
    So I understand your wanting to have a black-and-white line 
there, but that is not how it works. And the guys who are 
really getting clobbered are the little investors back here in 
the indirect investors.
    Mr. Harbeck. Again, if you focus on the common pool of 
assets known statutorily as ``customer property,'' that is 
where the lion's share of any customer's assets are typically 
restored, not the advances from SIPC. So typically, the person 
who is an indirect holder will not be clobbered because the 
entity that has the account will get, typically--not in Madoff, 
granted, but typically--will get a large share of its assets.
    Because typically--and here I find myself reluctantly, very 
reluctantly, defending the SEC--they usually find these things 
at a point where the amount of missing assets is small. And 
that means that the common pool of assets is in the 95 percent, 
98 percent range.
    In Madoff, there was an egregious failure that proves that 
rule. So ordinarily, the entity would receive a substantial 
portion. There have only been, prior to Madoff, somewhere in 
the vicinity of 350 customers--entities, or any kind--whose 
claims were not 100 percent satisfied; individuals, entities, 
whatever.
    And the total amount that those claimants did not receive--
again, this is prior to Madoff--was somewhere in the vicinity 
of only $47 million. So I am not sure that pounding the Madoff 
issue is the reality for most people who get caught in one of 
these unfortunate situations.
    Mr. Perlmutter. Thank you.
    And, Mr. Chairman, if I could ask unanimous consent to 
insert into the record a letter dated March 2, 2012, from the 
Agile Funds Investor Committee?
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Perlmutter. Thank you. I yield--
    Chairman Garrett. The gentleman yields back.
    Dr. Cassidy?
    Dr. Cassidy. I want to first thank the chairman and the 
ranking member for allowing me to ask questions.
    Mr. Harbeck, I am not a securities attorney. I am a doctor, 
so your knowledge greatly exceeds mine, and if I say something 
stupid, it won't be the first time, and it won't be the last, 
so please forgive me.
    That said, let me first ask, was there a settlement offered 
by SIPC to the SEC on behalf of the Stanford victims?
    Mr. Harbeck. Yes, there were settlement discussions.
    Dr. Cassidy. And was one offered?
    Mr. Harbeck. We made an offer. But I would hasten to add 
that I won't go into the details on that because--
    Dr. Cassidy. That is fine. But the fact that you offered, 
even though you categorically deny the rationale for it in your 
testimony, gives me a little bit of pause regarding your 
testimony.
    Secondly, let me ask you this. It seems as if you have two 
objections to SIPC expanding coverage: one, that SIPC does not 
cover losses of an investment; and two, the custody issue. So 
let me take the first. You quoted a court case earlier, in your 
reply to Mr. Green--clearly, you are an attorney, you defer to 
court--do you disagree with the Fifth Circuit Court, which 
found that a Ponzi scheme is, as of a matter of law, insolvent 
from the inception? That the value is fictitious; there is no 
value to lose because the value is not there at its inception. 
Do you disagree with the 5th Circuit?
    Mr. Harbeck. The fact that it is insolvent from the initial 
moment does not detract from the fact that the instrument 
received by the Stanford people was a real certificate of 
deposit issued by a real bank in a real country that is in a 
real receivership--
    Dr. Cassidy. It is a piece of paper, I will agree with 
that. But whether or not the value is real or fictitious seems 
to be the point. And the fact that it is insolvent at inception 
suggests that the value is fictitious. I would just make that 
point, and you can hash that out in court. But I--
    Mr. Harbeck. The other thing I would like to say is that 
this matter is in litigation.
    Dr. Cassidy. I understand that. But on the other hand, I 
think--
    Mr. Harbeck. And I--
    Dr. Cassidy. --your--
    Mr. Harbeck. --am constrained by that.
    Dr. Cassidy. Your testimony, written and spoken, really 
went after this case as if it were in case. And I think it is 
important on behalf of the victims to make the counterargument, 
if you will. So if the first point is that, indeed, the value 
is fictitious and there may not have been value to lose, let us 
move to the second, regarding custody.
    Again, knowing that you are an attorney and that you have 
previously quoted court cases in reply to Mr. Green, you spoke 
earlier about how you would have to fold in these different 
entities in the Stanford Financial Group to, if you will, give 
the Stanford victims standing.
    And yet there is a U.S. District Court for North Texas that 
says that the Stanford International Bank and Stanford 
Financial should be collapsed together; that, indeed, they 
should be folded and it is, again, a fiction to pretend that 
they are different.
    Now that effect--and my understanding, again I am a 
gastroenterologist, what do I know, although I feel like I am 
kind of in the sweet right now--that would not give them 
standing as a customer?
    Mr. Harbeck. For a wide variety of legal reasons, the 
answer is no.
    Dr. Cassidy. Okay.
    Mr. Harbeck. Among other things, the independence of the 
entity in Aruba has been recognized in several other countries, 
separate, who have not turned over assets to the receiver in 
Texas.
    Dr. Cassidy. Let me just point out, though, that the 
Stanford Group company was a broker-dealer registered with the 
commission, and it is a big member. That both that, and the 
Stanford International Bank, Ltd. were wholly owned and 
directed by Stanford. That the Stanford Financial Group was a 
brand name, under which SGC, SIBL, and others operated, to give 
credibility to SIBL.
    And that domestic clients purchasing Stanford International 
Bank limited CDs dealt substantially, if not exclusively, with 
Stanford Group company brokers. And that some SGCs--if you 
will, account holders--received consolidated statements from 
SGC regarding their Stanford International Bank loan 
investment.
    I could go on, but I think I am making the point. It does 
seem as if there is a case for them to be folded together, as 
the North Texas District Court suggests. This would be the one 
to do so. Let me just kind of go on for a couple of other 
things because I am almost out of time, I apologize.
    I have to admit, you give the hypothetical of, we have a 
salesman who says go ahead and invest in the Ponzi scheme and 
you will be covered. And I have to say that there isn't a 
victim yet who I learned would have invested in this Ponzi 
scheme should they have known it was a Ponzi scheme.
    Now, I will just frankly dispute that. And the idea that 
somehow, don't worry, you give your $500,000 to us and we will 
cover it on the backside--forget the fact that you have lost 
the investment value over the period of time it is with them--I 
will just make that point.
    But one last thing. Since there was a settlement offer, and 
since there has been discussion as to the amount of money it 
would cost for such a settlement, can you give us the cash 
figure that SIPC thought would be involved in such a 
settlement?
    Mr. Harbeck. No, sir, I will not.
    Dr. Cassidy. I appreciate that.
    Mr. Harbeck. That is a matter in litigation.
    Dr. Cassidy. But I will presume, because you are fiduciary 
agents, it would not have been one that would have broken the 
bank. And I think that point needs to be made.
    You have been generous with your time. I yield back, thank 
you.
    Chairman Garrett. I thank the gentleman.
    All Members have had the opportunity to ask questions, but 
a couple of members have asked for follow-up questions. So what 
we thought we would do is just split 5 minutes on either side, 
to split however the Members want to on either side.
    And, oops. I reclaim that whole statement, and we will 
start with the gentleman from California for his 5 minutes.
    Mr. Sherman. Last, and probably in this case least, what is 
the financial position of SIPC, and how is that affected by how 
you determine whether the Madoff investor, when pooled, is 
eligible for one $500,000 limit, or several?
    Mr. Harbeck. We didn't take SIPC's financial situation into 
consideration in the slightest in making those determinations. 
Those determinations are made by the law.
    Mr. Sherman. No, I am asking a financial question. I am not 
asking for a legal defense. What is your financial position, 
assuming your position on the Madoff claims is upheld by the 
courts, as I am sure you think it will be?
    Mr. Harbeck. Our financial position would be that we have 
already paid all of the customers who are entitled to 
protection. We have paid--
    Mr. Sherman. So what is the net worth of SIPC right now?
    Mr. Harbeck. One-point-five billion dollars.
    Mr. Sherman. And that is after paying all of the Madoff 
claims?
    Mr. Harbeck. Correct.
    Mr. Sherman. And if you were to lose on the arguments that 
have been raised for Madoff, how far underwater would you be?
    Mr. Harbeck. Which arguments, sir? There are several.
    Mr. Sherman. The argument that each participant in a pool 
is a separate investor.
    Mr. Harbeck. I will preface this by saying we have never 
lost that issue.
    Mr. Sherman. Right.
    Mr. Harbeck. And I believe the outside is $17 billion 
because that would--I assume that all of--
    Mr. Sherman. That would be the full--
    Mr. Harbeck. --everybody would get paid 100 cents on the 
dollar.
    Mr. Sherman. Okay. Do you have different rates for, in 
effect, what is insurance, based upon whether the securities 
are being held in one of the generally accepted depository 
houses, or whether the member of SIPC just says, ``Hey, I have 
a safe in the back room?''
    Mr. Harbeck. First of all, since it is almost all done 
electronically now, almost all securities positions are held at 
a common facility, such as the Depository Trust Corporation, or 
something like that. But we have tried--and many members have 
proffered the fact--that our kind of brokerage firm poses less 
risk.
    And every time a group of brokers says that, I can come up 
with an example of large--
    Mr. Sherman. So you charge the same amount for everybody.
    Mr. Harbeck. We charge the same amount for everybody. It 
doesn't work for--
    Mr. Sherman. What portion of your members do the, ``We have 
our own safe'' approach, rather than using one of the 
established depository--
    Mr. Harbeck. I don't think it is possible to go back to the 
days, in the 1960s, where--
    Mr. Sherman. Madoff did it.
    Mr. Harbeck. Oh, I see your point.
    Mr. Sherman. Yes.
    Mr. Harbeck. I--
    Mr. Sherman. If Madoff had had all his securities in--
    Mr. Harbeck. No. Many brokerage firms--self-custody 
positions. But in turn, the positions should be reflected at 
the Depository Trust Company, DTC. And in Madoff's case, if any 
examiner had bothered to check between the positions shown on 
Madoff's records and what was in DTC, they would have dropped 
dead on the spot.
    Mr. Sherman. If anybody had bothered to notice that he had 
an audit letter from a one-person CPA firm on a $17 billion 
balance sheet, that would have been caught, too.
    But I yield back.
    Chairman Garrett. The gentleman yields back, and seeing no 
one else coming in at the last mimute, we will then just close 
with 5 minutes, if there are 5 minutes of questions on either 
side to be split up.
    I will begin with the gentlelady from New York, then Mr. 
Pearce, and then Mr. Stivers.
    Mr. Pearce. Thank you, Mr. Chairman.
    You have brought almost 1,000 clawback suits. How many of 
those were against institutional investors?
    Mr. Harbeck. I don't know the answer to your question of 
percentage. It was done strictly--
    Mr. Pearce. Do you ever bring clawbacks against hedge 
funds, or the big guys?
    Mr. Harbeck. Oh, absolutely. And, in fact, if I could speak 
to your question and simultaneously to a point made by the 
chairman, many of the clawback suits are in sums in the 
hundreds of millions of dollars that have been settled.
    Mr. Pearce. The one speculation is that the trustee has 
said that 75 percent of the property is going to be distributed 
to institutional investors in the Madoff case. What happens to 
all the little guys?
    Mr. Harbeck. That statement was made by, I believe, Mr. 
Stein in his written statement. The trustee is going to 
distribute the money pro rata to each customer.
    Mr. Pearce. No. I said, what happens to the little guys?
    Mr. Harbeck. If there is a claimant who is, regardless of 
the nature of--
    Mr. Pearce. So the big guys get protected, and the lawyers 
get 500 bucks an hour, and we spend about a billion bucks.
    Mr. Harbeck. No, sir. Everyone gets the same pro rata 
share.
    Mr. Pearce. If you give 75 percent to the big guys, it 
looks like the little guys are going to be left out. I suspect 
I have used my minute there, Mr. Chairman.
    Mr. Harbeck. No, sir. I would like to respond, if I may.
    Chairman Garrett. Let me--
    Mr. Harbeck. Every customer--
    Mr. Pearce. The chairman owns the time, sir.
    Chairman Garrett. Yes. Let me go to the gentlelady from New 
York for a bit of--do you have any other questions?
    Then Mr. Stivers is--
    Mr. Stivers. Thank you. I have one quick follow up. Because 
when I was talking to Mr. Harbeck about the Madoff portion, I 
believe Mr. Madoff had two sides of his business. He had a 
broker-dealer side and an investment advisor side. And most of 
the problems were in the investment advisor side.
    But that is the side that is not regulated by FINRA. You 
indicated that his entire business was regulated by FINRA, or 
at least gave that impression. And I just wanted to make sure 
everybody in the room and everybody who might see this 
understands that the investment advisor side was not regulated 
by FINRA, and that is where most of the losses were.
    Is that correct?
    Mr. Harbeck. No, sir. Because the--
    Mr. Stivers. Okay.
    Mr. Harbeck. --custody of the assets would have been at the 
brokerage firm, and that should have been discovered.
    Mr. Stivers. The brokerage firm had the custody of the 
assets, but it may or may not have had the custody of the 
assets.
    Mr. Harbeck. It did not. That is the entire problem.
    Mr. Stivers. But that is the point. It may or may not have, 
in the first place--
    Mr. Harbeck. But FINRA--
    Mr. Stivers. There was no requirement that the investment 
advisor firm keep all of its assets at that broker-dealer firm, 
was there?
    Mr. Harbeck. No, but they did.
    Mr. Stivers. Okay, but there was no requirement. So 
therefore they could say they are--we have them somewhere else. 
And FINRA doesn't--you have to--there is too much coordination 
requiring, and FINRA doesn't have the ability to look at 
everything. So they are looking at the broker-dealer side of 
the business, and maybe they missed some stuff.
    But the whole point is, there is not really an SRO on all 
of the Madoff business, is there?
    Mr. Harbeck. No.
    Mr. Stivers. Thank you.
    Mr. Harbeck. Okay.
    Mr. Stivers. I yield back my time.
    Chairman Garrett. Mr. Green?
    Mr. Green. Thank you, Mr. Chairman.
    When the individual investor makes an investment through an 
institution, and that institution benefits from the common pool 
of assets, does the institution that benefits from the common 
pool of assets receive instructions as to how it is to 
distribute the funds to the individual investor?
    Mr. Harbeck. That is done by contract between the 
individual investor and the fund. But in response to 
Congressman Perlmutter's concerns, when we have settled--when 
the trustee, rather, has settled with a fund, perhaps on a 
fraudulent transfer of preference, thus allowing the fund to 
share in the pool, one of the things that we, the trustee, has 
done is, as part of the settlement, get an agreement from the 
fund that the money flows straight through to the individual 
investors.
    Mr. Green. Thank you.
    I yield back, Mr. Chairman.
    Mr. Perlmutter. Thank you. And sort of going back to the 
preference-fraudulent transfer piece of all this, the question 
is, let us say I put $100 in. I get to a fraud. I get 50 bucks 
back, so I have still lost 50 bucks. Somebody else puts $100 
in, and they get nothing back because they are the last guys in 
the game.
    The question is, I am out $50, but I got $50 more than the 
other guy who got robbed. So the question is, should we all get 
robbed equally? And I think that is where this clawback stuff 
comes in, and the policy behind the clawback. As we do these 
preferences, as say Tremont settles with the trustee, recovers 
all sorts of money, goes to Tremont.
    When I am looking at your letter--and I thank you for your 
letter of September 11th, actually, or September 30th--how will 
all of these investors from Colorado know that they are going 
to get treated proportionately as to Tremont's share?
    Mr. Harbeck. We don't.
    Mr. Perlmutter. In terms of the preferential or fraudulent 
transfer of recoveries--
    Mr. Harbeck. The way it works is, Tremont would have 
returned a preference of fraudulent transfer to the trustee, 
thus enabling them--freeing up, if you will--the entire amount 
of their valid claim. In the settlement of that preference, the 
trustee said that he would only enter into the settlement if 
Tremont or the other entities similarly situated would agree 
that regardless of any contractual commitments between the 
individual investors and the fund that they would pass the 
money straight through.
    You have demonstrated one of the hard problems of what 
happens when somebody pulls out of the fund itself, not out of 
the Madoff case. And all of that has to be done at the level 
where the books and records are for that particular fund.
    Mr. Perlmutter. Okay, thank you.
    Chairman Garrett. The gentlewoman from California?
    Ms. Waters. Thank you very much.
    Ms. Bowen, I see that you have described to us your work 
with the Task Force. And I am looking at recommendation number 
three--``protect participants in pension funds on a pass-
through basis.'' And I happen to have a communication here from 
Colorado, from one of our constituents.
    Let me just read it to you: ``My name is Peter J. Leveton. 
I live in Lakewood, Colorado, a Denver suburb in Congressman Ed 
Perlmutter's 7th District. I am an indirect investor victim of 
the Bernard L. Madoff Investment Securities, LLC (`Madoff' or 
`BLMIS') Ponzi scheme, and a Co-Chairman of the Agile Funds 
Investor Committee of the Agile Group, LLC, Boulder, Colorado 
(`Agile' or `Agile Group'). In December 2008, Agile had 205 
investors and managed three primary hedge funds. The Group and 
its funds are currently in liquidation.''
    Now listen to this: ``A large portion of Agile's funds 
under management were invested by Agile in the Rye Select Broad 
Market Prime Fund (the `Prime Fund') managed by Tremont Group 
Holdings, Inc. (`Tremont' or `Tremont Group'), and invested by 
Tremont with Madoff/BLMIS. Tremont is a subsidiary of 
Oppenheimer Funds, itself a subsidiary of Massachusetts Mutual 
Life Insurance Company.''
    I am trying to read this so I can get it all in very fast. 
Is this what you are referring to when you are rejecting the 
idea of pass-through to all who would claim that they should be 
considered for protection?
    Ms. Bowen. Yes. You mean outside of the pension, we would 
say other indirects would not be entitled? There would not be 
any direct customer relationship, in that case?
    Ms. Waters. What moves me about this is, he goes on to say, 
``Many of us placed a lifetime of savings in what we believed 
were safe investments but which were ultimately invested with 
BLMIS, often without our knowledge.''
    ``Many of us are now devastated, financially and 
psychologically.''
    ``Many of us have sold or are trying to sell our homes just 
to obtain money to live on without becoming wards of the 
state.''
    ``Many of us in our 60s, 70s and 80s have been retired but 
have had to, or are attempting to, go back to work,'' and on 
and on and on.
    The pension funds where you have the protection, they are 
more sophisticated. And, of course, they should have a lot more 
knowledge about investments.
    But these people, who appear to have invested in some small 
entities who were managed by other entities that were managed 
by other entities, had no idea this was going on. So do you 
feel that they have no right to some kind of protection?
    Ms. Bowen. I do empathize with them. They obviously have 
recourse against the funds in this instance. But SIPC was not 
really created to reimburse victims such as those, who 
unfortunately suffered because they put money in the wrong 
place. It is really unfortunate, but that is not what we were 
entitled to do.
    Ms. Waters. All right. Given that, I understand exactly 
what you are saying. But for those who are members of SIPC, are 
they advised or told, or any regulation or rule, about who they 
represent and how many they represent and who these people are? 
What is the responsibility of SIPC to the members who are 
covered?
    Mr. Harbeck. I am not certain I know what you mean, unless 
you are talking about the Agile to Rye to Tremont situation, 
something like that.
    Ms. Waters. Yes, I am talking about this situation.
    Mr. Harbeck. The fact of the matter is, there would be no 
way for SIPC to know those relationships.
    Ms. Waters. I know, and that is my question. In your Task 
Force review, did you consider this aspect of it? That you have 
your members who don't--SIPC would not know the relationship of 
the members that are protected to all of these other entities 
that are involved with them.
    Ms. Bowen. Yes.
    Ms. Waters. Was that considered?
    Ms. Bowen. It was considered by the Task Force. And we did 
hear from investors such as the one that you mentioned. We 
also, with some of our participants on the Task Force, 
particularly the State securities regulator--it was rightly 
pointed out that there are Ponzi schemes and frauds that occur 
throughout their State all the time. And those folks are not 
entitled to SIPC protection because it is not a broker-dealer.
    So unfortunately, we do have really bad people who are 
taking money from other people. But that is not really what 
SIPC is supposed to be protecting.
    Ms. Waters. So SIPC has no responsibility in this 
whatsoever in terms of educating?
    Ms. Bowen. Yes.
    Ms. Waters. The kinds of forms that you are talking about--
    Ms. Bowen. Yes. No, and that is something we did spend a 
lot of time talking about. Because there is a misperception as 
to what SIPC is and what SIPC is not. And so one of the 
recommendations is that we work with the SEC, with FINRA, and 
with the State regulatory agencies to try to broaden the 
educational pool; to, in fact, hire someone whose job is to 
work with these entities to better get the word out to the 
investing public as to what it is that SIPC does protect as 
well as what it does not protect.
    Ms. Waters. Does the broker-dealer have any responsibility 
to tell them that?
    Mr. Harbeck. The only responsibility is to display the 
symbol. We, at one point many, many years ago, tried to expand 
the investor education levels by the SEC. And we were not met 
with very enthusiastic results.
    Ms. Waters. So you need some congressional help.
    Mr. Harbeck. Let us see what we can do on our own first, 
and then we will try. Thank you.
    Ms. Waters. Thank you.
    Chairman Garrett. I thank the gentlelady.
    I thank the panel for your testimony, and for answering the 
questions today. Thank you.
    Ms. Bowen. Thank you.
    Chairman Garrett. The panel is dismissed.
    Mr. Harbeck. Thank you, sir.
    Chairman Garrett. And then we, following that, move on to 
our third and final panel for the day. And as you are getting 
ready, we have four members of the panel: Joe Borg, director, 
Alabama Securities Commission; Steven Caruso, partner, Maddox 
Hargett & Caruso; Ira Hammerman, senior managing director and 
general counsel, Securities Industry and Financial Markets 
Association; and Ron Stein, president, Network for Investor 
Actions and Protection.
    I assume that gave you all enough time, as I read that, to 
get your papers organized. I thank the members of the panel for 
coming forward today, and we look forward to your statements. 
As you know, your complete written statement will be made a 
part of the record, and you will now be recognized for 5 
minutes.
    Mr. Borg?

   STATEMENT OF JOSEPH P. BORG, DIRECTOR, ALABAMA SECURITIES 
                           COMMISSION

    Mr. Borg. Good morning, Mr. Chairman, Ranking Member 
Waters, and members of the subcommittee. Thank you for the 
invitation. I am honored to be back before the subcommittee in 
these hearings.
    I am Joe Borg, the State securities regulator for the State 
of Alabama. Our office has administrative, civil, and criminal 
authority under the Securities Act. And in addition to the 
examinations of audits of broker-dealers and investment 
advisors, we do quite a bit of investigation on Ponzi, 
pyramids, illegal blind pools, offshore and tax scams, 
fraudulent private placements under Reg D, oil and gas and 
everything.
    I have filed my written testimony with the committee, and I 
will briefly go over some of the points in that. And I will try 
and skip over some of the points that were discussed in the 
earlier panel. Direct equity investments, retirement plans, 
mutual funds, and similar investment vehicles have become the 
primary method by which Americans save for their future, 
accumulate wealth, and plan for a secure retirement.
    Financial fraud in any form threatens the future security 
and well-being of our citizens, destroys the hopes and dreams 
of families, and destroys what should be the golden years of 
our life-experienced seniors. As I previously testified back in 
September, the Task Force was charged to look at 12 particular 
areas.
    And out of that, we have a report covering 15 specific 
recommendations. The Task Force was split into two working 
groups. My particular subgroup covered recommendations 1 
through 4, 14, and 15. So I will briefly talk about those 
particular points.
    The $1.3 million reflects my original opinion of an 
increase to $1 million, plus an adjustment for indexing to 
inflation. Americans are looking to the markets and investments 
to secure their long-term future goals. The days of realizing 
the American dream of a secure future by saving only in a bank 
account or a certificate of deposit are long gone, especially 
with current rates below 40 basis points.
    Interestingly enough, in meeting with the Federal banking 
authorities, they had concerns about SIPC diverging from the 
historical relationship between FDIC and SIPC protection 
levels. In my opinion, the historical tie between SIPC and FDIC 
levels have contributed to the lack of understanding of the 
differences of FDIC and SIPC coverage.
    The insurance of FDIC to bank accounts, and the coverage 
non-insurance of SIPC to securities, is fundamentally different 
both in statutory application and practical application, at 
least under existing law. The reality is that my future 
security in retirement is not going to come from my savings and 
checking account, but from my investment accounts.
    Recommendation number two had to do with eliminating the 
distinction for cash and securities. This outdates--it is 
meaningless in today's markets. Consider that money market 
accounts were relatively small in 1978. Now, they are $2.7 
trillion. Brokerage cash sweeps into money market accounts or 
bank accounts overnight and back and forth, with substantial 
investor cash routinely held in brokerage accounts.
    Those funds deserve the full amount of SIPC protection. 
This distinction has caused inconsistent court decisions, 
investor confusion, and, in some cases, lost customer funds. 
Interestingly enough, the Canadian counterpart to SIPC did away 
with the distinction back in 1998.
    Again, banking authorities express concerns that SIPC will 
offer greater protection against cash losses than FDIC. This is 
an artificial connection. And again, maintaining parity does 
not benefit investors. The recommendation allows the realities 
of today's markets to determine the actual and appropriate need 
for the benefit of all investors.
    Recommendation three had to do with the pension funds on a 
pass-through basis. There are a lot of Americans whose 
investments are not, right now, covered by SIPC protection. 
They should not be discriminated against because they have some 
generally small accounts, they are part of a defined benefit, 
defined contribution, or a deferred profit sharing plan.
    The recommendations made comports with the trusted 
fiduciary provisions under ERISA. And we also took into 
consideration certain pension plans and employee benefit plans 
have been covered by FDIC and NCUA on a pass-through basis 
since 1978. On minimum assessments, according to the staff at 
SIPC, 25 percent of the membership paid a flat $150, based on 
net operating revenues.
    After Dodd-Frank, the 0.2 percent of gross revenues, many 
of the same members are actually going to pay less than $150. I 
think this has to do with accounting issues. If members are 
utilizing SIPC in marketing materials and benefiting from the 
SIPC program, they should pay some minimum amount.
    I personally thought the thousand was a little low, but the 
general consensus was a thousand would be reasonable in the 
current environment. The Task Force also discussed whether 
mutual fund dealers and assessments on mutual fund reserves 
should be included.
    SIPC currently exempts mutual fund revenues. 
Representatives of the mutual fund industry made a case that 
there was no significant history of losses to investors. I did 
not agree with the majority of the Task Force not to assess 
mutual fund revenues because the mutual fund industry utilizes 
the SIPC logo, touts specific coverage, and billions of dollars 
of mutual fund shares are held in street name.
    However, the fact is there is a history of minimal losses, 
and that was persuasive to the majority of the Task Force. And 
I respect the decision. Concerning international relations, it 
is a global economy. Geographical boundaries have no meaning. 
Cross-border effects of a failure like a Lehman or an MF Global 
have local, national, and international implications.
    The resolution depends on the respective national 
jurisdictions. That just doesn't work. The Task Force 
recommendation encourages SIPC to elevate the program in taking 
the lead in developing a new international association. I think 
investor education has already been covered.
    I proposed a suggestion with regard to adding information 
into brokerage accounts. The Task Force considered that 
recommendation, but were unable to determine the costs. The 
issue is left with a SIPC board. The invitation also asked for 
views on pending legislation. I will try and cover that very 
quickly.
    The purpose of fraud is simple; deprive honest people of 
their funds to benefit the crooks. Look, in a perfect world, we 
want anyone so injured to get back what they lost. The question 
is, is it the actual investment that was stolen and distributed 
as profits to other victims, less the amount taken by the 
crook, or what was promised--that is, the representations of 
potential profit.
    Our office investigates numerous Ponzi pyramids and other 
scams. I currently have 48 defendants awaiting trial for 
various forms of survey fraud right now, mostly Ponzis and 
pyramids and that type. In the past year, we have convicted 16. 
The problem is also the same: limited assets to distribute.
    And while the intent of H.R. 757 is noble, I think it is 
not equitable, and it confirms an unequal benefit to some 
victims over others. And unfortunately, earlier investors may 
benefit at the expense of later investments, and may receive 
distributions in excess.
    So with a limited amount of assets to distribute, we must 
find a way to treat every investor equitably by first 
attempting to make everyone whole on their initial investment. 
That is the amount invested minus amount received equals actual 
cash lost. Unless there is an endless supply of funds to pay 
promised returns, it becomes impossible from assets available 
to cover all promises.
    The fundamental problem with the last-statement approach is 
that when thievery is involved, the statements will match the 
fraudulent misrepresentations, historical or otherwise, 
regardless of reasonableness, market conditions, or reality. 
And H.R. 757 attempts to fix a terrible problem.
    I have a suggestion with part of it. During the September 
23, 2010, hearings, Professor Coffee and I--and I will give 
most of the credit for this to Coffee, it was his idea--here is 
a signage to consider the creation of a de minimis exception 
instructing a specific trustee not to bring a suit against 
persons whose withdrawals exceeded their investment by a set 
amount, a given amount.
    This would give peace of mind to many, but would not impede 
the trustee in his pursuit of the very large net winners. 
Another possible exemption is giving early investors credit for 
the imputed interest on their investments. Such amounts should 
not be regarded as fictitious profits.
    Congress could immunize some minimum amount of rate of 
return from the concept of fictitious profits. I don't know 
what that rate would be: 5 percent; 7 percent; 2 percent; or 
adjusted to some sort of standardized index. But whatever the 
basis is used, it should maintain equitable balance between the 
victims of a Ponzi scheme.
    H.R. 1987 contains similar concepts to H.R. 757. My 
commentary would be the same. I would say, again, there is no 
real profits in a Ponzi scheme, and payments to early investors 
are proceeds of a crime, unbeknownst to both the earlier and 
later investors.
    For a second, let me discuss indirect--
    Chairman Garrett. Before we do that, since you are 4 
minutes over time, let us allow the other members of the panel 
to testify, and we will come back to that thought.
    Mr. Borg. That would be fine, sir.
    [The prepared statement of Mr. Borg can be found on page 58 
of the appendix.]
    Chairman Garrett. Thank you.
    Mr. Caruso?

   STATEMENT OF STEVEN B. CARUSO, PARTNER, MADDOX HARGETT & 
                          CARUSO, P.C.

    Mr. Caruso. Thank you, Mr. Chairman, and Ranking Member 
Waters. My name is Steven Caruso. I am with the law firm of 
Maddox Hargett & Caruso in New York City. And as you may recall 
from our last appearance before this committee, our 
representation is of investors; people who have been defrauded, 
whether it is through some of the examples that we have 
discussed today--what I am going to call the ``trifecta of 
criminality,'' the Madoffs, the Stanfords, the MF Globals--but 
we see this every day.
    And in serving on the SIPC Task Force, one of the 
overriding considerations is, what are we going to do the next 
time one of these blows up? We have already today discussed the 
finances of SIPC. And if the Stanford case alone goes against 
the SIPC fund, that fund is gone. That fund is gone, the 
Federal Government backup of the SIPC fund is gone, and I would 
submit to you that investor confidence in our entire capital 
market system is going to be gone.
    So one of the primary things I think that needs to be 
looked at is, how do we pay for what needs to be done? And 
clearly, there are victims of Madoff, there are victims of 
Stanford. But the time, I would suggest, has come for this 
committee to consider requiring brokers and investment advisors 
to have insurance.
    It is too easy today to become a stock broker, it is too 
easy to become a registered investment advisor. But none of 
those folks are required to have insurance. So when we are 
entrusting them with millions of dollars, in some cases 
hundreds of millions of dollars, there is no requirement for 
any insurance whatsoever.
    And I think that as part of any legislation, insurance is 
something that needs to be considered. There is no free lunch 
in this world, and asking for insurance when we have to have 
insurance to drive a car, when we have to have insurance to 
rent an apartment, I think when we have a fiduciary who is out 
there as an investment advisor and an investment professional, 
requiring insurance will go a long way towards helping 
potential victims.
    I will yield back the rest of my time, given Commissioner 
Borg running over. And I thank you for the opportunity to 
appear here today.
    [The prepared statement of Mr. Caruso can be found on page 
160 of the appendix.]
    Chairman Garrett. There you go. Thank you, Mr. Caruso.
    Mr. Hammerman, please?

   STATEMENT OF IRA HAMMERMAN, SENIOR MANAGING DIRECTOR AND 
GENERAL COUNSEL, THE SECURITIES INDUSTRY AND FINANCIAL MARKETS 
                      ASSOCIATION (SIFMA)

    Mr. Hammerman. Thank you for the opportunity to testify as 
a member of the SIPC Modernization Task Force. I am appearing 
here today in my individual capacity, and not speaking on 
behalf of my fellow Task Force members.
    I would like to highlight some of the important pro-
investor changes recommended by the Task Force, namely 
expanding and increasing the protection available to customers 
in three important ways.
    First, when a brokerage is liquidate and the customer 
property marshaled by the trustee is inadequate to return all 
customer fund and securities, SIPC makes advances from its own 
funds to assure the return of the customer's property. For over 
30 years, these advances have been capped at $500,000 per 
customer. The Task Force recommends increasing the maximum 
advance to $1.3 million to adjust the limit to reflect 
inflation since 1980.
    Second, SIPA currently distinguishes between claims for 
cash and securities, setting a lower $250,000 limit on claims 
for cash entrusted to the broker-dealer. The Task Force 
recommends eliminating this distinction, which has been a 
subject of controversy and unproductive litigation.
    And third, the Task Force recommends a limited pass-through 
of SIPC protection to make individual pension plan participants 
eligible for advances with respect to their share of the plan's 
accounts at a failed broker-dealer.
    While I support these recommendations, I wish to note that 
they were made without any real consideration of their cost. 
This cost will be funded by the members of SIPC and, 
ultimately, by the investing public. Before implementing these 
recommendations, I suggest Congress obtain a reasonable 
estimate of the cost of that expanded protection, and consider 
whether these costs would be justified by the increased 
investor confidence.
    I am disappointed by the Task Force's failure to take 
action with respect to several critical areas previously 
identified by SIFMA. It is essential to ensure consistency 
between SIPA and the SEC's rules that determine the property a 
broker is required to reserve or segregate for its customers.
    Inconsistencies between the two may result in an insolvant 
brokerage holding an inadequate customer property to satisfy 
all the customers' claims for the property entrusted to it. To 
take just one example, discrepancies in the treatment of the 
proprietary accounts of broker-dealers may result in a multi-
billion dollar shortfall in the property available for 
distributions to customers of Lehman Brothers, as we have heard 
earlier today.
    The current discrepancies were briefly addressed by the 
Task Force's report, which recommended further study. The Task 
Force missed an opportunity to recommend a solution to a 
problem that is only going to become more urgent as the SEC 
promulgates rules for the protection of securities-based swap 
customers.
    Although the Dodd-Frank Act addressed the treatment of 
these customers in a liquidation under the bankruptcy code, it 
did not address their status under SIPA, where their status is 
highly uncertain. If they are not protected as customers under 
SIPA, securities-based swap customer protection rules may be 
futile.
    On the other hand, if they are protected as customers under 
SIPA, regular securities customers may be exposed to risks 
arising out of the swap business. The SEC should be authorized 
to make rules under SIPA so that it can promulgate harmonious 
rules addressing both the requirements for brokers to set aside 
property for customers, and also the distribution of that 
property in a liquidation.
    The SEC should consider tailoring the customer protection 
and distributive schemes so that customers with simple 
securities accounts are not unduly exposed to the risks of 
newer and more complex types of transactions. Finally, to the 
question of fraud committed by a broker-dealer, I would like to 
note, as intended by Congress, SIPC's funds are available only 
to replace missing customer property that was in the custody of 
a failed broker-dealer.
    I share in the sympathy with, and outrage on behalf of, the 
many innocent victims of massive fraud by the likes of Madoff 
and Stanford. Financial fraud undermines confidence in our 
markets and our regulatory system. However, SIPA is not 
intended to protect investors against losses on their 
investments, only against losses of their investments in the 
event of a broker-dealer failure.
    Investors who lose money because of a decline in the value 
of the securities are not protected by SIPA against such 
losses, whether the decline is due to market forces or even due 
to fraud.
    In conclusion. SIFMA appreciates the opportunity to 
participate in the work of the Task Force, and is committed to 
working constructively to modernize SIPA to better protect 
investors, and thereby increase confidence in the final 
markets. We look forward to continuing to work with the 
subcommittee on these important investor protection issues. 
Thank you.
    [The prepared statement of Mr. Hammerman can be found on 
page 165 of the appendix.]
    Chairman Garrett. Thank you, Mr. Hammerman.
    Mr. Stein?

    STATEMENT OF RON STEIN, CFP, PRESIDENT, THE NETWORK FOR 
             INVESTOR ACTION AND PROTECTION (NIAP)

    Mr. Stein. Thank you, Chairman Garrett, Ranking Member 
Waters, and members of the subcommittee. My name is Ron Stein, 
and I am president of the Network for Investor Action and 
Protection, NIAP, a national nonprofit organization comprised 
of small investors dedicated to improving our Nation's investor 
protection regime.
    I am also a registered investment advisor, certified 
financial planner, and a member of the financial services 
community. NIAP's primary constituents are individual, 
noninstitutional investors who are often the least equipped to 
deal with the fallout arising from Madoff-like catastrophes, 
but include an increasing number of regular investors concerned 
about protecting their assets.
    To supplement my written testimony, which goes into great 
detail about the Madoff liquidation and the urgent need for 
H.R. 757, I wish to emphasize the following points. First, a 
majority of the Madoff victims have not and will not receive 
any of the SIPC advance guaranteed by Congress under the SIPA 
statute due to the misguided and inequitable methodology 
adopted by SIPC and the trustee, which minimizes investor 
protection and the amount that SIPC needs to pay to defrauded 
investors.
    Despite assertions to the contrary, the payment of SIPC 
advances has nothing to do with investor-to-investor fairness 
or parity, nor does it reduce the amount of a customer fund 
available for distribution to customers. SIPC advances come 
from the SIPC fund, not from the customer property.
    Over 3 years into the fraud, it appears as though the 
Madoff liquidation has protected SIPC and enriched the trustee 
and the trustee's law firm at the expense of the customers. The 
trustee has acknowledged in court filings that his method for 
calculating net equity has saved SIPC over a billion dollars, 
money that should be paid to the victims.
    At the same time, the cost of the liquidation has exceeded 
$450 million, and this committee has been told to expect that 
an additional billion dollars will be spent before the process 
is complete. Ironically, it would have cost approximately the 
same amount to pay each Madoff victim the full measure of SIPC 
advances guaranteed by Congress when it enacted SIPA.
    SIPC and its trustee have fashioned a net equity 
methodology which consciously ignores reasonable customer 
expectations as reflected in customer account statements, 
destroys the certainty Congress intended under SIPA law, and 
virtually ensures that no rational investor can have confidence 
in our capital markets or in the protections that SIPC promises 
but fails to deliver.
    These core principles of basic investor protections were 
the fundamental reasons--indeed, the stated purpose--of 
enacting SIPA, despite an explicit congressional prohibition to 
the contrary. And in the Madoff liquidation, the trustee has 
been given carte blanche to create whatever definition he wants 
of net equity, including the one which favors SIPC over 
customers.
    As a result, customers can never be sure until long after 
the fact what protections they have if their brokerage firm 
fails. Moreover, in light of the clawback cases the trustee has 
brought, no investor will be able to safely withdraw funds from 
their brokerage account for fear that years later, some SIPC 
trustee will sue to recover those monies under the rationale 
that it was other people's money.
    Victims who have lost everything are now forced to defend 
against lawsuits that treat them as thieves, and victimizes 
them yet a second time. How can investors be asked to rely on a 
system which leaves wide open whether, and to what extent, SIPC 
will provide coverage, and which investors remain subject to 
clawback in perpetuity, even though they withdrew funds from 
their own accounts, in good faith, under the reasonable 
assumption that it was their own money.
    Simply put, as of now, no investor can have confidence in 
the validity of their statements. Enactment of H.R. 757 is a 
crucial step in restoring sanity to the SIPA process. It will 
make clear that account statements which reflect positions in 
real securities will be honored in the event of a brokerage 
firm failure.
    It will end the use of clawbacks against innocent victims. 
And it will end the cozy relationship between SIPC and their 
short list of trustees. I also commend Congressman Ackerman for 
his legislation which, among other things, would aid indirect 
investors who are often just as damaged, both financially and 
emotionally, from an event like Madoff.
    Thank you for allowing me to testify. I would now be 
pleased to respond to any questions. Thank you.
    [The prepared statement of Mr. Stein can be found on page 
211 of the appendix.]
    Chairman Garrett. Thank you. I thank the panel. I recognize 
myself, since--I was going to say because--I will begin on this 
point. We are all in agreement that there is an untold number 
of victims who are out there.
    But some of the beginning comments from this panel just 
lead me to a different set of--and I don't use the word 
lightly--``victims.'' That is, the conversations with regard to 
what happens as far as the fees, if you will, or the costs to 
the broker-dealers because of the money that is being paid out 
now and trying to build up the fund going forward, and what 
have you.
    It is interesting to hear, first of all, as far as the 
previous figure, about $150. And that may actually be less, in 
certain circumstances. But we have also heard from certain 
broker-dealers that the assessment figure could be 
substantially higher. And these are, usually, still the smaller 
guys who did absolutely nothing wrong in this situation and did 
nothing wrong in any other situations.
    But you might say, from their perspective and ours, as 
well, perhaps, that they are now being penalized for the errors 
of others. So I guess I will throw that out to Mr. Caruso, 
because I believe you were talking about the idea of mandating 
insurance. Is this a different, another class, of ``victims'' 
that we have to consider because of the ills and the bad 
behavior of others?
    Mr. Caruso. Chairman Garrett, one of the ways I would 
respond to your question is, I have never had a car accident in 
35 years of driving. And yet through my insurance coverage, I 
am certainly paying for the ills of others. Again, looking at 
our financial system, somebody is going to need to focus on how 
we finance what we are discussing in this hearing and in 
similar hearings.
    Whether we provide restitution, the money is not endless. 
Although I guess in this City, sometimes people think it is 
endless. But if you look at the SIPC fund, there is not enough 
money to accomplish, I would submit, what needs to be 
accomplished. The Madoff investors are victims because quite 
honestly, the government let them down.
    The SEC did not pick up on what was going on. I think they 
deserve to be treated differently than the Stanford investors 
or the ML Global investors. But clearly, where the government 
is at fault, and allowed certain things to go on longer than 
they clearly should have, those people are indeed being 
victimized twice.
    Chairman Garrett. Thank you.
    Along another note, the whole panel was here, obviously, 
all day listening to the previous panel. Mr. Stein, you heard 
Mr. Harbeck discuss several reasons why--three or four reasons 
why--he had concerns with, or opposed H.R. 757. Would you like 
to run down some of those, his position versus whether he is 
correct in his oppositions?
    Mr. Stein. I think Mr. Harbeck has a slightly different 
worldview than we do at NIAP. I think what we have all clearly 
heard from Mr. Harbeck today is that the SIPC fund, instead of 
perhaps saying, how can we help, says, how can we not help. I 
think, in Mr. Harbeck's worldview, there is equitability in 
denying SIPC protection for 75 percent of the victims, of the 
innocent victims of a fraud.
    I think, in Mr. Harbeck's worldview, suing a thousand 
innocent victims on a clawback claim is an equitable solution. 
I think in Mr. Harbeck's world, making sure that close to 90 
percent of the recoveries of customer property go to the 
highest, most wealthy institutions and institutional investors 
is equitable.
    I think what Mr. Harbeck is missing is the point that there 
are basically two pots from which to provide restitution for 
victims or benefits to victims. You have the SIPC fund, which 
has a responsibility to pay victims based upon their final 
account statements, or the reasonable expectations of those 
final account statements.
    And I would say that is a very, very core principle 
underlying the creation of SIPA, and that is step one. Step two 
is finding and seeking some equitable solution to dealing with 
the distribution of money from the recovery of customer 
property. But to focus on customer property, we believe is a 
red herring.
    Second of all, Mr. Harbeck seems to feel that in some way, 
paying SIPC benefits in a Ponzi scheme empowers the fraudsters; 
it legitimizes the fraudsters. I would suggest to you that the 
only thing that legitimizes the fraudster is the failure of the 
regulatory apparatus to catch the fraudster.
    And to say that the protection of--that giving funds to a 
customer or a victim of a fraud in a situation like this 
enables the fraudster is akin to saying a fire truck and a 
fireman putting out a fire that was caused by an arsonist in 
some way legitimizes the arsonist. It is an absolute absurd 
twisting of the concept.
    At the core, we are talking about protecting customers. We 
are protecting small customers, people who are at the core of 
our financial system. And it doesn't sound to me like Mr. 
Harbeck has really addressed those core principles. Because 
that, in fact, is what is needed for Madoff victims now.
    Chairman Garrett. Thank you. And I have a few more 
questions.
    But Mr. Hurt? Thank you, Mr. Stein.
    Mr. Hurt. Just following up with Mr. Stein, what I thought 
I heard Mr. Harbeck talking about, though, was that, in his 
opinion, the SIPC was not designed financially, in a fiscal 
way, to be able to address all of the inequities that could 
possibly occur. And that with respect to the Stanford case, if 
you follow the rules as he interprets them, it was not designed 
to do that.
    Now, if Congress or SIPC wants to expand that authority, 
then suddenly you are going to have to build a different model 
and there is going to have to be more capital involved. I think 
what he said was you would end up having to draw down on the 
equity line with the Treasury in order to be able to guarantee 
that.
    I think that is what he was saying. Can you talk about it 
in terms of that? Because I think that is what he was saying.
    Mr. Stein. Yes. Let me speak to that briefly, Congressman. 
I think, first of all, we are in great sympathy with a vast 
majority of the victims of the Stanford fraud. The vast 
majority of them had no knowledge that they were investing in 
something that was not going to be protected, that they were 
investing through a broker-dealer that was not going to 
property manage their funds.
    They are truly victims. And what I think is important for 
SIPC to do in a situation like this is to address the situation 
in a way that says, what can we do to help, and what do we need 
to do in the future to prevent these sorts of calamities from 
happening again? And frankly, that is something that requires 
all parts of the regulatory apparatus to work together.
    The fact of the matter is, Mr. Harbeck was correct. There 
were major failures of regulatory oversight that allowed the 
Stanford fraud to continue. And that is something that we have 
to pay very, very significant attention to. That said, I think 
we also have to find a way to think about how we can help the 
Stanford victims rather than do them further damage.
    Mr. Hurt. Another question that I would like to address, or 
have addressed, is a question that I asked the previous panel. 
And that is, when you look at the broker-dealers that are 
paying for this protection for the public--which I think 
everybody understands and agrees is appropriate--at some point, 
it seems to me, you have to be concerned about how much you are 
asking those to contribute.
    Because at the end of the day, that comes out of their 
bottom line. It makes them either more profitable or less 
profitable, allows them to stay in business and provide that 
protection.
    But it is something that I am aware of because as I travel 
across my district, I hear from people in every line of work 
who say, ``You know, these little fees, they sound good when 
you are talking about them in a committee meeting in 
Washington. But once they all pile up on us, they have a 
devastating effect on our ability to be competitive.''
    And I was wondering if maybe each of you could just speak 
to that topic. What is the appropriate level of assessment, and 
does that assessment take into account the size and relative 
risk that perhaps each dealer-broker exposes the fund to?
    Mr. Stein. I think Mr. Caruso has spoken well to that 
issue. But the fact that for the better part of the last 20 
years, every member of SIPC has been charged a paltry $150 per 
year, that ultimately led to the potential trauma that is now 
being experienced by the SIPC fund is beyond comprehension.
    And by the way, the SIPC fund as its presently constituted 
has more than sufficient assets to pay off the advances to all 
the Madoff victims, just as a point to be made. But you get to 
a very important point. And that is, why were the members of 
SIPC resistant to increasing SIPC fees for the last 20 years, 
when this committee and other committees recommended an an 
increase to the SIPC assessment over the last 20 years?
    We would have a SIPC fund that would have multiples of 
billions of dollars, more than capable of paying for the 
Stanford and the Madoff and, potentially, even some of the MF 
Global situation had there been a proper assessment on the SIPC 
members.
    Now, the second part of this that Mr. Caruso alluded to is 
the process of underwriting. If you are going to take on a SIPC 
member who increases by their very practice the level of risk, 
it is important that we find some method to increase the cost 
for that individual. A high-risk driver should be charged a 
higher rate than a low-risk driver.
    An investment advisor that has custody of their own assets 
should probably be charged a different rate than one that 
doesn't. So to get to the ultimate part of it, I think we have 
to find an assessment level that is consistent with the risk, 
and also begin the process of bringing in the private sector to 
improve the extent of--
    Mr. Hurt. Thank you, Mr. Stein. My time has expired, but I 
don't know if, without objection, there are others who could 
add to that point. Go ahead.
    Mr. Hammerman. Thank you, Congressman. I just wanted to 
echo the concern raised by your question. There are 
approximately 5,000 different broker-dealers, many of whom are 
small business operators. Which is why, in my oral statement, I 
indicated that while as a Task Force member I agreed with the 
notion of increasing the level of protection to the $1.3 
million, one piece that we as a Task Force just did not really 
analyze is the cost.
    What will these costs ultimately require for all the 
broker-dealers, from the smallest firms up to the largest? So I 
just think that is a relevant question, and part of the data 
analysis that should occur.
    Mr. Hurt. Mr. Caruso?
    Mr. Caruso. Thank you, Congressman. Obviously, we don't 
have access to the member assessments from SIPC as far as who 
is paid what over the past number of years. But looking just a 
few years ago, realize Citigroup global markets, Smith Barney, 
Merrill Lynch, Morgan Stanley--those firms paid a total of $150 
apiece.
    So does the system have to be changed? Certainly. You can't 
have a firm of that size, with thousands of brokers, paying 
$150. To come down here today, the shuttle cost me $800. Now, 
at $150 a year, I would have paid my SIPC dues for almost 6 
years.
    That is insanity, and that is what is at the core of the 
problem today, and why I would suggest that the SIPC fund, with 
just one more catastrophe, will not be viable any longer on its 
own or with the Treasury backstop.
    Mr. Hurt. Mr. Borg? Thank you.
    Mr. Borg. The question of assessments really depends on 
what the focus of the fund is to do. If it is going to be 
limited to where it is now, or at least under the current 
interpretation, that is going to be one assessment. If you are 
going to expand it to cover potential losses on statements that 
may be inflated--especially 20 years' worth of Bernie Madoff--
that is going to be a completely different assessment.
    I think the committee, the Task Force, when looking at 
this, made recommendations not knowing what those costs would 
be. So we took what was the current law--the Dodd-Frank 0.02, 
quarter of 1 percent on revenues--and said that is what the law 
is now. And what we only did was say, look, it is ridiculous to 
have $150.
    At least have some minimum. But I think it is incumbent 
upon Congress to decide where the parameters are. And I think a 
lot is going to depend on this SEC versus SIPC lawsuit. 
Because, quite honestly, if the SIPC is required to pay the 
Stanford or the account stated on account statements, then I 
would submit to you I have about $4 billion or $5 billion worth 
of Reg D 506s sold through broker-dealers on oil and gas deals 
and medical facilities that also would be required to pay.
    What my concern is on the bills is not what you are trying 
to accomplish. It is that they only cover certain Americans in 
certain situations. Everybody is entitled to equal protection 
of the law. If you are going to cover Stanford--which, in 
essence, is going to cover an overseas bank, basically turning 
SIPC into FDIC insurance for an overseas bank--what about one 
of my cases? Mallory is a now-defunct broker-dealer.
    I put them all in jail. There are not assets. But I have 
probably $600 million worth of account statements and folks who 
invested in U.S. projects that were fraudulent. There is no 
SIPC coverage for that. I can't give them their money back. 
Lets cover it for all Americans. But at that point, you have to 
look at what that universe is.
    You cannot parcel the universe and say just Stanford or 
just Madoff--cover everybody, or decide not to cover anybody. 
Or try and find some level of protection that everybody can 
participate in.
    Mr. Hurt. Thank you, Mr. Chairman.
    Chairman Garrett. Sure.
    Just on that last line, I am sorry, I wasn't familiar with 
that case. So that was not a securities case. That was--
    Mr. Borg. Most of--
    Chairman Garrett. That last--they were--
    Mr. Borg. Sorry, Mr. Chairman. Yes, Mallory was a broker-
dealer out of California. It was FINRA-registered. However, 
they specialized in the private placements under Regulation 
506, which is exempt from State securities jurisdiction, except 
for enforcement. There is no gatekeeper function. And what we 
discovered was that out of southern California, they were 
running an operation where they would do multiple 506s; 72 
percent to 75 percent of all the money went to the company--
salaries, bonuses, salesmen.
    There was never any money for projects. They would open up 
a little project, and there was no chance it would ever succeed 
because there was no money to fund it. And this was a primary 
fraud. We see the same thing with captive broker-dealers in the 
oil and gas industry, where an oil and gas developer will set 
up a broker-dealer and sell only oil and gas placements.
    DBSI out of Idaho was a real estate pool.
    Chairman Garrett. And that would not come under the SIPC, 
then?
    Mr. Borg. No, because it is all fraudulent statements with 
false profits. It is identical to the Stanford situation.
    Chairman Garrett. Yes.
    Mr. Borg. But if the case turns out that it is covered, 
then I think all those have to be covered, as well.
    Chairman Garrett. Yes.
    I have a couple of other particular questions. But I guess 
Ms. Bowen actually raised some of that point before as to there 
are other classes, there are other activities of fraud that are 
out there--and we are trying to address where this fraud should 
be covered, right?
    And I appreciate that. Part of the problem in this 
particular area is, where you were, clearly, in Madoff--which 
is the more infamous one where you are looking in that 
situation: one, it was covered; and two, there was an 
expectation of coverage.
    Now we get into the two issues that we have in that 
particular case. Obviously, the one that the gentleman from 
Colorado picks up on the most is the feeder fund situation, and 
what was the expectation in that situation as far as the 
unlearned, the average investor on that situation.
    And the other is the situation about the various pools of 
funds that are available for recovery. And to those separate 
points, Mr. Borg, you raised the point, I guess, in your 
opening comment. Just a side line on this is how mutual funds 
are treated under this.
    The fact that they have the logo there, so to speak--
although I guess most people really don't see that, since you 
are dealing with a lot of this online nowadays--your position 
was, and I will look at the rest of the panel, what the 
solution is, dealing with mutual funds.
    The exemption is appropriate? Or is the exemption similarly 
removing of that logo, and say since they are not going to--
    Mr. Borg. Mr. Chairman, I disagreed with the rest of the 
Task Force members on this point. I thought mutual funds, 
because they do: one, use the logo; and two, because money is 
going back and forth in brokerage accounts and there are all 
these mutual funds that are being held in a street name for 
that matter--all those shares that back up the mutual funds--
    Chairman Garrett. Sure.
    Mr. Borg. --I just thought they should not be an exemption. 
I don't know what that kind of money would bring in, but that 
is a huge industry.
    Chairman Garrett. Does anybody else want to--since we know 
you were on that--just find where the rest of the panel is?
    Mr. Caruso. The only thing I would offer, Mr. Chairman, is, 
when we explored that issue as part of the Task Force, one of 
the things we looked at was how often do mutual funds fail. 
Yes, they all use the SIPC logo, but they don't pay anything 
for it. And the counterargument from the Investment Company 
Institute--the trade association for mutual funds--was, none of 
our members ever fail.
    As Commissioner Borg indicated, mutual funds are a huge 
business in today's day and age, and they are part of the 
securities industry. But historically, they have been carved 
out.
    Chairman Garrett. Right.
    Mr. Caruso. Revenues from mutual funds. And I think given 
the current financial position in the environment, it is 
something that needs to be revisited.
    Chairman Garrett. Right. Anybody else?
    Mr. Hammerman. The only thing I would add, Mr. Chairman, is 
that many mutual fund complexes have broker-dealers as part of 
the complex. That is how they sell the mutual funds. So there 
would be SIPC coverage and assessment at that level.
    Chairman Garrett. Okay. The magnitude of those funds is 
still de minimis, based upon the current configuration.
    Mr. Stein?
    Mr. Stein. I would agree exactly with what Mr. Hammerman 
just said on that.
    Chairman Garrett. Yes, yes. And also, I am down here, and 
since I can give myself as much time as I want--but I am 
mindful of your time--SIPC says what with regard to the payment 
methods? Cash-in, cash-out, right, when you are dealing in that 
equity calculation?
    Do you want to just spend a moment on the appropriateness 
of that? And then to bifurcate that issue--and the rest of the 
panel, I will throw it out to you, as well--to bifurcate that 
issue to the fact that you can bifurcate that as far as whether 
you have one pool or two, right? The advances, or the other 
assets--back?
    And your comment would be in general, should there be a 
distinction when you are dealing with both pools?
    Mr. Stein. Sure.
    Chairman Garrett. Okay.
    Mr. Stein. Sure. Sure, let me get to that.
    Chairman Garrett. Okay.
    Mr. Stein. All right. So when Congress passed SIPA law in 
1970, at the same time that it was moving away from the use of 
physical securities that you referred to earlier today, it was 
doing so at the same time it was making an agreement with the 
American public of offering a degree of assurance that what was 
going to be replacing that physical security had to be 
meaningful.
    It was intended to be modeled on the kinds of assurances 
that were provided by the Federal Deposit Insurance Corporation 
(FDIC). In fact, the original legislation was essentially a 
cut-and-paste from the original FDIC legislation. But the 
upshot, it was trying to protect the small investor and create 
a state of certainty, so that an investor knew that when we 
were dealing with something that was on an account statement, 
it was a true and honest and legitimate reflection of what they 
owned. Congress made this recommendation amidst a background of 
failed brokers, of Ponzi schemes, of thefts. The circumstances 
all existed, that we are talking about today, in various forms.
    And Congress still said, we are creating a SIPC fund. This 
fund is going to protect the net equity based on understood-to-
mean final account statement. So that an investor knew, when 
they looked at their statement, that they owned something. And 
it was necessary. Because after all, we were looking at 
protecting the smaller investor.
    Richard Nixon's statement, when he signed that legislation, 
was a profoundly powerful one. And what it does tell us, very 
clearly, is that investors who are in their later years, who 
are now living on their retirement funds, cannot afford to 
think that their protections are being reduced by the amount of 
money that they pull out of those funds.
    That the profits that their hard-earned savings have made 
on those funds in those accounts, whether it is at a bank or a 
financial institution, have to be protected. And that worse 
still, somewhere down the road, no trustee can come in 20 years 
hence and say no, you have to give that money back.
    That is precisely what is going on now. So the SIPC fund 
itself has to be based upon reasonable expectations of final 
account statements. And frankly, if the statements are 
outrageous or wrong, then we really have to get to whether or 
not a person receiving those statements was willfully turning a 
blind eye.
    The courts have the ability to say no, you are getting 40 
percent return--maybe you don't get that protection. But when 
we come to the issue of the recovery of customer property--and 
I think that is where so much of the time has been spent--maybe 
there is a different standard.
    The trustee has had the flexibility to apply a different 
standard and a reasonable standard. And that standard could 
incorporate the time value of money, it could find some way to 
equitably determine what the fair distribution would be of the 
recoveries of those monies.
    But it should not eliminate the use of final account 
statement and reasonable expectations on the core of this 
protection, which is the SIPC fund. So customer property has an 
opportunity to have all kinds of equitable, ratable 
methodologies applied to it to come up with a good solution 
based upon what the trustee sees at that particular time.
    The fund, however, that belongs to SIPC, the SIPC fund, is 
inviolate. It cannot be modified or changed. It is what the 
customer has to be relying upon for their protection.
    Chairman Garrett. The rest of the panel?
    Mr. Caruso. The only thing I would add, Chairman Garrett, 
is the one thing that has been clear from today's hearing is 
that how you stop this problem is you don't allow people to 
prepare their own account statements. If Madoff had not 
prepared his own account statements on one side of his floor, 
none of this would have happened.
    So, a very simple solution, if we want to keep this from 
happening again, is that I cannot prepare my own statements. 
That solves the problem.
    Chairman Garrett. Mr. Borg?
    Mr. Borg. In my office, investment advisors are looked at 
once every 3 years on a rotating cycle. We use a risk 
assessment. If they have custody and control, they go way to 
the top of the list and they are looked at a lot sooner and a 
lot quicker.
    If they are strictly financial advisors that just give 
advice, and they have no custody, no control--no physical 
custody of the property--then they go to the bottom of the 
list. Because there is a clearing firm or someone else out 
there. The comment was made, and we try and encourage at least 
the investment advisors under our jurisdiction--Madoff would 
have been under the SEC jurisdiction--to get a clearing firm.
    Again, I agree. A lot of the problems with these Ponzi 
schemes, if they are going through either a brokerage, or 
usually an IA, can be eliminated by actually having a dual or 
triple control. Because now you have three entities that have 
to conspire to make it all work.
    Chairman Garrett. Unless, of course, you control all three 
entities, and, as in the Madoff situation, where--
    Mr. Borg. In that case, I would consider that as a unitary 
control because Mr. Madoff actually had control over both ends 
of his business. There has to be a Chinese wall between the 
two. Even where there are clearing firms that self-clear, we 
look at the controls between the two. Usually it is an outside 
auditor or an outside advisor, or some other third party that 
has to certify that they have looked at those systems and those 
systems are intact.
    Chairman Garrett. Have you ever had the case where you have 
a situation like that? Where there is collusion, and it doesn't 
solve the problem, as Mr. Caruso suggests?
    Mr. Borg. I have not seen--yes, one time that I can think 
of. In fact, it gets tied up with that Mallory case because 
there was a separate organization called Capital Guardian which 
handled the trust accounts.
    Chairman Garrett. Okay.
    Mr. Borg. In other words, if you had an IRA and there was 
collusion between the two. There was joint ownership, but it 
was so cleverly disguised it took us a little while to find it.
    Chairman Garrett. Find it, yes.
    Mr. Borg. But it didn't last 20 years.
    Chairman Garrett. Yes. That is because you had good folks 
over there digging into it on a regular basis--
    Mr. Borg. Thank you, Mr. Chairman. I appreciate that.
    Chairman Garrett. Sure.
    If Mr. Hurt does not have any other questions at this time, 
I will dismiss the panel, and thank you all very much for your 
testimony today. And without objection, I will put into the 
record a statement from the Financial Services Institute, and 
also from the Bond Dealers of America (BDA). Without objection, 
it is so ordered. And again, I very much appreciate this entire 
panel for your information and discussion today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    Thank you. The hearing is adjourned.
    [Whereupon, at 12:42 p.m., the hearing was adjourned.]










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                             March 7, 2012




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