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



 
                    OVERSIGHT OF THE U.S. SECURITIES
                        AND EXCHANGE COMMISSION

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

                                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

                               __________

                             APRIL 25, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-119



                  U.S. GOVERNMENT PRINTING OFFICE
75-091                    WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  



                 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:
    April 25, 2012...............................................     1
Appendix:
    April 25, 2012...............................................    51

                               WITNESSES
                       Wednesday, April 25, 2012

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange 
  Commission.....................................................     8

                                APPENDIX

Prepared statements:
    Schapiro, Hon. Mary L........................................    52

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Article by Beagan Wilcox Volz entitled, ``Lawyer Skewers 
      Boston Fed Chief's Money Fund Comments,'' dated April 24, 
      2102.......................................................    67
Schapiro, Hon. Mary L.:
    Written responses to questions submitted by Representative 
      Grimm......................................................    70
    Written responses to questions submitted by Representative 
      Hensarling.................................................    71
    Written responses to questions submitted by Representative 
      Hurt.......................................................    72
    Written responses to questions submitted by Representative 
      Miller.....................................................    75
    Written responses to questions submitted by Representative 
      Schweikert.................................................    77
    Written responses to questions submitted by Representative 
      Sherman....................................................    78


                    OVERSIGHT OF THE U.S. SECURITIES
                        AND EXCHANGE COMMISSION

                              ----------                              


                       Wednesday, April 25, 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 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Royce, Manzullo, Hensarling, Pearce, Fitzpatrick, Hayworth, 
Hurt, Grimm, Stivers, Dold; Waters, Sherman, Lynch, Miller of 
North Carolina, Maloney, Moore, Green, and Ellison.
    Ex officio present: Representative Bachus.
    Chairman Garrett. Good morning. Today's hearing of the 
Subcommittee on Capital Markets and Government Sponsored 
Enterprises entitled, ``Oversight of the U.S. Securities and 
Exchange Commission'' is called to order. I thank Chairman 
Schapiro for being with us this morning with all of her notes 
and preparation.
    With that, we will begin with opening statements, and I 
will recognize myself for about 3 minutes. And again, welcome.
    The intention of today's hearing is to conduct appropriate 
oversight of the operations of the SEC, and there is no 
shortage of issues that we will be hearing about.
    The SEC's current workload touches on almost every facet of 
the Nation's financial markets: money market funds; conflict 
minerals; the implementation of the JOBS Act; the oversight of 
broker-dealers and investment advisers; Title 7 rulemaking; 
credit rating agencies; market structure; accounting and 
auditing oversight; community advisers; and many more.
    It is because of this breadth and scope that all new market 
regulations coming out of the agencies must go through a 
rigorous review of costs and benefits associated with each 
rule. I want to thank the Chairman for her recent focus on the 
importance of this concept with the new formal Guidance on 
Economic Analysis issued last month to agency divisions and 
offices. This guidance and its newfound consensus of cost-
benefit analysis will hopefully rebut some of our colleagues on 
the other side of the aisle who continue to demagogue a cost-
benefit analysis as simply a way to undermine Dodd-Frank 
regulation.
    This analysis is actually a good faith attempt to ensure 
that new rules being produced meet their intended goals to not 
add unnecessary and overly burdensome costs to the private 
sector. So I look forward to continuing to work with the 
Chairman to ensure that this new guidance is binding on the 
agencies and the new standard in this document is applied to 
all rules under consideration. I also hope that the Chairman 
will be more supportive of my SEC cost-benefit legislation so 
that we can ensure that our future Chairmen are subject to the 
same appropriate standards.
    Another broader issue that needs to be addressed is the 
fundamental restructuring of the agency. Section 967 of the 
Dodd-Frank Act required an independent study to be done and 
recommendations to be made as to how the SEC should reorganize 
itself to be more efficient and achieve better results with the 
taxpayers' money. Section 976 also required periodic reports to 
the SEC on the status.
    The exploratory note to the SEC's March 30, 2012, report 
states, ``The Commission was not consulted on the decision to 
hire the consultants advising to the MAP Project or the cost of 
the scope thereof.'' I do find that statement troubling.
    Nowhere in Dodd-Frank are you required actually to spend 
literally millions of dollars for an outside consultant to help 
the agency implement the recommendations of the study. I have 
heard estimates of up to $10 million, something which could 
have been done internally through the Office of the Chief 
Operating Officer. This is a very blatant example of millions 
of dollars that people say are being wasted. And I find it 
difficult to sympathize with requests then that we hear from 
the agency for additional taxpayer money year after year when 
we are spending in this manner.
    Finally, I am dismayed that back in February when you gave 
a speech on the state of the SEC, you specifically omitted 
facilitating capital formation as a primary component of the 
SEC's mission. It is hard to imagine that this was just some 
sort of casual oversight, given the depth of the ongoing 
congressional negotiations at that time of the JOBS Act. 
Furthermore, in your testimony today, once again that area is 
omitted. Fortunately, there is a bipartisan and bicameral 
majority of Congress that recognizes the importance of capital 
formation on job creation, even if the agency and yourself do 
not.
    Too many times, the idea of protecting investors is only 
framed under the umbrella of protecting them from fraud. 
Protecting investors is also about assuring investors that they 
have a place to invest their capital and make a return. It is 
about providing investors with choices and cost-effective ways 
to conduct their business. Capital formation is a vital and 
equally important part of that mission. And hopefully, you will 
remember that in future testimony and remarks.
    With that, I yield back my time, and I recognize the 
gentlelady from New York for 3 minutes.
    Mrs. Maloney. Thank you so much. I would like to welcome 
you, Chairman Schapiro, and thank you for your service. It is 
nice to see you again. I believe I saw you last the week before 
the OGR Committee and that was hearing number 48. Is that 
correct?
    Forty-two? So now, it is 43--43 hearings you have attended. 
And at that hearing last week, I asked you about the progress 
the SEC is making in terms of implementing the many rules in 
Dodd-Frank, and I want to reiterate how important it is that 
these rules be done and finalized as soon as possible. Because 
in many ways I think it is the lack of certainty, not the rules 
themselves, that are concerning. And I know the SEC is working 
overtime to get these rules done and I am sure these issues 
concerning cost-benefit analysis will be firmly covered today 
and I believe that cost-benefit analysis is a very important 
part of making decisions going forward. I know that you do, 
too.
    I do want to mention that I am very concerned about the 
clearinghouse rules. It is very important, going forward, to 
make sure that these clearinghouses are rock solid strong. And 
your decisions that you made recently on high-frequency trading 
and the consolidated tape throughout this process is a very 
important one. And I also wanted to mention the swap 
definition. I know that is a rule you are working on jointly 
with the CFTC and it seems like that needs to be put in place 
before many other rules can be addressed.
    So I hope that you will be telling us where that is going 
forward. And the extraterritorial guidelines of exactly how far 
it goes and the oversight that you have, I hope is an area you 
will be discussing. As you know, the ranking member put forward 
an amendment in one of our bills that would have increased the 
oversight of the SEC in the territorial area. I also wanted to 
take a minute to raise the issue about real estate investment 
trusts which are a very important industry in my district.
    Last August, the SEC published a concept release to revisit 
the scope and application of the statutory exemption of 
mortgage REITs from regulation under the Investment Company Act 
of 1940. You well know the important role that REITs play in 
terms of providing liquidity in the housing market, and given 
the fragility of that particular sector, it has been the 
hardest one to bounce back.
    And the fact that significant holders of mortgage credit 
are backing away or deleveraging. We are always looking for 
ways to encourage increased participation of private capital. I 
know that you and your staff are giving due deference to these 
considerations. And I hope you will be mindful of this as you 
decide whether to move forward. And I look forward, as always, 
to your testimony, and I welcome you to your 43rd testimony 
before Congress this session.
    Thank you.
    Chairman Garrett. The gentlelady yields back.
    The gentleman from Alabama, the chairman of the full 
Financial Services Committee, is recognized for 3 minutes.
    Chairman Bachus. Thank you, Chairman Garrett, for holding 
this hearing.
    And thank you, Chairman Schapiro, for being here this 
morning.
    The Dodd-Frank Act expanded the SEC's authorities and 
responsibilities, requiring the Commission to promulgate 123 
rules, conduct 32 studies, and establish 7 new offices or 
committees. That makes today's hearing particularly urgent, as 
this committee has the responsibility to conduct oversight of 
the SEC's activities and initiatives and budget requests.
    The SEC's budget has increased by roughly $1 billion over 
the past decade, and the Administration is requesting $245 
million more for the agency than it requested in 2012. How the 
SEC spends its money is a reflection of the Commission's 
priorities, and this hearing will help us better understand 
what those priorities are, and how the SEC is prioritizing its 
resources.
    One of those priorities appears to be further money market 
fund reforms, yet, as Vice Chairman Hensarling and I noted in a 
recent letter to you, Chairman Schapiro, the SEC has missed 
numerous deadlines for mandatory rulemaking. So the suggestion 
that the agency is now devoting time and resources to a 
discretionary rule, without providing Congress or the public 
with empirical data and economic analysis to justify such a 
rulemaking, raises questions about the SEC's priorities and 
abilities to manage its resources.
    We believe the Commission should first determine whether 
more reforms are needed before choosing among the proposals 
that are reportedly under consideration. In past hearings, I 
have commended Chairman Schapiro for pursuing reforms designed 
to avoid future debacles such as the SEC's failure to detect or 
prevent the Bernie Madoff or Allen Stanford Ponzi schemes.
    However, I do want to point out--and this is not to 
diminish the fact that you have made a lot of needed reforms--
that one regulatory gap remains unaddressed--and you 
acknowledge this--relating to the Commission's oversight of 
investment advisers.
    Last year, only 8 percent of investment advisers were 
examined by the SEC. This lack of oversight, particularly in 
the aftermath of the Madoff scandal, is perilous and risky. 
Retail investors are at risk if their investment professional 
is examined only once every decade.
    All investment professionals should be subject to 
consistent examination and oversight, which is why bipartisan 
legislation I am introducing this week establishes one or more 
self-regulatory organizations to oversee retail investment 
advisers. This will dramatically increase the examination rate 
for investment advisers with retail customers.
    A responsive SEC that is wisely prioritizing its use of 
resources is the goal for all of us to share.
    I know you share that goal, Chairman Schapiro.
    I thank Chairman Garrett for calling this important 
hearing, and I yield back the balance of my time.
    Chairman Garrett. I thank the gentleman.
    Ms. Waters is now recognized for 3 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. I appreciate 
you holding this hearing today. And I would like to thank 
Chairman Schapiro of the Securities and Exchange Commission for 
coming before us to testify today. I appreciate that this 
subcommittee has conducted rigorous oversight of the SEC. By my 
count, this is the 16th time that the SEC has been before the 
Financial Services Committee during the 112th Congress. And of 
course, the Commission also makes frequent appearances before 
other committees in this Congress.
    There are several topics I hope we can explore with 
Chairman Schapiro today, including the SEC's budget request, 
implementation of the JOBS Act, potential money market fund 
reforms, and of course, the continued work to finalize rules 
related to the Dodd-Frank Act. I hope that we can productively 
explore these topics, but I also hope that we can recognize 
attempts to weaken or undermine the SEC, by either underfunding 
it, or imposing upon it much more onerous cost-benefit rules.
    I would like to believe, and I must believe, that we are 
all interested in an SEC that can perform the task and the 
mission that it is charged with. And that while there is need 
for clarification and definition, none of us on either side of 
the aisle would like to weaken the SEC and not have it do its 
job.
    The Commission has made a good faith effort to be 
responsive to some of the criticism of their cost-benefit 
analysis, and I am curious to hear more about the recently 
issued guidance on this topic. However, there has been a lot of 
work done by this committee that can be identified as 
legislative efforts that may tie the hands of the SEC as it 
attempts to protect investors.
    Some legislation that moved through this committee had 
perhaps laden the Commission with additional litigation 
expenses and could make it very difficult for the SEC to do the 
job that Congress asked it to do under the Dodd-Frank Act. 
There is no better effort or job that can be done by this 
committee than for both sides of the aisle to get together 
again and ensure that the SEC is not hampered in doing its job, 
and that all of the attempts that are being made in this 
committee are attempts to clarify, to define, and to clear up, 
rather than undermine.
    Under this backdrop, I think it is important to keep fresh 
in our minds what has happened, the damage that has taken place 
to our capital markets and our great economy just 4 years ago. 
We cannot forget the many foreclosures that have taken place, 
and all of the dollars of household wealth that has been wiped 
out; it must be kept fresh in our minds. Although the financial 
services industry has rebounded, American households still 
struggle from the fallout from this recession.
    Having said that, I hope that we can have a productive 
hearing today, and I certainly look forward to testimony from 
our witness.
    And I thank you again, Mr. Chairman, for holding this 
hearing.
    Chairman Garrett. I thank the gentlelady.
    Mr. Hensarling is recognized for 2 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    And welcome, Madam Chairman. I guess you took note that 
this is, I think, your 42nd appearance before the committee. 
Given that you have been in office for a little over 3 years, 
and given the provisions of the Dodd-Frank Act and a number of 
questions about the committee, my guess is we can get you up to 
50 appearances in relatively short order.
    As you well know, there are a number of members of this 
committee who are concerned about the lack of fundamental 
economic analysis that has historically taken place at the SEC. 
And I certainly want to commend Chairman Garrett for his 
legislation.
    At a time when our Nation is still suffering from roughly 
37 to 38 straight months of 8 percent-plus unemployment, with 
the underemployment being almost twice that, the worst record 
since the Great Depression, knowing how invaluable the 
efficiency and vibrancy of our capital markets is to job 
creation, it is a good and proper and important topic that we 
deal with on ensuring that there is meaningful economic 
analysis.
    In addition, there have been questions concerning the 
relative priorities of the Securities and Exchange Commission, 
and the seeming misallocation of resources as well. I do want 
to commend you for the steps that you have taken in issuing 
staff guidance regarding economic analysis. I will look forward 
to hearing more in this hearing about that.
    But I do want to also echo what Chairman Bachus said 
about--if my figures are right--the SEC having missed 
approximately 62 percent of its mandatory deadlines under Dodd-
Frank. And in this case, that might not necessarily be a bad 
thing, but it does question certain discretionary rules that 
are being considered, particularly the money market fund 
regulations where we are still looking for the rationale and 
the empirical evidence that the 2010 administrative rule 2A-7 
has not proven sufficient.
    So that is an open question in our minds. But I look 
forward to your testimony.
    And I yield back the balance of my time.
    Chairman Garrett. The gentleman yields back.
    Is there a request for time? Yes? Yes, there is.
    The gentlelady is recognized for 3 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman. I didn't 
prepare an opening statement, but I couldn't resist the 
opportunity to congratulate the Chairman of the SEC for the 
diligent hard work that they have done under very stressful 
situations with the tremendous numbers of additional 
responsibilities that have come to the agency upon the advent 
of Dodd-Frank.
    It has occurred to me that there are many criticisms that 
are levied against the SEC about your increased spending 
authority, but you have tremendous increased responsibilities. 
And I just wanted to make note of the tremendous breadth and 
depth of reforms that you have already put into place.
    I look forward to hearing your testimony and asking some 
very specific questions about some things I think are 
concerning to me.
    And with that, Mr. Chairman, I would like to yield back the 
balance of my time.
    Chairman Garrett. Thank you. The gentlelady yields back.
    Mr. Royce is recognized for 1 minute.
    Mr. Royce. Thank you, Mr. Chairman.
    There are some concerns. There have been many failures at 
the SEC over the last several years, and despite our hearing 
testimony from people like Harry Markopolos about the over-
lawyered culture at the SEC and the ``investigative 
ineptitude''--in his words--last Congress, Dodd-Frank rewarded 
the SEC with additional authority without looking at the 
fundamental problems within the agency. And that is one of our 
concerns.
    And Chairman Schapiro, I do not envy you. You have a lot on 
your plate as you display in your testimony today; you do. And 
I appreciate also the work you are doing with this idea of 
taking a slow-to-act bureaucracy head on with the idea that we 
are going to take people with expertise in these critical areas 
from the market and put them into important positions, hire 
them to these positions because they have a background. 
Addressing the over-lawyered nature of the SEC is important 
because there is a perception of regulatory competence 
throughout the financial sector. There is this perception that 
people do not have to do due diligence because, after all, the 
SEC is going to do that.
    And that leads, frankly, to an erosion of market 
discipline, in my opinion. That is one of the things that 
happened. Like it or not, that perception is out there.
    So it is in everyone's interest that we get this right to 
the extent possible following the crisis. And that is why these 
moves to bring people in with that type of expertise that you 
are undertaking, I think, is very important.
    I yield back, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    Mr. Fitzpatrick for 1 minute.
    Mr. Fitzpatrick. Thank you.
    Chairman Schapiro, good morning.
    You have made a number of speeches recently about your 
intention to propose rules later this spring to further limit 
the use of money market funds. And one element in the proposal 
would be to force money funds to float their net asset value so 
they could no longer be offered at a dollar per share.
    Another would be to impose capital requirements on money 
funds which would essentially make them more like a bank 
product.
    As a former county official from Pennsylvania whose county 
benefited from the use of money funds for cash management, I 
would like to hear about whether the SEC has done an analysis 
as to how many entities may not be able to use money funds 
under the proposed rules that are being considered at the SEC.
    With that I yield back.
    Chairman Garrett. And the gentleman yields back.
    Mr. Dold is recognized for 1 minute.
    Mr. Dold. Thank you, Mr. Chairman.
    Chairman Schapiro, welcome back. As always, we appreciate 
your time and testimony here today.
    These oversight hearings are critical. They are a critical 
congressional responsibility, and also critical for the 
Executive Branch agencies because they have a responsibility to 
help improve government transparency, accountability, and 
effectiveness.
    So I want to thank you for your participation. I guess we 
are going on 42 or 43--depending on how you count it--but 
certainly, we appreciate it.
    Obviously, the SEC is facing some significant changes, 
issues, and challenges. And these include conducting and 
completing multiple studies and reports, as well as writing and 
implementing many new and complicated and consequential rules, 
all dictated by Dodd-Frank.
    I am certainly pleased that this committee has worked 
frequently on a bipartisan basis to try to clarify 
congressional intent and try to identify and avoid unintended 
consequences, which necessarily come from a complicated Dodd-
Frank process.
    I know that we will get into many of these issues today, 
but for now I want to specifically highlight the municipal 
advisers rulemaking as one of the clearest, most important 
examples of the need to clarify congressional intent to avoid 
serious unintended negative consequences.
    So I look forward to your testimony today, and I look 
forward to digging into some of these issues.
    Thank you so much.
    I yield back, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    And finally, Mr. Grimm is recognized for 1 minute.
    Mr. Grimm. I thank the chairman.
    And welcome back, Chairman Schapiro.
    As I am sure most of us here would agree, in order to have 
strong financial markets in the United States, we must have 
clear rules that are fairly and uniformly enforced by 
regulators such as the SEC. And, unfortunately, if the crisis 
of 2008 showed us anything, it showed that a lack of 
enforcement of existing rules did help to bring our financial 
system to the brink of disaster.
    Therefore, today, if possible, I have particular interest 
in hearing what steps the SEC has taken thus far to implement 
the reform and modernization recommendation presented by the 
Boston Consulting Group, as well as which steps the Commission 
plans on taking in this area in the near future.
    With that, I yield back. And I thank you.
    Chairman Garrett. The gentleman yields back.
    And that, I believe, concludes all of the opening 
statements.
    We will now recognize our witness, the Honorable Mary L. 
Schapiro, Chairman of the U.S. Securities and Exchange 
Commission.
    Chairman Schapiro, you are recognized. And thank you again 
for being with us for many, many meetings.

  STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S. 
               SECURITIES AND EXCHANGE COMMISSION

    Ms. Schapiro. Thank you.
    Chairman Garrett, Ranking Member Waters, and members of the 
subcommittee, I appreciate the opportunity to testify regarding 
the recent activities of the United States Securities and 
Exchange Commission.
    In the past 3 years, the SEC has experienced enormous 
change, substantial challenges, and significant progress. The 
aftermath of the financial crisis, the extensive new 
responsibilities placed upon the agency, and the rapid growth 
of the financial markets have together obliged the SEC to 
become more efficient, creative, and productive to achieve its 
mission, which of course includes capital formation as well as 
investor protection.
    I am pleased by our record. To cite just a few highlights, 
the Commission filed more enforcement actions in the last 
fiscal year than it has ever filed, and it obtained orders for 
more than $2.8 billion in penalties and disgorgement.
    We brought actions arising out of the financial crisis 
against more than 100 individuals and entities, naming 55 CEOs, 
CFOs, and other senior corporate officers.
    We implemented a risk-focused examinations program, and in 
2011 completed more than 1,600 oversight exams. The exam 
program has resulted in both improved guidance to the financial 
industry about risky practices and in actionable information 
for our enforcement unit.
    We implemented a new whistleblower program that is already 
providing high-quality information regarding difficult-to-
detect wrongdoing and permitting the investigators to focus 
resources more efficiently.
    We improved our internal financial controls, which resulted 
in a GAO audit opinion for Fiscal Year 2011 with no material 
weaknesses. We implemented a host of internal reforms designed 
to improve the agency's structure, strengthen capabilities, 
upgrade internal controls, and enhance workforce competencies.
    And we have used external hiring opportunities to obtain 
specialized industry expertise in areas as diverse as 
quantitative analysis, computerized trading, and structured 
products.
    While we have made significant progress in many areas, we 
realize that we must constantly evolve to keep pace with those 
we regulate. In addition to improving our core operations, we 
are working to implement the significant new responsibilities 
assigned to the agency under the Dodd-Frank Act and the JOBS 
Act.
    Already the SEC has proposed or adopted rules for over 
three-fourths of the more than 90 Dodd-Frank provisions that 
require SEC rulemaking. And we have issued 14 of the required 
studies and reports.
    While the agency's budget has grown in recent years, so 
have our responsibilities in the size and complexity of the 
markets we oversee. For example, during the past decade, 
trading volume in the equity markets has more than doubled, as 
have assets under management by investment advisers now 
totaling $48 trillion--trends that are likely to continue for 
the foreseeable future.
    In addition to the growth of the market, the new 
requirement of the JOBS Act will also call for significant 
commitment of agency resources. There, too, we have made 
progress. We have formed rulemaking teams comprised of 
economists, attorneys, and experts. We have sought public 
comment earlier than the rulemaking process requires.
    And in the days immediately following enactment, the staff 
prepared and posted practical guidance on, among other things, 
how emerging growth companies can file their confidential IPO 
submissions and on the new requirements and thresholds on 
Exchange Act registration and de-registration.
    With respect to our budget request for Fiscal Year 2013, 
our request would allow the Commission to achieve four high-
priority initiatives. First, it would allow us to enhance our 
investor protection activities by bolstering staff resources 
and our enforcement in our examinations units and by continuing 
to develop and implement robust analytical models that identify 
regulated entities with high-risk profiles.
    Second, it would allow us to speed capital formation by 
eliminating regulatory bottlenecks, to improve economic 
analysis, and to efficiently consider authorizations to 
businesses engaged in new lines of business.
    Third, it would allow us to strengthen the market stability 
effort. Currently, the SEC has fewer than 25 staff persons to 
monitor the 8 clearing entities that clear and settle an 
average of $6.6 trillion in transactions every day. We believe 
a greater presence is needed.
    In addition, there is a need for agency attention to 
important issues such as market structure improvements, high-
frequency trading, exchange-traded funds, and enhanced efforts 
against cyber security threats.
    Finally, it would allow us to make IT investments in data 
management, disclosure review, internal accounting and 
financial reporting, electronic discovery, and to modernize the 
EDGAR system and sec.gov.
    I believe that our past efforts and our future priorities 
will help us fashion an ever-better equipped, more expert, and 
effective agency. I look forward to working with you to build 
on this progress.
    And, of course, I am happy to answer any questions.
    [The prepared statement of Chairman Schapiro can be found 
on page 52 of the appendix.]
    Chairman Garrett. Great. Thank you very much for your 
statement.
    We will now begin with questions. And I will recognize 
myself first. We are limited for time, obviously, with all 
these questions, so what I thought I would do is run through 
half a dozen sort of yes-or-no questions, and then come back to 
elaborate on that, okay?
    Starting, first and foremost, with cost-benefit analysis--I 
understand that a memorandum was issued regarding current 
guidance on economic analysis. Is that correct?
    Ms. Schapiro. Yes.
    Chairman Garrett. And that was done back in the spring of 
this year, in March?
    Ms. Schapiro. It was, I believe, distributed in March. It 
had been in the works for a while.
    Chairman Garrett. Yes.
    This guidance is binding, then, on the agency?
    Ms. Schapiro. Yes, the staff is following the guidance.
    Chairman Garrett. Right.
    Have you as Chairman put in writing, then, to each of the 
divisions that it is binding on them?
    Ms. Schapiro. The guidance has been distributed and 
everybody is following it, and everybody understands the 
expectation is that they will follow it.
    And, of course, the Commission is the ultimate arbiter of 
whether the staff has followed the guidance. The staff 
understands that they are to follow the guidance.
    Chairman Garrett. Okay, so the staff understands. I guess 
the question, then, is out of--because the memorandum comes out 
of the OGC and the RSFI?
    Ms. Schapiro. It comes from the Chief Economist and the 
General Counsel.
    Chairman Garrett. Okay.
    Should a directive come from your office?
    Ms. Schapiro. It certainly could. We have professional 
staff at the SEC, and they understand that this is the 
expectation and this is the requirement. I haven't sent out an 
e-mail that says, ``You must follow this guidance.'' They will 
and are following it.
    Chairman Garrett. Will you instruct them?
    Ms. Schapiro. I certainly could.
    Chairman Garrett. Okay. Is this guidance publicly 
available?
    Ms. Schapiro. It is not publicly available, in part because 
it has been circulated to the Commissioners and we are awaiting 
input from the Commissioners to see if there is any further 
enhancements or evolution to the guidance based on their input.
    At that point, I am comfortable having it circulated. And 
of course, a number of committees of Congress or Members of 
Congress have it, as it was provided for a cost-benefit 
analysis hearing last week.
    Chairman Garrett. So it is mandatory? I am going to go 
back, contrary to what I was going to do, yes or no. So it is 
mandatory on the agency, but it hasn't been--the Commissioners 
have not signed off on it?
    Ms. Schapiro. They have not formally voted on it. They are 
aware of it. They have been briefed on it. My understanding is 
most of them think it is excellent, and the staff is following 
it. If the Commission has edits to it or changes or 
enhancements, we will as a Commission work through those. And 
at that point, we can vote on it as a formal document.
    Chairman Garrett. Is it normal, the practice that something 
becomes mandatory on the agency before the Commission signs off 
on it?
    Ms. Schapiro. In fact, most policies like this, the 
Commission probably doesn't sign off on most internal 
procedural policies. But this one, because of its importance 
and because we think the Commission will have valuable input to 
the process, we wanted to make sure they all had it and were 
comfortable with it.
    Chairman Garrett. And since you just say because of its 
importance and because that it is now, as you say, binding on 
the agency, does the SEC need now then to what, to re-propose 
the rules that it had previously proposed but are not yet done 
in the process, that in other words are not yet final, in order 
to go through this process and to give the public notice of 
that?
    Ms. Schapiro. The staff is going through a process right 
now of looking at all of the rules that have been proposed but 
not yet finalized to see if, in light of the new guidance, 
additional economic analysis will be necessary. And where it is 
necessary, we will supplement with additional analysis.
    It is important to note that this guidance, while it puts 
everybody on the same page and it communicates very clearly 
what the requirements are for economic analysis in SEC 
rulemaking, many of these things were being done in many 
rulemakings already. So I don't have a final count on whether 
it will be necessary to re-propose anything.
    I can give you an example from 2 weeks ago. We actually 
reopened a comment period based on the receipt of additional 
data and were able to make that part of the file before we went 
final on a rulemaking. So we are looking at whether we need to 
do more with rules that have been proposed but not finalized.
    Chairman Garrett. Right, because they would have to--if 
this is the new way where you are going forward, that the 
public would want to be able to--the public should be able to 
have the ability to comment on the economic analysis, that in 
essence was not part of the process under this memorandum 
previously.
    Ms. Schapiro. Although for some rules, there was a complete 
economic analysis already done at the proposing stage, but if 
there is additional data, we can always open the comment period 
for comment on that data. But as I said, the staff is doing an 
analysis of all the existing rules proposals.
    Chairman Garrett. And so you will do that for each 
particular rule, say whether or not it will happen then? Is 
that what you are saying?
    Ms. Schapiro. On a case-by-case basis with each rule as it 
comes to the Commission for final approval, we will make a 
determination whether the prior economic analysis was 
sufficient and meets the standards of the guidance.
    Chairman Garrett. And just one last question. Normally when 
you come before this body, you do not give your opinion on 
legislation. That is sort of your policy I guess, which is 
fine. But I know that with regard to the JOBS Act, you did 
actually send your position in opposition to the legislation. 
Was there anything that prompted you to do that on that 
legislation? Is there anyone from the Senate or Senate staff 
who prompted either you or your staff to engage in that 
conduct?
    Ms. Schapiro. No. And, Mr. Chairman, I do give my opinion 
from time to time in fact. As you may recall, I have commented 
on H.R. 2308 in the past and some of the additional 
requirements in your bill on economic cost-benefit analysis for 
the SEC to do.
    And, as I testified on a number of capital formation 
initiatives over the course of the last year, I stressed some 
of the issues that were in my letter about the need to balance 
investor protection.
    Chairman Garrett. But will this affect your ability to 
implement the JOBS Act because you have--
    Ms. Schapiro. Absolutely not.
    Chairman Garrett. And will you continue to prioritize it 
even though your limited resources over such a prioritization 
of Dodd-Frank?
    Ms. Schapiro. We have many Dodd-Frank rules to complete. As 
was pointed out, we have missed a number of deadlines already. 
Those are a high priority. The JOBS Act is a high priority. It 
is the law of the land. We will absolutely faithfully implement 
it as Congress intended.
    Chairman Garrett. Thank you. I appreciate it.
    The gentlelady from California?
    Ms. Waters. Thank you very much.
    I heard you just relate to a question relative to the JOBS 
Act. And I voted for the JOBS Act. It was a leap of faith for 
me. I had some concerns about it, but in an attempt to listen 
to the arguments about job creation and support for small 
business and all that, I supported it. But, I was very much 
desirous of having my amendment on research included in that.
    I offered an amendment to the provision of the research 
section that would have taken several steps, including 
preventing the repeal of certain aspects of the so-called 
Global Settlement that former Attorney General Spitzer 
negotiated almost 10 years ago. This settlement limited 
potentially damaging conflicts of interest between the 
investment banking and research departments of large investment 
firms in the United States.
    The U.S. Chamber of Commerce even wrote to the House, 
saying this aspect of the JOBS Act went too far, saying there 
may be blurring of boundaries that could create potential 
conflicts of interest between the research and investment 
components of broker-dealers. And I think you even wrote to the 
Senate leaders expressing your concerns with this provision 
after the bill passed the House.
    And even though I did not get my amendment in, I don't know 
what your authority is to pay attention to this area because of 
your understanding and my concerns and others about this 
potential conflict.
    Having said that, I also want--and you may have answered 
this question already about priorities. Does this in any way 
take priority--the JOBS Act--in the SEC over Dodd-Frank, or how 
do you view that?
    And lastly, since I am going to get all of my questions in 
so you can answer them all at once, I was the author of a proxy 
access. And I know the decision of the courts on proxy access. 
What are we doing to get it back and to be able to frame in 
ways that the court indicated it should be dealt with?
    Ms. Schapiro. Congresswoman, I lived through the research 
analyst investment banking conflicts of interest in a very 
direct way at FINRA, and we participated in the Global 
Settlement. And so let me say that the Global Settlement 
remains in effect.
    The issue becomes the fact that a number of FINRA (the 
self-regulatory organization) rules replaced provisions in the 
original Global Settlement. And several of those rules are 
directly implicated by the JOBS Act.
    The JOBS Act is quite clear that those rules cannot 
continue to be maintained, nor could new rules be written in 
particular areas that sought to put a wall between research and 
investment banking.
    So for example, right now research analysts are prohibited 
from participating in pitches with the investment bankers to 
get their investment banking business. Under the JOBS Act, that 
rule may have to be reconsidered.
    There are also quiet periods that now operate within 40 
days after an IPO or within 15 days of the expiration of a 
lock-up period where research can't be issued, so-called 
``booster shot'' research. The JOBS Act makes it clear that 
quiet periods' rules cannot be maintained.
    So we will, again, faithfully follow the law, as will 
FINRA; and where rules cannot be maintained, they will have to 
be eliminated.
    Ms. Waters. I and others will keep a close eye on this, and 
want to work with you to understand whether or not we are 
running into conflict of interest problems. And maybe we can 
revisit that at some time, but I am really worried about it.
    Ms. Schapiro. That would be fine, and we would be happy to 
provide Congress at some point with our view about whether 
issues are arising again. And let us hope that that they won't.
    On your question about priority of Dodd-Frank over the JOBS 
Act, I would say that they are both very high priorities. 
Whenever we have congressional mandates, particularly those 
with specific deadlines, we prioritize them over other things. 
And so we will be working very hard on both completing our 
Dodd-Frank work and our JOBS Act work.
    And with respect to proxy access, I think that is not an 
issue that we have the capacity to take on, again, at this 
time.
    Ms. Waters. I don't understand exactly what your last 
answer was. What do you mean you don't have the capacity to 
take on at this time?
    Ms. Schapiro. In terms of re-proposing a proxy access rule 
and putting that on the Commission's immediate agenda, we don't 
have the capacity right now to redo that whole process in terms 
of the number of people and the hours in the day for the 
agency. It is something that we will continue to look at over 
time, but we are just not going to be able to get to it as we 
finish all this other work.
    Ms. Waters. Thank you very much. I am going to have to 
think about that.
    Chairman Garrett. I now recognize the gentleman from 
Alabama, the chairman of the full Financial Services Committee, 
Chairman Bachus.
    Chairman Bachus. Thank you.
    Chairman Schapiro, you are hearing questions about economic 
analysis and capital formation. We have expressed concerns 
about the derivative rule, about the Volcker Rule, about the 
Federal Reserve's (Fed's) proposal to enact single counterparty 
credit limits, and all these questions concerning the JOBS Act. 
And you have expressed that the crowd funding could pose some 
risk.
    Let me tell you what our motivation is. And I think I speak 
for most Members. My grandfather was a railroad engineer, and 
that was part of his identity. That is what he did. My dad was 
a contractor. My other grandfather was a farmer. That is really 
our concern. It is about jobs. And the jobs just aren't there 
today.
    People talk about how homeownership is the American dream, 
but even to have homeownership, you have to have a job. And 
today we have unemployment. We have underemployment. We have 
part-time employment. We have temporary workers. We have 2 
million Americans who have even given up looking for a job 
because they are so discouraged. And the reason we are 
concerned about the Volcker Rule's impact on jobs, and we 
passed the JOBS Act, which I think was a bipartisan effort, is 
we want to put America back to work. And I know you do too.
    I can tell you that the institutions you supervise are not 
based on safety and soundness regulation; it is about 
disclosure and ensuring that investors have all of the 
information they need, and you should not be trying to take the 
risk out. You are charged with promoting capital formation and 
job creation.
    You know, what does your uncle do? Well, he is unemployed. 
You have seen those lines during the Great Depression, and boy 
are those sad images. And that is why we keep saying, has there 
been an economic analysis on this proposal? What we are really 
asking is, is this going to eliminate jobs? Is this going to 
put people out of work? My question to you would be, do you 
know of any of the agencies that have undertaken a 
comprehensive economic analysis on what Dodd-Frank will do?
    And I won't pose it as far as capital formation or 
availability of credit, but has anyone done a study on its 
impact on job creation? Because we have had employer after 
employer that has come in and said, this is going to eliminate 
2,000 jobs. This is going to eliminate 1,000 jobs. And this is 
somebody's father. This is somebody's son who is going to lose 
their job if we don't get this balance right. So I would ask 
you, do you know if there has been any study done on the 
cumulative economic impact of Dodd-Frank on job creation, or 
capital formation, or economic growth?
    Ms. Schapiro. Mr. Chairman, I am not sure that any agencies 
have done that. I have, I think, seen some private sector 
studies that talk about the potential cumulative impact and 
costs, although I don't know that they have translated it into 
the number of jobs.
    I would say that we care deeply about job creation, 
although we come at it from a slightly different angle, which 
is that we must have markets in this country that operate with 
integrity so that investors have confidence to invest in 
companies that can create jobs, that can build factories, and 
that can create the economic growth that we are all striving 
for.
    And it is getting that balance right with regulation that 
helps to ensure the integrity of the marketplace, that allows a 
company to trade freely and actively on the stock exchanges, 
and that gives investors sufficient information to make 
reasoned judgments about, ``I will put my money here, but not 
here.'' To balance the regulation necessary for that to happen 
with a need to not have unnecessary and overly burdensome 
regulation and not to regulate to the nth degree because we 
won't take all the risk out.
    Investing is risky. And it should be risky. But it should 
be risky not based on a lack of information or a market 
structure that doesn't work as it didn't on May 6th. Or because 
there is fraud or Ponzi schemes or other market abuses. So, I 
actually think we very much share the same goal and have 
slightly different perspectives about how to get there. Part of 
this rule-writing process has been about bringing so many 
perspectives through thousands of comment letters and hundreds 
of meetings together to help inform us about how to get that 
balance right.
    Chairman Bachus. Sure. And I appreciate that. I think your 
job is to prevent fraud and misrepresentation; to have markets 
that operate with integrity but not to take the risk out. 
Because with risk, can come reward. And if you try to take that 
out, it is an impossible venture.
    Ms. Schapiro. I absolutely agree.
    Chairman Bachus. Thank you.
    Chairman Garrett. The gentleman yields back.
    Mrs. Maloney?
    Mrs. Maloney. Thank you, Mr. Chairman.
    And welcome, Madam Chairman. I really agree very much with 
the gentleman from Alabama that we need to make it a priority 
to put Americans back to work. That is the priority. But we 
have to understand that this financial crisis which by all 
accounts and from every economist points to the cause as coming 
from huge swaths of the financial industry not being regulated 
at all, or deregulated. And this crisis has cost this country 
$18 trillion.
    After the Great Depression, Congress put in place three 
major reforms: the FDIC; Glass-Steagall; and the SEC. It was 
after Glass-Steagall was dismantled and when huge swaths of 
areas that the SEC regulated were deregulated principally in 
energy derivatives, that we got this financial crisis.
    So I would argue that balanced and fair regulation can 
preserve jobs, grow our economy, and is very, very important. 
So I feel that we need to implement Dodd-Frank in order to 
preserve economic growth. I think every American would be 
pleased to have 60 years of economic growth, which is what we 
had after the crisis of the Depression and the reforms we have 
put in place.
    I would like to ask you--you mentioned the equity market 
structures; and I know that you came out with proposed rules 
roughly 2 years ago. But I haven't seen any activity in the 
market structure since then. And this may be an issue on which 
we will hold hearings. It is certainly an area that many of my 
constituents are concerned about and some feel that our current 
market structure is outdated. So, what are your plans for 
moving forward on market structure proposals?
    Ms. Schapiro. Since the Flash Crash of May 6th which 
heightened everybody's awareness of the fact that market 
structure is actually an important issue for capital formation 
as well as investor protection, we have done a number of really 
important things. We put in place single stock circuit breakers 
so that trading in a stock is paused for 5 minutes if a stock 
moves more than 10 percent over a 5-minute period, as a way to 
prevent the kind of dramatic decline we saw in good stocks on 
that day for no apparent economic reason.
    We also are working on market-wide circuit breakers that 
would halt trading across all the equity and derivatives 
markets based on certain price moves. We also banned naked 
access to the marketplace, which now requires that customers go 
through a broker-dealer's risk management before they can put 
orders into the market. We eliminated stub quotes. We put out 
clear rules about when trades would be broken, and a number of 
other--
    Mrs. Maloney. Since my time is limited, I would like to go 
to the statement that you made on the Flash Crash in May of 
2010, that it took the SEC 5 months to figure out exactly what 
happened and everyone involved agreed that 5 months is just too 
long.
    So I was concerned about your walking away from your 
determination to get real-time data in market tracking and I 
would like to put several articles in the record concerning 
this, and I would like to find out exactly where you stand on 
this: the idea for a database. Do you still support the 
database? And is your database part of the Office of Research 
that was part of Dodd-Frank?
    Did you just drop the real-time element of it, or the 
entire idea? And did you ever do an RFI to see if the 
technology was out there to be able to do it in real-time and 
get real comparative costs?
    Ms. Schapiro. We are going forward with the consolidated 
audit trail. As you point out, there is no single comprehensive 
audit trail that exists today. That is why, with heroics, it 
took 5 months for the SEC and CFTC staff to reconstruct trading 
from May 6th. That is just not acceptable, from my perspective, 
for the world's largest capital markets.
    I hope the consolidated audit trail proposal will go to the 
Commission for a vote in the near future. We are likely to not 
require real-time reporting. The costs of that are 
extraordinary, and the benefit is limited.
    Mrs. Maloney. Madam Chairman, would this just be for the 
SEC or is this part of the total research project for--
    Ms. Schapiro. No, this is--
    Mrs. Maloney. --Office of Research?
    Ms. Schapiro. This is the SEC undertaking to reconstruct 
trading in the equity and options markets. We would hope 
eventually it would cover the futures markets as well.
    Mrs. Maloney. I think my time has expired. Thank you.
    Chairman Garrett. Thank you. The gentlelady yields back.
    The gentleman from Arizona is recognized.
    Mr. Schweikert. Thank you, Mr. Chairman.
    Madam Chairman, why don't I do a broad-breadth question 
instead of, as I touched base with you before, where I was 
going over lots of microissues.
    First, in the JOBS Act that now is in front of you, there 
are a number of implementing mechanics with which you must 
deal. Can you give me a top line of what is moving and any 
timelines you know of?
    Ms. Schapiro. I will be happy to try.
    It is in its early days. I will say the on-ramp provisions 
were all effective upon enactment, but that still required that 
the SEC staff publish guidance and answer lots of the questions 
we have been getting. We did all of that within the first week 
of the bill being signed. And we have received two confidential 
IPO filings already and one bank is already coming to de-
register.
    With respect to Title II, the general solicitation, we are 
required to do rulemaking there. The deadline is 90 days. With 
respect to general solicitation, we are required to do 
rulemaking within 90 days. That is going to be very, very 
challenging because the requirement that purchasers be verified 
as being accredited will raise a lot of difficult issues about, 
``What does that verification process look like?''
    Crowd-funding rulemaking is required within 270 days. And I 
will say for general solicitation, crowd funding, regulation A 
and 12G, we have two rulemaking teams already assembled. We 
were already doing some of this work on our own initiative to 
try to facilitate some capital formation issues before the JOBS 
Act was passed. So we have just slipped those people into these 
new roles.
    In crowd funding, we have to deal with an intermediary 
registration system if a funding portal, not a broker-dealer, 
is going to be utilized and there are issuer disclosure 
requirements that we will have to develop.
    Mr. Schweikert. And to that point--and I don't want to stop 
you--but to that point, any window of timeline there?
    Ms. Schapiro. As I said, the rulemaking is due in 270 days. 
I don't know what the staff's best estimate is, but I would be 
happy to try to provide that for the record.
    Mr. Schweikert. If part of it is--I literally have dozens 
of folks, particularly from Arizona, who are just giddy about 
both the on-ramp and also some of the crowd funding and some of 
the opportunities here. And I keep ginning them up that, ``Hey, 
it is coming; continue to do your work and get your mechanics 
laid out.'' So--
    Ms. Schapiro. We have already opened e-mail comment 
mailboxes, so we are actually already getting comments on what 
people think are important features of these rulemakings. And I 
think that is going to be informative to us.
    Reg. A, which extends the offerings up to $50 million in a 
12-month period, will also require rulemaking, although I think 
that is a much easier lift and the thresholds of shareholders 
for reporting under the 34 Act also requires rulemaking; but 
again, I think, not nearly as complicated as potentially crowd 
funding and general solicitation are.
    Mr. Schweikert. Any discussions from counsel or around you 
in regards to--I guess the proper term is decimalization moving 
to--for lightly traded securities?
    Ms. Schapiro. My recollection is that the statute requires 
us to study that issue and so our economists are setting out 
the terms of that study now.
    Mr. Schweikert. Okay.
    To sort of leap to one of our favorite subjects here--and I 
know you have already actually touched on this a bit--give me a 
top line where you see us moving right now in the discussions 
on money market funds.
    Ms. Schapiro. I would be happy to.
    And I just want to add on the JOBS Act, within a day after 
it was enacted, our staff did a Web cast for 1,000 people to 
explain the terms of the Act and how we expected it to operate 
and interact with existing SEC systems.
    Money market funds--we could talk for a long time about 
that issue, and I know it is of interest to a number of 
Members. The staff is working on some proposals for the 
Commission to consider that would seek to try to bolster the 
resiliency of money market funds and finish the job that 
effectively was begun in 2010 when we did a lot of reforms. 
They were important reforms. I think they are judged to have 
been successful with what they were designed to do, which was 
to ensure that money market funds had sufficient liquidity to 
meet redemption requests. And we saw in the summer, with all 
the volatility in Europe, that they in fact did have sufficient 
liquidity.
    What those rules did not do is protect against a default by 
money market--defaults on paper held by a money market fund as 
we saw in the Reserve Fund breaking the buck.
    Mr. Schweikert. Mr. Chairman, I know we are out of time, 
but this is one of those occasions where my great concern is, 
we did have, what was it, two funds that ultimately broke the 
buck?
    My fear is we do something that damages rates of return in 
those funds for so many investors, so many communities, so many 
pensions. So it is trying to find the rational balance of where 
we stay safe, where we don't also create a cascade of lower 
returns for lots of folks for decades to come.
    Mr. Chairman, I yield back. Thank you, sir.
    Chairman Garrett. Thank you. The gentleman yields back.
    Ms. Moore is recognized for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    And you know, I, of course, would like to pursue the same 
line of questioning as my colleague, Mr. Garrett, on the money 
market funds. I do want to commend you, Madam Chairman, for the 
reforms that you have made in the money market funds, these 
reforms. But I am concerned that the proposals that your staff 
may be reviewing now; I am just sort of perplexed as to how you 
came to the conclusion that this might be the most expedient 
thing to do?
    I don't see how floating the net asset value will continue 
to retain the liquidity for the customers. And I fear that 
municipalities, for example, will really rely on this 
instrument--won't even be able to use it if you float it.
    It certainly has been a very valuable instrument for 
liquidity for many companies and municipalities and I don't 
understand how sort of a pseudo margin requirement would 
operate and more importantly, I guess I am wondering that if 
there were customers who sort of fled money market funds 
because they would not be as attractive as a short-term 
investment, a place to just sort of park maybe your payroll or 
something.
    What would happen with the $2.5 trillion in funds that 
might make their way into banks? Wouldn't that increase some of 
the systemic risk that banks might have? I think a lot of banks 
don't even want the flood of $2.5 trillion in the banking 
system.
    So I am concerned about the rationale for these new 
proposals.
    Ms. Schapiro. Congresswoman, let me answer that. Maybe I 
can explain and bring multiple answers to your many questions 
by doing this.
    But at the end of the day, what motivates this is a desire 
that the taxpayer never be on the hook again for these 
instruments as they were in 2008.
    The Reserve Fund--
    Ms. Moore. But the taxpayers weren't on the hook.
    Ms. Schapiro. Oh, they absolutely were on the hook. The 
Treasury had to step in with a guarantee program; the Fed had 
to step in with a liquidity facility. There was a $62 billion 
fund called the Reserve Fund that held just $785 million of 
Lehman Brothers paper.
    On the day that Lehman went into bankruptcy, Reserve 
experienced a run, $40 billion of shares were--
    Ms. Moore. Right.
    Ms. Schapiro. --in 2 days.
    They quickly depleted their cash and they began selling 
securities, further depressing prices in the market. That run 
quickly spread to other money market funds and during that 
week, investors withdrew $310 billion or 15 percent of all 
money market fund assets.
    Those money market funds depleted their cash and they 
sought to sell portfolio securities into, again, an illiquid 
market.
    Ms. Moore. We paid out like $0.99 on the dollar to--
    Ms. Schapiro. On Reserve, after years of litigation.
    But the point is the run spread quickly to the rest of--we 
call it neighborhood risk--the money market fund community--
    Ms. Moore. I keep--
    Ms. Schapiro. --and it only stopped when the--
    Ms. Moore. Madam Chairman, I am just afraid of my time--
    Ms. Schapiro. Okay.
    Ms. Moore. I just still want to make sure that you carry 
this in a direction that I want.
    I do understand it. I think that the reforms that you have 
made really did address that. With respect to requiring greater 
capital requirements and I am just concerned--so go on.
    Ms. Schapiro. The run was only stopped because the Treasury 
stepped in and put a guarantee program in place. But the 
collateral consequences were not just the run on money market 
funds, but the short-term credit markets froze up completely, 
commercial paper issuers had to draw down on their backup lines 
of credit, and that put additional pressure on bank balance 
sheets.
    Ms. Moore. Madam Chairman, I just want to make sure--I 
understand that. I want you get to the question that I asked 
about the--what impact will this have when the money market 
funds no longer serve--for example, if we can't serve 
municipalities, they may not even be able to use a fund that is 
structured the way it is currently being proposed.
    Ms. Schapiro. There are certainly alternatives to money 
market funds and whether or not the Commission adopts a capital 
requirement or a floating net asset value, money market funds 
will continue to exist and will be an option for many, many 
investors.
    Other options include bank accounts, CDs, direct Treasury 
or other government obligation investments, and direct 
commercial paper investments. But I think what is important 
here is that we will do analysis accompanying any proposal that 
we might put out that will talk about the range of alternative 
investment products that could be considered: What are the 
tradeoffs in terms of risk and yield and liquidity? The extent 
to which any reforms we propose could shift money market fund 
investments into alternative products; what the impact of those 
shifts will be.
    We will estimate the best we can the operational costs and 
competitive impacts of anything we do. We will discuss the tax 
implications.
    We will have a full-blown analysis. My guess is that this 
will have a very vigorous comment and debate process follow it, 
then we will make a decision about whether this protection of 
the system from a destabilizing and potentially devastating run 
is worth the cost of changing what the money market industry 
currently looks like. Those are hard, hard questions and I am 
not belittling them in any way. We recognize them, but I also 
think that they are important issues that we, as a regulator 
and with responsibility for the economic system and systemic 
risk, have to be willing to at least talk about.
    Chairman Garrett. Thank you.
    Ms. Moore. And thank you for you indulgence, Mr. Chairman.
    Chairman Garrett. I recognize the gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    After listening to one of my colleagues earlier, I am again 
reminded of Santayana's famous admonition that, ``Those who do 
not learn from history are doomed to repeat it.'' And until we 
learn the lesson of history that when Washington, D.C., decides 
to lower underwriting standards and effectively mandates, 
cajoles, incents and arm-twists financial institutions into 
loaning money to people to buy homes they cannot afford to 
keep, then I fear for future financial crises.
    I would also note that, with the possible exception of the 
practice of medicine, I am not sure there was a more regulated 
industry prior to 2008 than the financial services industry; 
piling on more regulation on top of old is not necessarily a 
solution to the challenges that are before us.
    Madam Chairman, I want to follow up on comments that our 
full committee chairman made, Chairman Bachus. I believe you 
know this, and I am heartened by things that I have heard you 
say today about balance, about the purpose of our capital 
markets. But I also recall that I find myself agreeing with 
about 80 percent of what our President says. I just end up 
disagreeing with about 80 percent of what he does.
    And this goes to the whole question of economic analysis, 
which is really having a cogent defensible jobs impact 
statement to rulemaking. I have to tell you, whether I am 
talking to Fortune 50 CEOs in Dallas, Texas, where I reside, or 
good, honest, hardworking small business people in the rural 
areas of the Fifth District of Texas, they cite the red tape 
and regulatory burden coming out of Washington as the number 
one impediment to job creation, at a time when you know our 
economy is hugely underperforming.
    And so, the first question I have--and there is not much in 
Dodd-Frank I am fond of, but it is the law of the land. Much of 
it you have to implement. So my question is this: Since the 
passage of Dodd-Frank, how many additional employees have been 
added to the SEC? And what is the breakdown between attorneys 
and economists?
    Ms. Schapiro. I don't have an exact number on the breakdown 
between attorneys and economists. I would be happy to try to 
get that information for you. I think it is important to 
remember that we are also a law enforcement agency. And that 
requires that we have people who can go to court and try cases 
and conduct investigations.
    I will also say that we have had the largest ramp up in 
economist staff under my tenure, and, I think, of almost any 
time in the agency's history. We have 24 economists just 
working on rule-writing, and we have many more economists who 
do litigation support, risk analysis, quantitative modeling, 
and so forth. We are hiring 20 more economists right now, and 
have offers outstanding to 17 recent Ph.D. candidates, and we 
have asked for 20 more in Fiscal Year 2013--
    Mr. Hensarling. My time is limited. I appreciate that. So 
if you could get the exact number in specific detail--
    Ms. Schapiro. I would be happy to provide you with that.
    Mr. Hensarling. --if you could relay that to me, I would be 
appreciative.
    In the remaining time I have--there has been a lot of 
discussion obviously about money market funds, so I don't want 
to belabor the point. Clearly, there is concern here. And I 
guess, Madam Chairman, there may be something to what you are 
doing. Many of us have open minds.
    But at the same time, we are not sure, given the recent 
changes that have been made, that there has been a really 
thorough study on what the impact is going to be on the 
investment community, whether or not the new additions to the 
rules have had a chance to really be assessed. And so, there 
continues to be great concern here on a product that, again, 
many Americans rely on. And so, I would hope that you would be 
very careful in your deliberations there.
    There continues to be a debate with regards to the request 
for funding of your agency. Now, I think we have had something 
like a six- to eight-fold increase in the last decade. Clearly, 
you have outlined a number of challenges. As you are aware, an 
independent management study was part of the Dodd-Frank Act.
    And as I understand it, on March 30th, the SEC issued a 
report of the implementation of the SEC organizational reform 
recommendations, where it said, ``Staff and management time to 
devote to this initiative will continue to be in short supply, 
and in future phases of implementation are likely to require 
levels of funding that must be directed at other agency 
priorities at this time.''
    Again, given some of the criticisms of the U.S. Court of 
Appeals with respect to the proxy access rules, certain 
management challenges with respect to leasing and other 
matters, I guess I have the question--I don't know if you are 
pushing back on the conclusions of the management study, or you 
just simply don't see it as a priority, whether I am 
interpreting this correctly? But many of us have great problems 
in simply putting more money into a vehicle that in many 
respects may not be working.
    Ms. Schapiro. Congressman, I am not arguing with the 
recommendations at all. In fact, we have made a lot of 
progress. A number of them have been, in fact, implemented, and 
we are continuing to do so. All we are trying to say there is 
that BCG estimated it would cost $45 million to $55 million to 
implement all of those recommendations over a 2-year period. We 
don't have that kind of money to spend on this. We don't think 
that is an appropriate amount of money to spend on this. So we 
are going to take these recommendations in chunks.
    And so, we have done a number of things. We have redesigned 
our information technology group. We have implemented a 
continuous improvement program that is identifying cost 
savings. In fact, over $8 million in cost savings was 
identified very recently. We are restructuring different 
operations. We have recalibrated the relationship with SROs so 
that our reliance on them is a leverage point for us. We have 
implemented a new performance management system. We are doing 
strategic hiring, as Congressman Royce mentioned.
    But we are going to focus on these in increments while work 
continues on all 17 groups of recommendations that came out of 
BCG. And we are only going to put supplemental contractor 
dollars to workforce planning initiatives and data governance 
initiatives until those are completed. And then, we will do 
more of them while we continue to do things like look at our 
regional office strategy and some of the other ongoing work 
streams.
    So we are moving ahead on multiple fronts, but we also have 
an enormous amount of work that Congress has asked us to do, 
whether it is Dodd-Frank or the JOBS Act, and management 
attention is in a bit short supply.
    Mr. Hensarling. I yield back.
    Chairman Garrett. The gentleman yields back.
    I believe Mr. Green actually has been here since the 
beginning. So--
    Mr. Green. Thank you, Mr. Chairman.
    And I thank Chairman Schapiro for appearing here today as 
well.
    My intelligence indicates that in 2005, you had 
approximately 19 examiners for each $1 trillion managed by 
investment advisers. And today, you have approximately 10. Is 
this correct, Madam Chairman?
    Ms. Schapiro. The magnitude is about right. I am not sure 
of the exact numbers. But, yes, we are only now back at our 
2005 staffing levels overall for the agency.
    Mr. Green. There is also an indication that broker-dealers 
have increased from 95,000 in 2005 to 160,000 today. Is this 
generally in the ballpark as well?
    Ms. Schapiro. That would be broker-dealer branch offices?
    Mr. Green. Yes.
    Ms. Schapiro. The actual number of broker-dealer firms is 
about 4,500, I believe.
    Mr. Green. 4,500?
    Ms. Schapiro. But 160,000 branch offices.
    Mr. Green. Yes. Is it fair to say that with these 
increases, you do need additional cops on the beat?
    Ms. Schapiro. We do. The markets are not only 
extraordinarily more complex, but they are growing rapidly. New 
products are devised and introduced all the time. We have new 
responsibilities with respect to over-the-counter derivatives, 
with respect to municipal advisers, private funds and hedge 
funds and so forth that have registered, and new credit rating 
agency responsibilities.
    We are trying to deploy the best technology in the SEC's 
history to help us manage all of this burden. But, we do need 
more examiners and we do need more enforcement staff.
    Mr. Green. Much has been said, and I agree with much of 
what has been said, about overregulation. But I do think that 
you should take just a moment and give us some indication of 
what can happen if we have underfunding such that you cannot 
properly police the consequences of underfunding. Would you 
speak briefly on the consequences, please, of underfunding?
    Ms. Schapiro. Sure. I think there are four broad categories 
of problems. One is that we won't adequately staff our mission-
essential functions, like going into brokerage firms, mutual 
funds or investment advisers and examining their activities to 
ensure that they are treating customers fairly. And we won't 
have the resources to bring all of the fraud cases and stop the 
Ponzi schemes that we should.
    Mr. Green. For just a moment, do this. Elaborate on what 
happens to market integrity and investor confidence when there 
is a failure in the system because of underfunding.
    Ms. Schapiro. I can give you a very specific example.
    After May 6th, the Flash Crash, when we saw that our market 
structure failed very badly, there were net outflows from 
equity mutual funds by investors for about every single week 
for about 6 or 8 months after that period. Investors had lost 
confidence in the integrity of the marketplace and its ability 
to function fairly.
    We see investors harmed by an enormous number of frauds to 
very devastating consequences. And that stops them from ever 
investing again, and that takes that capital out of the system 
and away from companies that can use it to create jobs and to 
grow their businesses. So, a failure to enforce the securities 
laws has real concrete, on-the-ground ramifications for 
investors who are cheated or defrauded. It has real 
consequences for our ability to oversee the marketplace when we 
don't have adequate funding.
    And also, it has real consequences for businesses that 
don't want to face regulatory bottlenecks. If they come to the 
SEC and say, ``I want an exemptive order in order to be able to 
offer a new exchange-traded fund,'' and we don't have the staff 
and the resources to devote attention to that exemptive order, 
businesses are held up from doing what they want to do as well.
    Mr. Green. As I close, it is a difficult position that you 
are in, because you have a big job to do. It is huge.
    If you are not properly funded and we have some sort of 
breakdown--and I am trying to be polite with my language--you 
will be accused of not doing your job. And many times the 
reason that things can't get done is because you don't have the 
resources to do these things.
    So it puts you in a very difficult position. You, on one 
hand, have to politely ask for the funding, understanding that 
if you don't get it, there can be consequences. But it is 
difficult for you to talk about the consequences, because you 
don't want to insult the people that you have to ask to fund 
the agency.
    And I have great sympathy for the position that you are in. 
I do hope that you can continue to make the case for the need 
for funding and the consequences of underfunding. I think 
overregulation is without question a matter to be considered. 
But underfunding is also of paramount importance and I thank 
you for making the case.
    Chairman Garrett. The gentleman yields back.
    Mr. Pearce is recognized for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    And thank you, Madam Chairman, for being here and answering 
the questions. On page 11 in your testimony, you talk about 
investor confidence and the fairness of the financial markets. 
And so I kind of want to pursue the information on MF Global.
    Coming down into the decision on the bankruptcy there was 
an option to go one direction to Chapter 11, which there are 
nuances that seem to favor creditors. And then the other option 
was to go to Chapter 7, which seemed to have nuances that 
favored customers.
    So who made the decision that it--I previously questioned 
Mr. Harbeck with SIPC, the CEO, and he told me that he was 
notified by a member of the SEC Trading and Market Division at 
5:20 a.m. that, ``Things are really rapidly deteriorating at MF 
Global.'' So at 5:20 in the morning, Mr. Harbeck was informed 
that the decision had already been made. Who made that 
decision?
    Ms. Schapiro. Congressman, my understanding, and I will be 
happy to verify this for you, is that with respect to the 
holding company, the decision to go into bankruptcy was made by 
them and their management. The SEC staff made a--
    Mr. Pearce. Who decided that it was going to be selected as 
a security firm rather than a commodity trading firm? That was 
a pretty key little point.
    Ms. Schapiro. The SEC staff made a recommendation to the 
CFTC Chairman and to me that the broker-dealer, the dually 
registered Futures Commission merchant broker-dealer be put 
into SIPC.
    Mr. Pearce. Which would mean that--so that we are going to 
go and we are going to favor the creditors rather than the 
customers, right?
    Ms. Schapiro. Not under SIPC, no. And SIPC is required, 
when it becomes clear that a brokerage firm is not capable of 
meeting its obligations to its customers--
    Mr. Pearce. Yes, but--
    Ms. Schapiro. --and SIPC--
    Mr. Pearce. --proceeding as a Chapter 11, if I could 
interrupt--proceeding as a Chapter 11 allows them to continue 
to try, doesn't it?
    Ms. Schapiro. But that is not at the broker-dealer level. 
That may have been at the holding company level. At the broker-
dealer level, once it is clear they can't meet their 
obligations to their brokerage customers under SIPA, the 
appropriate course is the institution of a SIPC proceeding.
    Mr. Pearce. So that decision was again made by whom?
    Ms. Schapiro. It was a recommendation by the SEC staff to--
    Mr. Pearce. You all were in the room watching the 
progression of MF Global. When they began to dip down and use 
those customers' segregated funds, did that qualify as 
misconduct?
    Because I am reading in the second paragraph on page 11 
there that you were to act quickly to halt misconduct. Is that 
misconduct when MF Global began to reach down and use that 
money?
    Ms. Schapiro. I have to say that I don't want to prejudge 
any potential enforcement action by opining upon whether they 
violated the law.
    Mr. Pearce. So you think that it is okay for--
    Ms. Schapiro. No, it is never okay to utilize customer 
assets for the--
    Mr. Pearce. Okay, so they were doing it. It says here that 
you are to act quickly. That is your testimony. It says, ``We 
are going to act quickly to halt misconduct.'' And you are 
saying it is never appropriate. Why didn't you step in and stop 
that?
    Ms. Schapiro. Congressman, if I could just point out, there 
were only 318 securities accounts at this firm. There were 
30,000 futures accounts. We were not the regulator or primarily 
looking at--or looking at all at--what was happening with 
respect to the futures segregated accounts. That would have 
been--
    Mr. Pearce. But you have an input into the room; so you 
have the guy who worked for Goldman Sachs sitting there in the 
room, Mr. Gensler, who later recuses himself. Did you as the 
SEC express concern about who the CFTC had in the room; that 
you had a guy who was really deeply embedded with the people 
who are in the process?
    I think that on October 27th--I think Goldman Sachs 
actually made a large purchase. So you have Mr. Gensler sitting 
in here, who previously worked for Goldman. They make a large 
purchase of securities. They didn't even bother giving the 
money to them.
    So MF Global is starving for cash and surely--you said your 
law enforcement agency--surely law enforcement doesn't stop and 
say, ``I am only in charge of law enforcement for my 318 
firms?'' Somebody has to be blowing the whistle here.
    Ms. Schapiro. Of course, I agree with you. And the SEC, the 
CFTC, the FBI, and the U.K. Financial Services Authority are 
all heavily engaged, along with the trustee in bankruptcy and 
the trustee in SIPC, with investigating exactly what happened 
and what went wrong in this firm.
    I raise the point about there only being 318 securities 
accounts because it is a very tiny part of what happened here 
as compared to the futures side.
    So the primary regulator there was the Chicago Mercantile 
Exchange--
    Mr. Pearce. If I can take back my time, I need to make one 
more comment.
    From this perspective, I see all the regulators sitting in 
a room watching the thing turn upside down. You have 36,000 hog 
farmers and dairy farmers and people out here who have their 
money at stake. They would be the 99 percent.
    I see regulators which allowed Goldman Sachs to come in and 
buy assets; George Soros to buy assets at deeply discounted 
prices all the while saying that, ``We are there to stop 
misconduct.'' Watching people dip into the customer trading 
accounts without securitizing it on the other end. For 4 or 5 
days, the regulators sat there.
    We talk every day in this Administration about fairness to 
the 99 percent. But when I see the actions, I see things that 
look desperately like the 1 percent got much more fair 
treatment than the 99 percent.
    Ms. Schapiro. Congressman, let me just say that if there 
are violations of the law here, we will pursue them with as 
much vigor and force as we possibly--
    Mr. Pearce. I hear that, but the last time we asked, nobody 
had even bothered talking to Mr. Corzine. Mr. Corzine was the 
one at the helm. Nobody had even bothered talking to him.
    I yield back, Mr. Chairman.
    Chairman Garrett. The gentleman yields back.
    Mr. Lynch is recognized for 5 minutes.
    Mr. Lynch. Thank you Mr. Chairman.
    And Madam Chairman, thank you very much for coming to this 
committee and helping us with our work.
    I do want to follow up on the line of questioning that was 
being conducted by Ms. Moore previously regarding the 
possibility of the proposal of the SEC going to a net asset 
value standard for short-term money market funds.
    And I understand that about 57 percent of the short-term 
municipal debt is currently being held in these short-term 
money market funds.
    As you well know, in many of our districts, State and local 
governments are in difficult straits. And I am wondering how 
you see the proposal to go to a NAV standard? What that will do 
to municipal markets? I am very concerned about that. And I 
just wanted to follow through your thinking on that?
    Ms. Schapiro. Absolutely. This is an area of concern for 
us. And--
    Mr. Lynch. I would be happy to hear that.
    Ms. Schapiro. And I should say--and you may not have been 
in the room when we began this conversation--we do not take 
this on lightly, this whole area of money market fund reform.
    We did a set of changes in 2010 we think were very 
important and very helpful to bolster the resiliency of this 
market. It is a $2.5 trillion market. We understand it is 
important. We understand why people love it. The risk isn't 
priced into the product.
    But, I also believe it creates real systemic risk and the 
potential for the taxpayer to be on the hook again as they were 
in 2008 when the Reserve Fund broke the buck. That said, there 
are lots of important issues to explore here. One is the use by 
municipalities of money market funds and what kind of cost-
benefit analysis we can do around that issue to understand what 
their alternatives are and whether or not just having a 
floating net asset value or perhaps a capital requirement would 
in any way dissuade them from continuing to utilize this 
product. And we are having those conversations.
    Mr. Lynch. Let me just jump in there because I don't want 
all my time to be--I have another question.
    But, if you look at the whole market, it is probably closer 
to $6 trillion. I know that you know the very short-term is 
probably $2.5 trillion to $3 trillion, but if we move that 
money out of short-term money market funds, it is like to go 
into banks that we are trying not to get bigger.
    We don't want these banks to get even bigger. But I think 
that might be the perhaps unintended consequences of what you 
are proposing here. Or going to hedge funds or some other 
alternative, as you--that really presents another set of risks 
that I think we may not be anticipating.
    Ms. Schapiro. There no question that each alternative 
involves tradeoffs, whether it is less yield or more risk. And, 
we are currently evaluating survey data from corporate 
treasurers, including those who actually don't use money market 
funds, to look at how they currently allocate their portfolios.
    I will say for the corporate treasurers who don't use money 
market funds for cash management, the bulk of their assets are 
actually in government securities; although a significant 
amount are in bank accounts.
    But, these are important issues and they are issues we will 
be pursuing as we try to formulate a potential approach here.
    Mr. Lynch. I just ask for caution; that is all.
    Ms. Schapiro. Absolutely.
    Mr. Lynch. I really am concerned about this, especially 
with respect to the municipal markets here.
    Ms. Schapiro. We have heard the concern, believe me.
    Mr. Lynch. Okay.
    Ms. Schapiro. I have been the subject of lots of vitriol 
about even raising this issue. We have done a President's 
Working Group report that laid out a series of options. We have 
held a roundtable. We have had hundreds of meetings and comment 
letters. And we haven't even put out a proposal yet. So--
    Mr. Lynch. Okay.
    Ms. Schapiro. --we will proceed with great deliberation, I 
assure you.
    Mr. Lynch. All right. Thank you for that.
    The other question I had is, back in January 2010, the SEC 
issued a concept release on restructuring U.S. equity markets.
    Mr. Capuano and I recently asked for some response to that. 
I know you have moved to put into effect the proposals and the 
concept release and you have not done that yet. And we are 
still dealing with a fair amount of volatility in market 
structure, such as opaqueness and a high percentage of canceled 
orders.
    I guess what I am asking you is, do you foresee the SEC 
putting out a proposal on the concept release any time soon?
    Ms. Schapiro. We have done quite a few things in the market 
structure area already--single stock circuit breakers; banning 
naked access to the markets.
    We will shortly, I hope, approve a new proposal for a limit 
up, limit down that will not allow orders outside a specified 
range to even be entered into the marketplace, hopefully 
helping to stem some of the volatility. And I hope that we will 
shortly propose and adopt market-wide circuit breakers that 
will be keyed across the equity options and futures markets, 
and if we have very dramatic moves in the marketplace.
    That said, there is unfinished work in the market structure 
area, particularly with respect to high frequency trading.
    Mr. Lynch. I just want to add that I know you are working 
at 2005 funding levels. And that is absolutely wrong. So I am 
not blaming you. I don't think you have the resources you need. 
But this is an incredibly important issue. And, we have to get 
this done. So--
    Ms. Schapiro. I couldn't agree with you more. To me, one of 
the most important things the SEC needs to be focused on is 
market quality and what is contributing to or detracting from 
market quality.
    Mr. Lynch. All right.
    Thank you, Mr. Chairman. I thank you for your indulgence.
    Chairman Garrett. Thank you.
    Mr. Royce is recognized for 5 minutes.
    Mr. Royce. Thank you.
    Chairman Schapiro, it is nice to see you today.
    As you know, the Department of Labor is currently working 
on a proposal to revise the definition of fiduciary as it 
relates to the provision of individualized investment advice 
for a fee, which the Department might release this summer.
    And officials at the Department have made a number of 
public comments about how they are working with the Commission 
and how they are working with other Federal agencies, I assume 
Treasury and the CFTC and so forth, to mitigate the impact that 
the revised definition will have on the regulations being 
enforced by the other agencies.
    Is there a concern at the Commission that the next proposed 
rule issued by the DOL will have implications beyond fair 
jurisdiction and implications for your jurisdiction?
    Ms. Schapiro. It is a great question. And we have had a 
number of conversations with the Department of Labor. Our 
economists have been, in fact, sharing literature reviews and 
so forth. And I think there are three primary issues.
    One has been resolved, fortunately. And that is whether the 
disclosures that would be required by swap dealers and swap 
market participants under Dodd-Frank could turn those entities 
into fiduciaries under ERISA. And DOL has given us clear 
guidance in a letter to us and to the CFTC that that will not 
be the case.
    But it leaves the second issue, which is whether there 
should be a fiduciary duty for investment advisers and broker-
dealers when they are giving advice to retail customers about 
securities, a standard that exists on the adviser side but not 
the broker-dealer side currently, and whether there is a 
potential for the DOL fiduciary rule to conflict with that.
    We will work very hard to make sure that conflict doesn't 
occur. Our fiduciary duties are more disclosure-oriented. DOL's 
are more toward prohibiting certain kinds of transactions by 
fiduciaries.
    The third issue--and I think the one the securities 
industry is most concerned about--is whether broker-dealers who 
provide advice on IRA accounts, which I think account for about 
40 percent of broker-dealer accounts, would be fiduciaries 
under ERISA. Today they are not, and I think that is probably 
the major point of contention in the DOL rulemaking from the 
perspective of the securities industry.
    Mr. Royce. Let me ask you--the letter that you received--
that is not binding from the DOL. Am I correct, or how do you 
interpret that?
    Ms. Schapiro. I haven't looked lately. It came last fall. I 
would have to go back and look at the exact wording of it. But, 
I took it as an official declaration that they do not believe 
compliance with the business conduct standards under Dodd-Frank 
rulemaking would turn those dealers into fiduciaries.
    Mr. Royce. Let me ask you another quick question. The issue 
I wanted to talk to you about again was the liquidation of 
Lehman.
    In your response previously, you mentioned the Commission 
staff is implementing the recommendations regarding the 
trustees' fees. What progress can you share with us? Because 
the data I have is as follows, and this is on the progress 
report by LBI.
    And so here are the highlights: Unresolved customer claims, 
$41 billion; claims that moved from disputed to closed, $300 
million--so that is 0.7 percent of unresolved claims; claims 
allowed in the period, 0.1 percent of unresolved claims, or $40 
million; fees in the 6-month period for the trustee, the fees 
are $92 million; total fees to date, $733 million. So for every 
$1 of claims resolved in the last 6 months, the trustee spent 
$0.27.
    To get back to a point that I have raised before--at what 
point do we look at the progress being made, which after those 
initial back office customer account transfers appears to be 
minimal, and at what point do we look at this huge bill being 
run up and question the reasonableness of these fees?
    Ms. Schapiro. I think it is a very fair question. And there 
has clearly never been a more complex liquidation proceeding 
than the Lehman one under SIPA. As you pointed out, we are 
looking very closely at recommendations from our Inspector 
General about our oversight of SIPC. And he put forth, I think, 
12 recommendations.
    Ten of those have already been implemented. The last two 
are in the process of being implemented. They required 
consultation with the Commission. And we are working hard to do 
closer oversight of SIPC and the trustee's fees. As you know, 
we don't select the trustee. And in fact, under SIPA, it is 
required.
    Mr. Royce. I know, but that brings up another point. And 
that is why I would like you to monitor this case; because, as 
you know, this was the trustee that was assigned to the MF 
Global case as well. To me, it seems that a critical function 
of a trustee is to manage disputes and settle claims, and I 
watch the progress on this and it really calls that into 
question in my mind.
    Ms. Schapiro. All I can really say is that we are 
redoubling our efforts for oversight in this regard, but there 
are contingencies in this liquidation that are going to take a 
significant amount of time to resolve. As you know, there are 
multiple entities involved, multiple jurisdictions involved, 
and it is enormously complex.
    I do think that the litigation with Barclays over the 
transfer of funds under the Asset Purchase Agreement having 
been resolved on one level could amount to a substantial 
payout. The problem is that decision has been appealed to the 
courts. And again, that will take time.
    Mr. Royce. Thank you, Chairman Schapiro.
    Thank you, Mr. Chairman.
    Chairman Garrett. Thank you.
    The gentleman from California is recognized.
    Mr. Sherman. Thank you.
    Madam Chairman, thanks for being here; so many questions, 
so little time. Many of the questions I raise I will ask you to 
respond to for the record.
    The first concerns REITs. Let me mention that the SEC 
published--your concept released to revisit the--Congress has 
provided a carve-out in the Investment Company Act of 1940.
    We need REITs to be involved, especially in the California 
economy. Investor protection is paramount, but I know you will 
give due consideration to the congressional carve-out of 
mortgage REITs and the role they play in capital formation.
    Now let me shift over to Iran. Companies that do business 
with Iran--particularly with the Iranian government, 
particularly in areas of strategic significance--undermine 
American foreign policy, but also expose their shareholders to 
risks, namely sanctions.
    And, in fact, inside word here from Congress--don't want to 
provide insider information--those risks are going to increase 
as Congress imposes new sanctions on those companies, both 
U.S.- and foreign-based, that do business with Iran and its 
government.
    By a vote of 410 Members of the House, we adopted the Iran 
Threat Reduction Act. And I would like you to tell us for the 
record what the SEC has done to further the disclosure 
requirements of that Act.
    I think investors deserve to know which companies are 
engaged in what kinds of activities with Iran, both to protect 
themselves financially, but also investors have a right to make 
investment decisions based on foreign policy concerns as well.
    Chairman Schapiro, you were here back in July 2010, and you 
told us that you would be taking steps to educate investors. 
And I would like to know what steps the SEC has taken to 
educate investors about the risks companies face from doing 
business in Iran and the potential impact of sanctions.
    Of particular concern is that the SEC established 4 years 
ago a Web-based tool to allow investors access to a list of 
companies which in their public filings with the Commission 
disclosed that they conduct business in countries that sponsor 
terrorism.
    Now the greatest problem with is that it was effective, and 
the companies wanted to deny potential investors information 
about what they were doing. They didn't want to have to face 
investor pressure. So they pressured the Commission, and they 
said, ``Aha! Your tool is imperfect.''
    The response of the SEC was to pull the tool and to try to 
make it even more perfect. And now it is 4 years later and 
nothing has been done and the tool still isn't up. So I would 
like to ask what efforts the SEC is making to reestablish this 
tool so that investors can easily identify those companies that 
do business in countries designated as state sponsors of 
terrorism.
    Why don't I give you a minute to make some more comments 
about Iran? And then I will have one other question I need to 
squeeze in.
    Ms. Schapiro. Congressman, I am going to have to get back 
to you on the tool, specifically. I remember reading about it. 
It was discontinued by my predecessor. I remember there were 
lots of issues around it. But I would like to supplement the 
record--
    Mr. Sherman. The real issue was that it was effective.
    Ms. Schapiro. That may well be the case. I will say--
    Mr. Sherman. And we did have a promise that it would be 
restored, and it has been 4 years.
    Ms. Schapiro. I will get right on it. I will also say that 
the staff had been working on a disclosure rule for companies 
that face material risks from possible violation of sanctions 
legislation. And that is circulating with the Commission.
    But I will say that the Senate appropriations report for 
this year actually directs us to require disclosure by 
companies of activities that may subject them to sanctions 
under the Iran Sanctions Act and the staff is in the process of 
developing that rule. It is very similar to what the House 
passed in December, so I can get you an exact timeframe for 
that, but it is well under way.
    Mr. Sherman. I look forward to reading that timeframe in 
your written response. And I hope that you will be moving 
forward as you promised us in 2010 with an education program.
    Finally, I would like to shift to the FASB standards 
dealing with leases. This could balloon the liabilities 
reported on the balance sheets of almost every American 
company.
    There are economic studies that show that this rule could 
do real harm to the U.S. economy. And I would like you to 
explain what steps the SEC will take to work with the FASB to 
make sure that the economic impact of rule changes is reviewed 
and that the SEC takes a broad policy view as to this possible 
change in FASB standards.
    Ms. Schapiro. As you know, we oversee the FASB, and I am 
not intimately familiar with all the requirements of the 
proposed standard, but I will be happy to provide you with 
information about exactly where it stands and what the 
Commission's approach will be to that.
    Mr. Sherman. You come here for 5 minutes and you end up 
with a lot of work, but thank you very much for your future 
steps. Thank you.
    Ms. Schapiro. Thank you.
    Chairman Garrett. Great.
    The gentleman yields back.
    Mr. Fitzpatrick is recognized for 5 minutes.
    Mr. Fitzpatrick. Thank you.
    Chairman Schapiro, a couple of weeks ago, we had a hearing 
in this subcommittee on the issue of mandatory audit-firm 
rotation. And at that hearing the chairman of the PCAOB--his 
name is Mr. James Doty--stated that conducting a cost-benefit 
analysis related to the PCAOB concept release on mandatory 
audit firm rotation would be, what he called, ``putting the 
cart before the horse.'' And I was wondering if you agreed with 
that sentiment?
    Ms. Schapiro. I didn't hear that statement. I know that 
under the JOBS Act, the PCAOB will be required to do an 
analysis and that would be important for the SEC to see in 
reviewing any proposed PCAOB standard.
    Mr. Fitzpatrick. I also, at that hearing--I brought with me 
a stack of comment letters which would been submitted to the 
PCAOB, and a vast majority of those comment letters were 
opposed to the idea of mandatory audit firm rotations so it 
sounds like you can commit to the committee that the SEC will 
require--you are saying the JOBS Act requires--
    Ms. Schapiro. I believe it does--
    Mr. Fitzpatrick. --financial analysis?
    Ms. Schapiro. --that it requires some kind of an economic 
impact analysis.
    And, of course, the comment period I think has just ended, 
maybe this week, on this proposal and the PCAOB has held some 
public hearings and roundtables. So there will be a lot of 
information available for the SEC staff in reviewing this 
potential rule as well as for the PCAOB staff.
    Mr. Fitzpatrick. But the Commission had, in the event that 
the JOBS Act doesn't require they take the position, it is not 
required by the Act, had the SEC step in and say, we want to 
see an economic analysis?
    Ms. Schapiro. We will certainly want to see an analysis. 
This is a very major undertaking. This is an issue that has 
been debated for years--was debated in Sarbanes-Oxley. The 
alternative that was adopted then was a lead partner rotation 
and that happens every 5 years and I think that has actually 
had a positive effect.
    So this is not a new issue to us and one which we will be 
very closely involved in.
    Mr. Fitzpatrick. Okay.
    And I wanted to follow up on Congresswoman Moore's 
questions.
    In 2008, was it only the second time in over 40 years that 
a fund broke the buck, this is on money markets. As a result, 
in 2010, the Commission adopted reforms for the money market 
industry and the reforms seem to be working. So I was 
wondering, what is the purpose of proposing rule changes at 
this point?
    Ms. Schapiro. Sure. But it is important to note that while 
the Reserve Fund was one of only two that actually broke the 
buck, just in the period of I think 2008 to 2009, it might have 
been 2007 to 2008, over 100 money market fund sponsors had to 
step in and provide capital or other support so that their 
money market funds wouldn't break the buck. Now that is 
implicit; it is not explicit. Investors expected it to happen, 
but there is no source of capital that is committed or 
dedicated to money market funds that had to necessarily be 
there.
    And of course in the Reserve Fund's case, they didn't have 
any capital. Their parent or their sponsor was not in a 
position to buy out that Lehman paper that caused them to break 
the buck. The result was obviously a devastating run stopped 
only by the American taxpayer in the form of a Treasury 
guarantee program.
    We still believe that even though the reforms that we put 
forward in 2010 have had a very positive impact on money market 
fund resiliency, it doesn't protect against a credit event that 
could cause a money market fund to break the buck. Investors 
don't appreciate that these are investments--these are not cash 
instruments, they are investments, and when they break the 
buck, the impetus to run is enormous, and institutions get out 
first, leaving retail investors in the fund and the losses are 
concentrated with those remaining investors.
    And again, from my perspective, the fact that the American 
taxpayer had to be on the hook for this $2.5 trillion industry, 
at that time it was even larger, is just not an acceptable 
place for us to be. We have to explore whether there are other 
things we can do to ensure that that doesn't happen.
    We will be very deliberate. We will try to be very 
thoughtful and very careful about how we go forward with this.
    We appreciate that these are valuable instruments for 
corporate treasurers, for municipalities, for individual 
investors, but the reality is they have a structural weakness 
that makes them susceptible to runs that can devastate our 
entire economy.
    Mr. Fitzpatrick. So is this a proposed rule at this point 
or are you actually--
    Ms. Schapiro. It is not even--
    Mr. Fitzpatrick. --in the process?
    Ms. Schapiro. --it is not even a proposed rule.
    The staff is working on a proposal. And it has largely 
taken the form of either floating net asset value, meaning the 
price would reflect the actual value of the instrument, or in 
the alternative, capital requirements so that if one does get 
into trouble, there is a capital buffer there to absorb the 
losses, or a capital requirement in conjunction with some kind 
of minimum account balance for some short term of time.
    Mr. Fitzpatrick. Where do the other Commissioners stand?
    Ms. Schapiro. You would really need to ask them. Some of 
them have spoken publicly about it and expressed reluctance. I 
think they all would say right now they still have an open 
mind. But we will see and, of course, it will require three 
votes to become a proposal.
    Mr. Fitzpatrick. Thank you.
    Chairman Garrett. The gentleman yields back.
    Mr. Miller is recognized.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    I will have questions for the record or a question for the 
record about the conflict minerals regulation to sort of 
certification that conflict minerals were not used in 
manufactured products.
    But the questions I have today are about the valuation of 
second liens in the biggest banks financial statements.
    Obviously, the biggest banks are enormous and they do 
everything and they operate everywhere. Chase's balance sheet, 
for instance, is $2.3 trillion. It is apparent from the fact 
that several of the biggest banks are trading well below book 
value that investors are skeptical about the valuation of some 
of their assets and their liabilities. And one of those appears 
to be second liens.
    They have enormous portfolios of second liens and 
apparently do not--they continue to buy those at par as long 
the second liens are performing, but a good many of those 
second liens are behind firsts that are not performing or 
behind firsts that are underwater. So those are second liens 
that may have trouble in their future.
    And if a first mortgage ends up defaulting and going into 
foreclosure, the second lien loses everything, they lose out 
completely.
    Is that something the SEC is looking at as an investor 
protection the valuation of second liens?
    Ms. Schapiro. It certainly would be and our concern 
obviously would be for the quality and the truthfulness of the 
disclosure and the disclosure by the banks. I have a 
recollection, but I would like to clarify it for the record, 
that we have given guidance in this area in the last 6 months 
or so to the large banks.
    But if I could supplement the record with that information, 
that would be great.
    Mr. Miller of North Carolina. Okay. You will provide that 
additional information in--
    Ms. Schapiro. Absolutely.
    Mr. Miller of North Carolina. --in a supplemental? Okay.
    Ms. Schapiro. But whether we have given guidance, we are 
seeing in our review of the largest financial institutions--
public disclosure on this issue.
    Mr. Miller of North Carolina. And you do agree that second 
liens are behind even if a second lien is performing if it is 
behind either a nonperforming first, a delinquent first, or an 
underwater first, which is essentially unsecured debt, that it 
should be valued at much less than par?
    Ms. Schapiro. I am not an expert so I probably should not 
say whether I agree, but that seems to make sense to me.
    Mr. Miller of North Carolina. All right.
    Mr. Chairman, I will yield back.
    Chairman Garrett. Thank you.
    The gentleman yields back.
    Mr. Stivers is recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    Welcome Ms. Schapiro, and thanks for taking a lot of your 
time today to talk with us about a few things.
    I wanted to follow up a little bit on a few things that 
have already been asked.
    One question that has not been asked is sort of a 
structural question; a question about harmonization between the 
SEC and the CFTC which will lead to a bigger structural 
question in a second. But how are you doing at harmonizing the 
derivatives rules?
    Ms. Schapiro. I think we are actually doing very well.
    Last week, we were able to finalize a really important 
foundational rule which is the definition of security-based 
swap dealers, major swap market participant, major security-
based swap market participant. And for all those dry words, 
those are really important rules. We were able to do that 
jointly and get that done.
    The next big joint rulemaking will be to define the 
products: what is a security-based swap and a swap?
    Once those are done, the two agencies can go forward with 
finalizing other rule requirements, some of which will not be 
identical because there are differences in the markets we each 
regulate. We are just 5 percent of this multi-hundreds of 
trillions of dollar market. The CFTC has the bulk of it and 
with commodity swaps and energy swaps and interest rates, it is 
a very diverse market for them. For us, it is a much narrower 
market.
    Mr. Stivers. And do these new agreed-upon definitions 
conform with the Securities and Exchange Act, because I know 
that your rules originally did and the CFTC's did not. So I 
would like it when you conform with the law--let me go ahead 
and be clear there.
    Ms. Schapiro. Yes, I think what we relied on a lot in our 
security-based swap dealer definition is the trader-dealer 
distinction that exists, and has existed for many, many years 
under the securities laws. And I think what the CFTC ultimately 
adopted as this process went along was much more of that 
thinking. So I think they are consistent with the Federal 
securities laws.
    Mr. Stivers. Great.
    And I don't know if you have paying attention to what has 
happened here in the House. The House has passed a couple of 
bills, one of which is mine, H.R. 2779; and another, H.R. 2682, 
which we passed with overwhelming majorities.
    I know mine got 357 votes, and I think Mr. Grimm's got more 
votes, so congratulations to him.
    My bill deals with their affiliate swaps and how they are 
treated; and H.R. 2682 deals with end-user exemptions.
    Have you come to any agreement with the CFTC with regard to 
those things? Obviously, the Senate has not moved either one of 
those bills yet. But with the overwhelming bipartisan 
majorities in the House, have you come to agreements that will 
make either of those bills unnecessary?
    Ms. Schapiro. I don't know the answer to that with respect 
to the inter-affiliate transactions, and I would be happy to 
come back to you on that one specifically. With respect to the 
end-user margin, that is generally a CFTC issue, because it is 
the non-financial end-users commodity--producers, agricultural, 
co-ops, and others--that are the kind of end-users we have all 
been most concerned about in this regard. So since we are only 
regulating security-based swaps, we see this as much less of an 
issue on our side.
    Mr. Stivers. Sure, okay.
    I am certain to run out of time. I do want to ask you--
follow up on the questions that the chairman raised earlier 
about the regulatory system. You came to my office a few months 
ago, and we talked about the SRO model. Can you give us a few 
sentences of your opinion on the SRO model and whether it works 
or not?
    Ms. Schapiro. Sure.
    With full disclosure, I spent 12 years at an SRO, FINRA, 
and its predecessor, NASD, so you will understand where I am 
coming from. But I think in a time when there are constrained 
resources within the Federal Government, the ability to 
leverage a self-regulatory organization is really critical. And 
if you just look at our numbers, we examine about 8 or 9 
percent of investment advisers every year.
    Mr. Stivers. I need to cut you off, but I do know you have 
three models for investment adviser oversight. I hope you will 
choose the one that includes authorizing self-regulatory 
organizations, because I think it works.
    Ms. Schapiro. You will have to choose that. We don't have 
the authority.
    Mr. Stivers. Okay. We will get on that. The other thing 
that you just talked with, I think Mr. Fitzpatrick, about was 
the floating net asset value and you talked about some options 
that you have come up with. Have you looked at some illiquid 
investments in these money market mutual funds?
    Have you looked at a regulator choosing a capital 
requirement that closely conforms with the illiquid 
investments, because frankly, that is the real issue? And I 
didn't see that as one of your choices of your three options 
that you explained to Mr. Fitzpatrick.
    Ms. Schapiro. I think the economic analysis that we do will 
actually look at how big a capital buffer you need under 
different rate and redemption scenarios, for example. And so, 
we will try to do some analysis of how you might calibrate 
appropriately the capital buffer.
    Mr. Stivers. Thank you.
    And I yield back my nonexistent time. Thank you.
    Chairman Garrett. I appreciate that.
    Mr. Ellison is now recognized for 5 minutes.
    Mr. Ellison. Thank you, Mr. Chairman.
    Just a few questions--can you share with us the status of 
the salary ratio and the rule process? How is it coming? Are we 
going to make it on track? I appreciate you responding to my 
letter of March 8th on this topic.
    Ms. Schapiro. I am happy to do that. This is not a 
rulemaking I believe that had a specific deadline, although 
there is obviously a lot of interest in it. This is the 
calculation of the median of employees' compensation compared 
with the total compensation of the CEO.
    Our staff is working very hard on that rule. I will tell 
you that it is a very, very difficult rulemaking. If it was a 
matter of adding up all the W-2s of employees and comparing 
that to the CEO, we could have done it quickly. It is quite a 
prescriptive provision in the law, and there are very extensive 
record-keeping requirements in order to come to a total 
compensation calculation.
    For example, right now, companies have to give that total 
compensation calculation for five named executive officers. 
They actually compute that manually. That can't be done 
manually when you have 60,000 or 70,000 or 80,000 employees 
around the world. There are a lot of questions about, ``How do 
we treat part-time employees in this calculation; what about 
joint venture employees; what about employees overseas?''
    And as I said, the definition of total compensation is 
quite complex, and includes the necessity of calculating 
pension benefits and so forth. This is a long way of saying we 
are working on it. We have had lots of meetings with interested 
investors as well as public companies and we are working hard 
to try to get it right in a reasonable way.
    Mr. Ellison. I want to urge you to continue that effort, 
because it seems to me that one of the problems we get into in 
this committee, and probably in others, is that we start with a 
simple idea: What is the ratio of CEO pay to other average 
employees? It sounds like a simple idea like you said; the W-2 
thing versus CEO pay.
    And then, people who really don't want to do it, never 
wanted to do it, and are fundamentally against doing it because 
they don't want to disclose, come up with an inordinate number 
of ways to just make it complicated and therefore impossible. 
And so, I just hope you don't let the complexity of the 
situation overcome you, and that you keep on soldiering on, 
because it is important.
    And if there is any doubt about that, there was a recent 
report about how shareholders at Citigroup came out and said, 
on CEO pay, ``We have a problem with this compensation.'' It is 
about empowering shareholders. Some people think, why are you 
interfering? At the end of the day, shareholders and the public 
want to get a better handle on this issue of compensation for a 
lot of reasons. And I don't have time to go into all of them.
    Let me ask you this question: Will you be able to continue 
aggressive action to protect investors in capital markets 
without the budget increase you requested?
    Ms. Schapiro. We think the budget increase is really 
essential, given the additional responsibilities that the 
agency is taking on under Dodd-Frank and under the JOBS Act. 
And so, with whatever resources we have, we will work our 
hearts out to protect investors, to facilitate capital 
formation, and to make sure our markets operate with integrity.
    But we are underresourced to the task that we have been 
given, and while we are becoming ever more efficient and 
innovative in leveraging alternatives to do our job, I think it 
is really critical for this country, and for this economy to 
have a strong Securities and Exchange Commission.
    Mr. Ellison. And if I may also add, we underfund an agency, 
and then when a Madoff situation comes up we blame the agency, 
and then use that catastrophe as proof that the agency is not 
doing a good job; therefore, a justification to cut it even 
more. And it is disappointing when that happens. And so I do 
hope that your budget is fully supported, because of course it 
is essential that the work you do goes forward.
    I did want to ask you a question about the cost-benefit 
analysis you are required to do with regard to rules. How is 
that affecting your ability to promulgate rules? Is it 
undermining, is it helping, is it an aid, is it a hindrance, is 
it mixed? What are your thoughts?
    Ms. Schapiro. We firmly believe a good cost-benefit 
analysis, an economic analysis, is important to us in informing 
the policy choices that we need to make in order to do rules 
that will accomplish what Congress has asked us to do in the 
legislation. So we are very committed to doing it.
    I will say it has probably slowed us down in some cases, 
that we are doing a more robust, more analytical cost-benefit 
analysis, although we have always done cost-benefit analyses. 
We have done Paperwork Reduction Act, Reg Flexibility Act, 
efficiency, competition and capital formation analysis, burdens 
on competition analysis.
    Of all the Federal financial regulators, we do the most 
cost-benefit analysis and we are used to doing that. But we 
appreciate that we need to do it even better, and our new 
guidance I think will enable us to have everybody working from 
the same page and do an even better job.
    Mr. Ellison. Yes.
    Mr. Chairman, I ask unanimous consent to submit for the 
record a Bloomberg article, entitled, ``Dimon Widens Gap with 
JPMorgan as Wall Street Pay Slides.''
    Chairman Garrett. Without objection, it is so ordered.
    Ms. Schapiro. I would add that it is a key reason we need 
more resources. We are hiring many more economists to do our 
rulemaking.
    Mr. Ellison. Right. We hear you.
    Thank you.
    Chairman Garrett. Thank you.
    The gentleman yields back.
    Mr. Dold is recognized for 5 minutes.
    Mr. Dold. Thank you, Mr. Chairman.
    Chairman Schapiro, in May of 2009 Martha Haines, the head 
of the Office of Municipal Securities, told this committee that 
establishing an effective registration and examination program 
for municipal advisers would be easy, because there were only 
about 260 non-broker-dealer municipal advisers. Clearly, her 
estimate was inaccurate, as the proposed rule I believe could 
force thousands of individuals to register with the SEC.
    Is Dodd-Frank Section 975 written so broadly that the SEC 
has no other choice but to capture thousands of unsuspecting 
individuals as municipal advisers?
    Ms. Schapiro. I don't think so. The statute is written 
broadly, but I think the SEC has the ability to tailor the 
rulemaking. And as you and I have discussed, I think we cast 
the net too widely in our proposing release. And when we get to 
final rules, I think that you will see that we have tailored it 
quite a bit more.
    We have received 1,000 comment letters, so we know that 
there is deep interest in this issue from a wide range of the 
community; from engineers and geologists, to accountants, bank 
employees, and volunteer appointed officials in municipal 
entities. There are a lot of people who have weighed in with 
very good comments on how to tailor the rule more 
appropriately. And I am hoping that we will be able, at the end 
of the day, to strike the right balance.
    Mr. Dold. I certainly hope so. And I know that you have 
told this committee before that you believe, as you just did, 
that the rule as proposed is far too broad and that the 
Commission plans to scale back the rule before it is finalized. 
But can you at least give us some more specific areas where you 
would like to see it scaled back?
    Ms. Schapiro. Sure. For example, the definition of 
investment strategies is probably too broad and includes 
activities that don't necessarily need to be regulated by the 
SEC, such as whether the proceeds of a municipal offering ought 
to go into a bank account; and whether or not traditional 
banking and trust activities really need to be covered since 
those are otherwise regulated entities.
    We have received comments. I don't know that I have a view 
yet on whether the underwriter exemption needs to be broader, 
because it doesn't include enough activities that are related 
to underwriting.
    I do think that the exclusion for employees of municipal 
entities should be expanded to include those who are appointed 
officials. We do not want to dissuade citizen volunteers from 
serving and the definition excluded those who are elected, but 
not those who are appointed.
    Again, that is an area where I think we can make some 
reasonable carvebacks, and not do any damage to the goal behind 
a municipal adviser registration, but also not layer on 
unnecessary burdens.
    Mr. Dold. I certainly appreciate that. And that was 
actually going to be in my next question. As we look at 975, it 
did go through the process of exempting elected officials out, 
but didn't go through the process of actually exempting out 
those that were appointed.
    And you can just imagine school boards, all these different 
individuals who are out there across our Nation who are giving 
of their time to make the communities a better place, and I 
know you have heard from literally thousands of commenters that 
this would be a significant disincentive for these citizens to 
get engaged and get involved, because you would be forcing them 
to in essence register with the SEC, which you know is a fairly 
significant process.
    Ms. Schapiro. Absolutely.
    And it wasn't as though we wanted to capture them. We 
assumed that they would not be performing the functions that 
the rule dictates require registration. So it was really a lack 
of clarity on our part, not making a conscious distinction that 
elected is out, but appointed is in.
    We didn't think appointed would be engaged in the 
activities that would require registration. We clearly need to 
fix that.
    Mr. Dold. I think as we take a look through on a number of 
the different rulemakings--I certainly hope that this can 
provide some additional clarity, which I think is one of the 
important things for why we are having this hearing today; is 
so that we can provide additional clarity.
    I certainly hope that you take this back. Because we want 
to make sure that this is narrowly tailored and that we are not 
casting that wide net as you talked about before.
    Ms. Schapiro. Absolutely. And this is why the comment 
process is so valuable to us, too.
    Mr. Dold. Chairman Schapiro, thank you so much for your 
time. I appreciate your being here.
    Mr. Chairman, I yield back.
    Chairman Garrett. The gentleman yields back.
    Mr. Hurt is now recognized for--
    Mr. Hurt. Thank you, Mr. Chairman.
    And Chairman Schapiro, I want to also join in my thanks to 
you for appearing before our committee.
    I was reminded by the opening statements by some of our 
colleagues this morning about how funny I think people back 
home think it is when we congratulate ourselves for doing our 
job.
    With respect to the number of times that you have appeared 
on Capitol Hill, I think it is worth noting that whatever the 
failures may or may not have been of the SEC over the years, I 
think that we can all agree that a lack of congressional 
oversight has probably contributed to that.
    And we in Congress are as responsible for those failures as 
anybody I think in the executive agency. And I know, based on 
my observations of you in your job, that you fully understand 
that.
    Again, I appreciate your appearance. I appreciate the time 
that you spent with me and my colleagues I know on an 
individual basis coming to make sure that we understand what 
the issues are, because, good gracious, we need to.
    And so I thank you for that commitment. I know you have a 
tough job and it seems almost perhaps even impossible on some 
days considering the fact that we are borrowing $0.40 on every 
$1 we spend in this country.
    We have diminished resources to be able to do the important 
work or to provide funding for the important work that you do 
at the SEC. I was interested particularly during your comments 
with your hat tipped to capital formation and how we can reduce 
the regulatory bottleneck that can free up more resources in 
the private sector for capital formation.
    With that said, I would been thinking about the JOBS Act 
and I know that at least certainly an important portion of 
trying to reduce some of the red tape so that we can have more 
resources to create jobs, has to do with the registration 
process for banks and the deregistration process, and those 
certain thresholds.
    We have banks in my district in Merle, Virginia, the Fifth 
District, that now will be affected by these new thresholds. 
And with respect to the deregistration process, it is my 
understanding that once certain paperwork has been filed, they 
are immediately terminated from registration but have been 
informed by the SEC that they will have to continue to file 
periodic reports with the SEC for a certain period of time, 
maybe 90 days.
    I wonder if you could speak to that, the purpose of that 
and why that is necessary, and if there is anything that can be 
done to make it easier for these banks to have that certainty 
and get through that process more quickly?
    Ms. Schapiro. Congressman, I would like to get back to you 
further on that, but my recollection is that the reason the 
staff made that judgment was because there are people who are 
receiving public disclosure about these registered reporting 
companies that would no longer get any disclosure; therefore, 
there ought to be a time period where they get some final 
disclosure so they can make decisions about whether they want 
to continue to own the stock, in light of the fact that there 
will not be public reporting anymore.
    So yes, they will have the burden a little bit longer after 
they deregister, but the investors who own their shares will 
also have the loss of information as a result of the 
deregistration. So I think it goes to that, but I would be 
happy to get you more information.
    Mr. Hurt. It does seem to me that some sort of final report 
might be in order. But it seems to me to make the periodic 
reports for the time going forward, for 90 days or whatever, it 
is seems not to be consistent, frankly, with the law--
    Ms. Schapiro. I believe it may also be the current 
requirement pre-JOBS Act. For companies, of course, that go 
dark before two--just at much lower numbers. But let me come 
back to you--
    Mr. Hurt. Thank you.
    Ms. Schapiro. --if I could on that.
    Mr. Hurt. And then the other question I wanted to ask has 
to do with the registration of private equity companies that 
you have been very kind to discuss with us, and whether or not 
your exemptive authority would apply in exempting P.E. 
companies of any size, certain sizes, from registration. But in 
particular I wanted to ask you about whether or not the 
interpretive guidance that I think that you have indicated that 
you all will be providing.
    What is the status of providing that interpretive guidance 
for the registered advisers that deal with these private equity 
funds that would make clear that there are differences between 
private equity and other financial services products?
    Ms. Schapiro. Again, I know the staff has been working very 
closely with the P.E. industry to try to answer their questions 
and provide whatever relief would be appropriate under the 
statute and I would be happy to get back to you on that 
specifically.
    I think you also know that we have tried very hard to scale 
the requirements. For example, the systemic risk reporting for 
P.E. is only for firms with over $2 billion under management. 
And they only file very, very basic information annually.
    So we have tried to be very sensitive to the fact that a 
P.E. fund is different than a hedge fund and we understand 
that. And P.E. is different than a liquidity fund and 
different, frankly, than a venture capital fund and our 
requirements are sealed to the potential risks that they might 
pose. But I would like to come back to you, if I could, on 
where they are exactly with the relief.
    Mr. Hurt. I would appreciate that. Thank you very much.
    Chairman Garrett. The gentleman yields back?
    Mr. Hurt. I yield back. Thank you.
    Chairman Garrett. I now recognize the gentleman from New 
York, Mr. Grimm.
    Mr. Grimm. Thank you, Mr. Chairman.
    And thank you, Chairman Schapiro. You have been very 
gracious with your time.
    Trying to bring a little continuity--we were just speaking 
about the JOBS Act. One of the provisions of the JOBS Act I 
believe brings shareholder limits from $500 to $2,000. Just for 
clarification, is that going to be implemented--is that 
effective immediately or is that after all the rulemaking when 
the rest of the JOBS Act is done?
    Ms. Schapiro. I believe this requires some rulemaking. But 
I don't think it is very much rulemaking in this regard, unlike 
crowd funding which requires much more extensive rulemaking. I 
am sorry--I am just not recalling the details.
    Mr. Grimm. I will take that as, ``After the rulemaking, it 
will become effective?''
    Ms. Schapiro. I--
    Mr. Grimm. Do you want to get back to me on that one?
    Ms. Schapiro. Yes, I would like to get back to you because 
in fact we have had one bank already come in to deregister and 
we obviously haven't done rulemaking. So it may be that it is 
immediately effective.
    Mr. Grimm. Okay.
    Ms. Schapiro. I am just not remembering exactly.
    Mr. Grimm. That is fine.
    In that same vein, my understanding is that it was drafted 
in a way that it may not include savings and loans. But my 
understanding is you have the authority within your purview to 
fix that. Can you or will you fix that?
    Ms. Schapiro. We are looking at that. I received a letter 
about a week ago from a number of savings-and-loans asking us 
specifically about that issue, so the staff is looking at that.
    Mr. Grimm. Okay. Great.
    Let me switch to the Volcker Rule for a second. As written 
in the Volcker Rule proposal--could treat a mutual fund as a 
banking entity in limited cases? For example, I think a bank 
sponsor that has just launched a mutual fund and owns nearly 
all the shares of the new fund. As a result, the mutual fund 
itself would have to comply with trading and investment 
restrictions of the Volcker Rule? Yet that fund, like all 
mutual funds, will eventually become wholly shareholder owned.
    The proposed rule also states that a banking entity is 
prohibited from having an ownership interest interacting as a 
sponsor to a hedge fund, private equity fund or similar fund as 
the agency determines collectively. The proposed rule is called 
a covered fund.
    That term is defined so broadly that it could sweep in a 
range of investment vehicles, even highly regulated mutual 
funds. So my question is this: Do you agree that the Volcker 
Rule should not limit a bank's ability to sponsor, invest, and 
register investment companies?
    Ms. Schapiro. I will say that these are issues that have 
been raised in the course of the Volcker rulemaking. We have 
gotten 18,000 comment letters. It is a joint rulemaking among 
all the financial regulators. We are looking at it very 
closely, including the prohibitions and the extent to which we 
have any flexibility with respect to sponsoring funds. I don't 
have an answer right--
    Mr. Grimm. All right. I will broaden that. Congress' 
intent, I don't think, was restricting a mutual funds trading 
and investment activities.
    Ms. Schapiro. I think that is probably right.
    Mr. Grimm. Okay. Fair enough.
    If we could go back for a second--my colleague asked about 
MF Global. And you threw out some stats. I think it was 318 
securities accounts, I suppose the vast majority being CFTC-
segregated customer funds.
    Ms. Schapiro. Right. I believe there are 36,000 futures 
accounts, and only 318 active securities accounts.
    Mr. Grimm. Okay. That is what is bothering me.
    That begs the question--when the SEC staff recommended 
going with SIPC, Chapter 11; when you look at the 
disproportionate number of accounts, this firm mostly was 
covered by the CFTC. The vast, vast majority was covered by the 
CFTC, which would make me lead that the suggestion should have 
been to let the CFTC have the bankruptcy under Chapter 7.
    Ms. Schapiro. SIPC handles the bankruptcy of the combined 
entity, which was a broker-dealer as well as an FCM.
    Mr. Grimm. Actually, my understanding is that the law says 
that they have the ability to do so. It is discretionary, which 
is why you had the conversation in the first place. You 
wouldn't have needed a recommendation if the law said it has to 
go under SIPC.
    Ms. Schapiro. I don't recall that there was any discussion 
about--and I could be wrong, and I certainly wasn't in on every 
conversation--about whether or not to somehow try to separate 
the broker-dealer piece of this from the FCM piece of it. And 
of course, the trustee is working mostly to try to--
    Mr. Grimm. No, but here is the problem.
    Madam Chairman, here is the problem. Now that it has gone 
Chapter 11, the segregated fund, the customers have become 
creditors. They were never creditors. Had it been under Chapter 
7, they would have been protected.
    Because now they are going to be in U.K. foreign courts, 
which you have seen with Bear Sterns, you have seen with Lehman 
Brothers, years and years of litigation. But if you are a 
creditor, that is fine. You have taken on that risk; but as 
someone that has the protection of a segregated account--and 
that goes back to your statement before that part of your 
mandate is ensuring the integrity and consumer confidence of 
the markets.
    If I am a foreign investor and I am putting my money in an 
FCM, I am told that money cannot be touched. It is protected. 
Guess what? The decision that the SEC and CFTC made just turned 
that upside down because that is not true anymore. Because the 
monies that were taken out of those segregated funds, 
unlawfully, however it was done, shouldn't have been done. We 
understand it shouldn't have been done, but we know it does 
happen. That is why we have criminal statutes in place. But it 
does happen. People break the law.
    The bankruptcy decision took away my rights as a customer 
and made me a creditor. Why would I ever invest in the U.S. 
markets again under those circumstances if regulators can 
decide by bankruptcy law that now you are a creditor? And that 
is why I think that in light of Bear Sterns, in light of Lehman 
Brothers, we should really be looking at that.
    Because those decisions matter, especially when it is 318 
securities accounts, which means they really weren't doing much 
securities business; over 36,000 customer accounts. They were 
mostly an FCM, and, therefore, the CFTC should have put it 
under Chapter 7, in my opinion.
    I thank you, and I yield back.
    Chairman Garrett. The gentleman yields back.
    The gentlelady from New York is recognized.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Thank you, Chairman Schapiro. And I hope that your day will 
get easier from here.
    With all that we have been talking about, it is clear that 
one of the themes becomes management of limited resources, not 
only from the standpoint of the broad economy, but also from 
the standpoint of you as head of the SEC.
    Even if you were to be granted the entirety of your 
request, you would still probably be sorely challenged to get 
accomplished the full slate of things that you have to do just 
in terms of Dodd-Frank implementation. The Volcker Rule alone 
strikes me as something that could consume all of your time.
    So in light of that, I want to get your broader perspective 
just on how you are prioritizing. Because it strikes me, 
respectfully submitted, that you would want to prioritize your 
tasks really, and guide us accordingly, as those who advise or 
authorize the funding market impact of the rulemaking that you 
have to promulgate; the rules that you have to promulgate, 
including a cost-benefit analysis.
    Obviously we have talked a lot about that, recognizing that 
market participants also have limited resources to bring to 
bear; the material fulfillment of your prudential role, which 
Representative Grimm was just referring to obviously in terms 
of MF Global, which is a prominent case that does shake 
investor confidence; preventing overt fraud; having the 
resource allocation to do those things that really were 
antecedent to Dodd-Frank, that prudential regulatory role.
    So I would submit to you that--and I know just about all of 
us have chimed in about money market funds, but I do submit, 
with all due respect, that given the reforms that were put into 
place in 2010, the additional protections, it is not broke at 
this point.
    I haven't devoted any additional resources to that kind of 
task at this moment, nor would I to the CEO compensation 
calculations required by Dodd-Frank, which as you note are 
arcane and abstruse at best, byzantine almost, and take 
resources away from where we need them to be deployed without 
any additional information, because clearly those discussions 
about compensation ratios can be had within existing rules and 
regulations.
    So within that context, how would you propose really 
prioritizing your menu of tasks over the next several months?
    Ms. Schapiro. It is a great question.
    I think from where I sit, our number one obligation is to 
fulfill the mandates that Congress has given to us. And that is 
Dodd-Frank and the JOBS Act right now. Those are high priority, 
and they have been. We have been running at full speed since 
Dodd-Frank was passed. Now we have the JOBS Act work to do. And 
those would be two very high priorities.
    I have a personal deep interest, and I think it is 
incredibly important for the future of our country, frankly, 
that we get market structure issues well in hand. We have done 
a lot, but there is more to do. There is more to understand 
about our market structure and whether the rules that govern 
how our markets operate are still effective and still work, 
given technology, given globalization, given complexity.
    I think we have to continue to prioritize the internal 
reforms, hiring the new skill sets, bringing in different ways 
of thinking and doing things, and building our technology. We 
have four incredibly important technology projects that we are 
working on right now. Those have to continue to be a priority.
    I also think we have to prioritize issues coming out of the 
financial crisis--and I will disagree with you--like money 
market fund reform, where a really devastating run was only 
stopped because the taxpayers stepped in and guaranteed an 
industry that should never have to be guaranteed by the 
taxpayer.
    So we have to explore those issues. How long that takes us 
and where we land at the end of the day, I don't know. But I 
think we have to be willing to have the debate and the 
discussion. And so, I think those are all important areas for 
us to be dealing with.
    I will also put in the category of financial crisis areas, 
a new look at our capital rules and our broker-dealer custody 
requirements coming out of events like Madoff. We try to learn 
from the bad experiences the agency has had and make sure that 
we are doing what we can internally to make sure they don't 
happen again, and where the regulatory regime needs to be 
bolstered to do that as well.
    So that is basically how I had prioritized them. And of 
course there are a thousand decisions under those broad 
categories.
    Mrs. Maloney. Thank you, Mr. Chairman.
    And I know our time has expired. I yield back.
    Chairman Garrett. Yes, the gentlelady's time has expired.
    The gentlelady yields back.
    If the Chairman is amenable to staying for another 10 or 12 
minutes for just the Members who are here or in the back room, 
I will go through a proverbial lightning round for about--if we 
do 2\1/2\ minutes each, that is another 15 minutes; because I 
know you have been sitting there for some period of time.
    So very quickly, I recognize myself. The MAP program, 
Section 967, required of course that an outside look at the 
SEC, as far as management and proposals for corrections, 
administratively be done. Two reports have been submitted by 
the SEC. These basically have been focusing on administrative 
actions, and this is to my opening statements.
    The SEC has spent approximately, from what I see in the 
report on page 60, around $16.5 million for outside consulting 
and staffing. This goes to your question about you all, I am 
sure you are, working your hearts out here. Isn't this an area 
where you all--basically you are chief operating officer, 
should be working their hearts out and not putting this into 
outside consultants?
    Ms. Schapiro. I think they are working their hearts out, 
but I don't think we necessarily had all the internal skills 
that were necessary.
    Chairman Garrett. But this is just administrative at this 
level that they are trying to do.
    Ms. Schapiro. Oh, no, but it is not.
    For example, it is not administrative to redesign the 
Office of Information Technology, create an Office of the Chief 
Data Officer, and implement a continuous improvement program 
where we have identified savings as much as we can.
    Chairman Garrett. So how much money has been spent and will 
be spent on outside consultants in these areas?
    Ms. Schapiro. My understanding is that to date, we have 
spent $8.5 million for implementation plan development, 
modeling, risk management, and creation of the program office 
to support the 17 work streams.
    Chairman Garrett. And have the Commissioners--all the 
Commissioners have not been involved. Only the chairman has. Is 
that correct?
    Ms. Schapiro. I have administrative responsibility for 
running the agency. The Commissioners have all been briefed on 
the work streams by the senior staff of the SEC who lead those 
work streams. That is not led by--
    Chairman Garrett. So you don't think that they should be 
involved?
    Ms. Schapiro. I am happy for them to be--I have a very open 
door. I am happy for the Commissioners to be involved to 
whatever extent they would like to be. And I think they have 
all been briefed. They have all been asked for their input.
    Chairman Garrett. Okay.
    And one last question on another area, on ETF and ETF 
backlog. This goes to the issue about--as far as money needed 
for this.
    I understand you are saying the suggestion is that it is an 
issue of dollars and cents. They need more money. But Eileen 
Rominger was I guess giving testimony or information over in 
the Senate indicating that is not the case, that money is 
really not the issue, that there are other issues here.
    And part of the proof of the fact is that a backlog of ETFs 
go back over all the way, 4 or 5 years, to 2007. So that would 
say it is not a money issue. That is another issue. Maybe that 
is a decision orientation of the department or the agency 
instead.
    Ms. Schapiro. No.
    Look, sometimes there are money issues in terms of backlogs 
being created where industry wants relief and we don't have the 
people that we can throw at them. For example, we get about 
2,000 self-regulatory organizations, including exchange, 
filings, every year that have to be processed under Dodd-Frank 
on a very short timeframe. We move resources from other places 
to do that.
    There are a lot of very complex issues with respect to 
ETFs, particularly highly leveraged--
    Chairman Garrett. In 4 of 5 years, there is some of these--
this--
    Ms. Schapiro. I would have to go and look at what those 
specific ones were. I am guessing that the staff does not 
believe they can make the public interest finding to approve 
those. But I would be happy to get back to you on the specifics 
of those applications.
    Chairman Garrett. Okay. So that may be an issue there as 
far as what they are finding, as far as the public interest as 
opposed to a lack of funding, particularly or actually coming 
up and doing.
    Ms. Schapiro. It is possible and it is possible it is a 
combination.
    Chairman Garrett. Thank you.
    Mr. Stivers is eagerly writing down--
    Mr. Stivers. Yes, I am dutifully writing down--before I get 
to a question, I did want to associate myself with the remarks 
from Mr. Dold on the municipal advisors rule; hopefully you 
will redo that to avoid inadvertently capturing a bunch of 
extra folks.
    I also want to strongly associate myself with the question 
Mr. Grimm asked about savings and loans. Clearly there was no 
intent in this Congress to allow bank holding companies to move 
to 2,000 shareholders, but not allow savings and loans. And 
there may have been some inadvertent drafting that may or may 
not limit it, but I know that you have the ability, as you 
actually had the ability, you raised the capital limits from $1 
million to $10 million over the years but left the shareholders 
alone.
    You actually had the ability as we have talked in my 
office, to raise the shareholder limit and I hope you will use 
your discretion to ensure that there is a seamless transition 
for both banks and savings and loans to that 2,000 limit, the 
1,200 to deregister because I think it is really important that 
we don't change the competitive landscape between banks and 
savings and loans on capital formations.
    But my larger question is something that has not come up 
much today and that is on conflict minerals. I know that you 
have worked on some rules and you were talking about--the rumor 
is that sometime mid this year there will be a final rule and 
the problem that I know a lot of companies have is that they 
are forced to prove a negative, which is really hard. And even 
on trace amounts of minerals, they are potentially forced to go 
through this.
    I know there was at some point some discussion about maybe 
trying to get some flexibility and latitude on really small, 
almost minimal amounts of minerals. Do you know if you have 
come to any conclusion on that, or is there anything that we 
can do to help you on that?
    Ms. Schapiro. I think it is the staff's view that there is 
not really the flexibility to have a de minimis exception, in 
fact, because most products that contain these minerals do 
contain a very de minimis amount.
    That said, we are working through an awful lot of issues 
here; another enormous anxiety, I think, on both sides is 
whether you believe in the conflict minerals rule as a good 
thing or not.
    We know there is a lot of interest in it and a lot of 
anxiety and we are trying to work through to achieve the 
congressional intent, but also to make it as workable as we 
possibly can.
    Mr. Stivers. I will say before my time runs out--actually, 
I guess after my time runs out--we all want you to get it right 
as opposed to do it fast.
    Ms. Schapiro. ``Fast'' is out of the question, I would 
say--
    Mr. Stivers. Okay.
    Ms. Schapiro. --but we are working on ``right.''
    Mr. Stivers. Thank you.
    I yield back the balance of my time.
    Chairman Garrett. The gentleman yields back.
    By the way, I don't know if you saw the 60 Minutes piece 
this past weekend on Sunday--60 Minutes is on Sundays here--on 
Lehman's.
    I know whenever programs are on Sunday, we will get a call 
on Monday about them. And the calls in general, with regard to 
you all, the SEC, were all the folks who were at Lehman who 
were from the SEC today.
    The idea being, ``Should they have caught something and 
didn't''--this was all Repo 105, and we have had some hearings 
on that issue.
    And so, the question is, ``Where are the regulators who 
were actually inside Lehman's, not just the days before, but 
for months before, and--''
    Ms. Schapiro. That was all before my time--
    Chairman Garrett. Yes.
    Ms. Schapiro. --so I would have to go back and see who was 
there and where they are now. I am sure some of them are still 
with the agency, some of them are really talented people, but 
they were part of--
    Chairman Garrett. The piece on 60 Minutes--and 60 Minutes 
is good for it, of course, as you know how 60 Minutes is--
    Ms. Schapiro. Yes.
    Chairman Garrett. --raises a question all across. And that 
was a question--is, ``If they missed then, are they missing it 
someplace else? Are they over at the Federal Reserve today 
missing someplace else?''
    Ms. Schapiro. What I will say is that they were part of a 
program, the consolidated supervised entity program, which I 
have testified--
    Chairman Garrett. Yes.
    Ms. Schapiro. --about before. It was started and ended 
under my predecessor.
    Chairman Garrett. Right.
    Ms. Schapiro. It was wholly inadequately funded and 
supported by the agency. They were a small handful of people, I 
believe less than a dozen, responsible for the five largest 
investment banks. And it was a voluntary program. So--
    Chairman Garrett. Yes.
    Ms. Schapiro. I think one of the lessons of that is that 
voluntary programs don't work very well and if you are going to 
take on the regulation of the largest banks in the world, you 
need more than a dozen people to do it and they need to be 
adequately trained and have authority.
    Chairman Garrett. The other takeaway that--we get calls 
from districts on that after the program--was the lack of civil 
actions either by the SEC or by Justice. And I guess the report 
that came out was the 2-year--a couple of years ago indicated 
that perhaps that would have been appropriate.
    Would you be able to say whether there is any--
    Ms. Schapiro. I--
    Chairman Garrett. --likelihood? Yes?
    Ms. Schapiro. No, it would be inappropriate for me to 
comment on matters that remain under investigation and 
analysis. But I can tell you that our staff has conducted an 
independent and extremely extensive investigation of all these 
issues. They have searched through millions of pages of 
documents. We have taken testimony of all the key people 
including members of Lehman senior management, outside 
accountants. We--
    Chairman Garrett. The fact that you can't testify, does 
that mean the fact that it is still under review?
    Ms. Schapiro. It is still under review, I would say. But I 
would also add that I saw 60 Minutes. I actually went out right 
after the examiner's report was issued with the senior team 
from the SEC and met with Mr. Valukas for several hours to go 
through all of his findings and details so we would be sure 
that we had a road map.
    Chairman Garrett. Right.
    Ms. Schapiro. But it is clear that, at least in my 
experience, the illegality of conduct is something not quite as 
clear cut as it seems to be or is reported to be. And it makes 
bringing cases extremely difficult.
    Chairman Garrett. Did you ever make a recommendation to 
Justice, then, on something like this?
    Ms. Schapiro. I think on this matter, we talked quite 
extensively with Justice, as we do on many matters.
    Chairman Garrett. Do you make recommendations to them like 
go ahead with criminal charges?
    Ms. Schapiro. Again, not speaking to this particular 
matter--
    Chairman Garrett. No to this--
    Ms. Schapiro. --but there are certainly cases where we call 
Justice and say, this is criminal conduct, do you need to bring 
the case at the same time we are?
    Chairman Garrett. And can you say whether you did that in 
this case?
    Ms. Schapiro. I can't say.
    Chairman Garrett. Okay.
    And will you be able to say on--are you able to say on this 
case or any other case, or any other case when--like made up of 
all the cases that we talked about here--are you able to say 
when you finish an investigation--
    Ms. Schapiro. Sure.
    Chairman Garrett. --and when we come to you and then you 
would say--
    Ms. Schapiro. Sure.
    Chairman Garrett. --``Our investigation is done and we are 
either going to investigate or either going to recommend or not 
recommend''--are you able to say at that point?
    Ms. Schapiro. Once we have closed a matter and are not 
bringing in an enforcement case, we have done that and clearly 
we have done it with Madoff. I personally have spoken 
extensively about the issues surrounding the Madoff matter and 
we have done so in other cases.
    Once the case is resolved--
    Chairman Garrett. Yes.
    Ms. Schapiro. --there is nothing that prohibits us--
    Chairman Garrett. So it is not--
    Ms. Schapiro. --from talking about it.
    Chairman Garrett. --so it is not like sometimes with 
maybe--I may be mistaken on this, over in criminal area and 
FBI, they will say they will never tell you what the outcome is 
if they complete their investigation, they just sort of end 
them or something like that. You never know whether you are 
done being investigated by them or something like that is my 
understanding, at least that is what I hear.
    Ms. Schapiro. I think we tend to, too.
    Chairman Garrett. You draw a line--
    Ms. Schapiro. I think we do. I couldn't tell you if we do 
it 100 percent--
    Chairman Garrett. Yes.
    Ms. Schapiro. --of the time, but I think we do.
    Chairman Garrett. Okay, I appreciate that.
    Ms. Schapiro. Thanks.
    Chairman Garrett. And with that, I only have one item to 
put into the record, which is an April 24th article entitled, 
``Lawyer Skewers Boston Fed Chief's Money Fund Comments,'' by 
Beagan Wilcox Volz. And without objection, that is entered into 
the record.
    At this time, I appreciate the time and attention and 
questioning and the answers from our witness, Ms. Schapiro. And 
I thank you for being here on the 40--
    Ms. Schapiro. I don't--42nd, 43rd--
    Chairman Garrett. It all blurs together at this point. I 
look forward to seeing you here again.
    Ms. Schapiro. Thank you.
    Chairman Garrett. Thank you.
    The Chair notes that some Members may have additional 
questions for this witness, 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 this 
witness and to place her responses in the record.
    This committee is adjourned.
    [Whereupon, at 12:46 p.m., the hearing was adjourned.]



                            A P P E N D I X



                             April 25, 2012



[GRAPHIC] [TIFF OMITTED] T5091.001

[GRAPHIC] [TIFF OMITTED] T5091.002

[GRAPHIC] [TIFF OMITTED] T5091.003

[GRAPHIC] [TIFF OMITTED] T5091.004

[GRAPHIC] [TIFF OMITTED] T5091.005

[GRAPHIC] [TIFF OMITTED] T5091.006

[GRAPHIC] [TIFF OMITTED] T5091.007

[GRAPHIC] [TIFF OMITTED] T5091.008

[GRAPHIC] [TIFF OMITTED] T5091.009

[GRAPHIC] [TIFF OMITTED] T5091.010

[GRAPHIC] [TIFF OMITTED] T5091.011

[GRAPHIC] [TIFF OMITTED] T5091.012

[GRAPHIC] [TIFF OMITTED] T5091.013

[GRAPHIC] [TIFF OMITTED] T5091.014

[GRAPHIC] [TIFF OMITTED] T5091.015

[GRAPHIC] [TIFF OMITTED] T5091.016

[GRAPHIC] [TIFF OMITTED] T5091.017

[GRAPHIC] [TIFF OMITTED] T5091.018

[GRAPHIC] [TIFF OMITTED] T5091.019

[GRAPHIC] [TIFF OMITTED] T5091.020

[GRAPHIC] [TIFF OMITTED] T5091.021

[GRAPHIC] [TIFF OMITTED] T5091.022

[GRAPHIC] [TIFF OMITTED] T5091.023

[GRAPHIC] [TIFF OMITTED] T5091.024

[GRAPHIC] [TIFF OMITTED] T5091.025

[GRAPHIC] [TIFF OMITTED] T5091.026

[GRAPHIC] [TIFF OMITTED] T5091.027

[GRAPHIC] [TIFF OMITTED] T5091.028

