[Senate Hearing 112-6]
[From the U.S. Government Publishing Office]



                                                          S. Hrg. 112-6

 
   OVERSIGHT OF DODD-FRANK IMPLEMENTATION: A PROGRESS REPORT BY THE 
                    REGULATORS AT THE HALF-YEAR MARK

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

   CONTINUING THE OVERSIGHT OF THE DODD-FRANK WALL STREET REFORM ACT

                               __________

                           FEBRUARY 17, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                 Available at: http: //www.fdsys.gov /



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                     Dean Shahinian, Senior Counsel

                Laura Swanson, Professional Staff Member

             Andrew J. Olmem, Jr., Republican Chief Counsel

                       Dawn Ratliff, Chief Clerk

                      Brett Hewitt, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                      THURSDAY, FEBRUARY 17, 2011

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2

                               WITNESSES

Ben S. Bernanke, Chairman, Board of Governors of the Federal 
  Reserve System.................................................     4
    Prepared statement...........................................    40
    Responses to written questions of:
        Chairman Johnson.........................................    75
        Senator Shelby...........................................    76
        Senator Reed.............................................    84
        Senator Menendez.........................................    87
        Senator Brown............................................    88
        Senator Tester...........................................    90
        Senator Warner...........................................    91
        Senator Merkley..........................................    92
        Senator Crapo............................................    94
        Senator Corker...........................................    95
        Senator Vitter...........................................    97
Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation..     8
    Prepared statement...........................................    42
    Responses to written questions of:
        Chairman Johnson.........................................    99
        Senator Shelby...........................................   102
        Senator Brown............................................   111
        Senator Warner...........................................   116
        Senator Merkley..........................................   119
        Senator Crapo............................................   124
        Senator Vitter...........................................   125
        Senator Wicker...........................................   129
Mary L. Schapiro, Chairman, Securities and Exchange Commission...    10
    Prepared statement...........................................    50
    Responses to written questions of:
        Chairman Johnson.........................................   130
        Senator Shelby...........................................   136
        Senator Reed.............................................   155
        Senator Menendez.........................................   157
        Senator Tester...........................................   158
        Senator Warner...........................................   159
        Senator Merkley..........................................   160
        Senator Crapo............................................   164
        Senator Vitter...........................................   166

                                 (iii)

Gary Gensler, Chairman, Commodity Futures Trading Commission.....    11
    Prepared statement...........................................    59
    Responses to written questions of:
        Chairman Johnson.........................................   167
        Senator Shelby...........................................   168
        Senator Reed.............................................   180
        Senator Menendez.........................................   182
        Senator Warner...........................................   182
        Senator Merkley..........................................   183
        Senator Crapo............................................   185
        Senator Vitter...........................................   187
John Walsh, Acting Comptroller of the Currency, Office of the 
  Comptroller of the Currency....................................    13
    Prepared statement...........................................    63
    Responses to written questions of:
        Chairman Johnson.........................................   191
        Senator Shelby...........................................   193
        Senator Reed.............................................   201
        Senator Menendez.........................................   201
        Senator Brown............................................   203
        Senator Warner...........................................   208
        Senator Merkley..........................................   209
        Senator Crapo............................................   214


   OVERSIGHT OF DODD-FRANK IMPLEMENTATION: A PROGRESS REPORT BY THE 
                    REGULATORS AT THE HALF-YEAR MARK

                              ----------                              


                      THURSDAY, FEBRUARY 17, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee convened at 10:03 a.m., in room SD-538, 
Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of 
the Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I would like to call to order the first 
Banking Committee meeting of the 112th Congress.
    The last several years have been a historic time for this 
Committee. I have big shoes to fill, following in the footsteps 
of my recent predecessors, Chairman Sarbanes, Chairman Shelby, 
and Chairman Dodd. I am thankful and humbled by this 
opportunity and I look forward to working with all of my 
colleagues on this Committee to make this a productive session 
of Congress.
    We have five new Members joining our Committee and I would 
like to welcome Senators Hagan, Toomey, Kirk, Moran, and 
Wicker. I look forward to working with all of you.
    There is important work ahead of us. I am committed to an 
agenda that will bolster our economic recovery, make our 
financial regulations world class, and ensure that consumers 
and investors have the protections they deserve.
    Two vital parts of this agenda are overseeing the 
implementation of the Dodd-Frank Wall Street Reform Act and 
beginning the process of housing finance reform. We have 
compiled a further list of issues the Committee may consider 
which will be posted on the Committee's Web site today.
    This morning, we hold the first in a series of many 
oversight hearings on the Dodd-Frank implementation. There are 
certainly no shortage of topics for us to discuss with the 
regulators today, and in the coming weeks and months, we will 
take a closer look at many issues important to myself and the 
Members of this Committee. The Committee's oversight will seek 
to ensure that the letter and the spirit of the new law are 
being implemented by the regulatory agencies, public comment on 
proposed rules is being appropriately solicited and considered 
and that the new law is being enforced, legitimate concerns are 
recognized and addressed, and that the regulators have the 
resources they need. The regulators have been hard at work and 
I look forward to learning more about their progress 
implementing the Dodd-Frank Act.
    I want to be clear. The Dodd-Frank Act has brought 
significant and much-needed reform to our financial system. It 
improves consumer and investor protection, fills regulatory 
gaps by bringing oversight to the over-the-counter derivatives 
market, and helps prevent another financial crisis. The 
effective and timely implementation of the Dodd-Frank Act will 
help strengthen the economy by creating certainty for the 
business community, consumers, and investors. In turn, that 
certainty will bring market participants back to the table and 
restore consumer and investor confidence.
    A task of this complexity with such a global impact must be 
done with great care to avoid unintended consequences that 
could impair economic growth or send good-paying jobs overseas. 
Our oversight agenda will make sure we stay on the right track.
    I commend the hard work of all of the regulators. I look 
forward to working closely with all of you to be sure we get 
this right and I thank you for being here today in an 
incredibly busy week, with both the release of the budget and 
hearings in the House. Because of the busy schedules of our 
regulators, we will limit opening statements today to myself 
and Ranking Member Shelby and I ask the other Members of the 
Committee to please submit their opening statements for the 
record.
    With that, I turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    Last year, Congress passed the Dodd-Frank Financial Reform 
Act, as the Chairman has mentioned. The President and the 
majority proclaimed the Act a historic legislative 
accomplishment. At the signing ceremony, the President declared 
that the Act would provide certainty to our markets and lift 
our economy to a more prosperous future.
    Eight months later, the sober realities of what Dodd-Frank 
will mean for our economy, I believe, are now setting in. Our 
unemployment rate still stands at record levels. While the 
political forces that drove the passage of Dodd-Frank have 
waned, the huge costs of the Act are now becoming very clear. 
The Dodd-Frank party, I believe, is over. Unfortunately, our 
economy is now preparing to pay the tab.
    Our financial regulators have begun to implement Dodd-Frank 
and the decisions they make over the new few months will impact 
every American. Regulators will determine if Americans can buy 
a home or a car and if they can get loans to start businesses. 
They will also determine what financial products are available 
and to whom they may be sold.
    In Dodd-Frank, the majority party delegated an 
unprecedented amount of authority and discretion to the 
bureaucracy. Accordingly, our financial regulators now have 
more than 200 rulemakings to complete, many by July. The work 
required to implement these rules is staggering. For lobbyists, 
lawyers, and Government bureaucrats, Dodd-Frank is providing to 
be a gold mine. For the rest of us, however, it means more red 
tape, more governance, fewer choices, and higher fees.
    Today, I hope to learn more about how our regulators plan 
to manage this unprecedented workload. Already, concerns have 
been raised about the quality and the fairness of the 
rulemaking process. In the rush to comply with the unrealistic 
deadlines set in Dodd-Frank, the regulators have had to focus 
on speed rather than deliberation. And while our regulators 
will do their best to comply with the deadlines, Congress, I 
believe, should seriously examine whether the speed of the 
process is undermining its integrity. There are early 
indications that it is.
    One of the hallmarks of our regulatory process is openness. 
Yet with so many rulemakings being considered simultaneously, 
public participation could be stifled. It may be practically 
impossible for parties to provide thorough comments on so many 
rules and for regulators to fully consider every comment in 
such a short timeframe. And although the regulators will 
receive an enormous quantity of comments, what really matters 
is the quality of the interaction between the commentators and 
the regulators. With that in mind, I believe we should begin 
considering whether the final rules would be better if our 
regulators had more time to hear from the public.
    Another consequence of the hasty rulemaking process is that 
our regulators may not be properly conducting economic analysis 
of proposed rules. Any thorough consideration of a proposed 
rule obviously should include an understanding of its cost. 
Unfortunately, there are serious questions regarding the 
willingness and the ability of our regulators to conduct such 
analysis. At the SEC, the position of Chief Economist has been 
vacant for 10 months. At the CFTC, the position of the Chief 
Economist was vacant for 11 months before finally being filled 
this past December.
    I believe the failure to promptly fill these key positions 
suggests that economic analysis is not a high priority for our 
regulators. In light of the fact that the cost imposed by these 
rules may cause some Americans to lose their jobs, our 
regulatory agencies should, at the very least, make themselves 
aware of the economic impact of proposed rules before adopting 
them.
    And while improvements in the rulemaking process can smooth 
the implementation of Dodd-Frank, I am under no illusions that 
it can dramatically alter its long-term consequences. Absent 
legislative action, Dodd-Frank is going to be very, very 
expensive. Dodd-Frank may not raise taxes directly, but 
consumers will soon feel its cost when they pay higher 
regulatory fees, higher compliance costs, and higher prices for 
financial services.
    Just this past week, the President's budget calls for the 
CFTC to impose $117 million in new taxes in the form of user 
fees to pay for the cost of Dodd-Frank. Over the coming months, 
the hidden costs of Dodd-Frank will grow as our regulators 
steadily impose new rules and regulations. I hope that the 
Committee will focus at least as much attention on the cost as 
it does the rules over the next few months.
    Thank you, Mr. Chairman.
    Chairman Johnson. The Committee will now turn to Executive 
Session.
    [Whereupon, at 10:13 a.m., the Committee moved to Executive 
Session, and reconvened at 10:19 a.m.]
    Chairman Johnson. Before I begin the introductions of our 
witnesses today, I want to remind my colleagues that the record 
will be open for the next 7 days for any materials you would 
like to submit.
    The Honorable Ben S. Bernanke is Chairman of the Board of 
Governors of the Federal Reserve System. He is currently 
serving his second term as Chairman, which began on February 1 
of last year. Prior to becoming Chairman, Dr. Bernanke was 
Chairman of the President's Council of Economic Advisors from 
2005 to 2006. Also, he served the Federal Reserve System in a 
variety of roles in addition to serving as Professor of 
Economics at Princeton University.
    The Honorable Sheila Bair is Chairman of the Federal 
Deposit Insurance Corporation. Prior to her appointment in 
2006, Ms. Bair was a Dean's Professor of financial regulatory 
policy for the Isenberg School of Management at the University 
of Massachusetts at Amherst. She was also Assistant Secretary 
for Financial Institutions at the U.S. Department of the 
Treasury from 2001 to 2002.
    The Honorable Mary Schapiro is Chairman of the U.S. 
Securities and Exchange Commission. She is the first woman to 
serve as permanent Chairman of the SEC and was appointed by 
President Obama in January of 2009. Previously, she was CEO of 
the Financial Industry Regulatory Authority, or FINRA. Chairman 
Schapiro also served as Commissioner of the SEC from 1988 to 
1994 and Chairman of the Commodities Futures Trading Commission 
from 1994 to 1996.
    The Honorable Gary Gensler is Chairman of the Commodities 
Futures Trading Commission, which oversees the commodity 
futures and options markets in the U.S. Chairman Gensler 
recently served in the Treasury Department as Under Secretary 
of Domestic Finance and Assistant Secretary of Financial 
Markets. In addition, he served as Senior Advisor to Paul 
Sarbanes on the Senate Banking Committee.
    Mr. John Walsh is Acting Comptroller of the Currency of the 
Office of the Comptroller of the Currency. Mr. Walsh assumed 
the position last August. He previously served as Chief of 
Staff and Public Affairs. He has been with the OCC since 2005 
and prior to that was the Executive Director of the Group of 
Thirty. Mr. Walsh also served with the Senate Banking Committee 
from 1986 to 1992.
    I thank all of you for being here today. I regret that I 
had my surgery on my voice box recently, but I hope it will 
clear up.
    Chairman Bernanke, you may begin your testimony.

 STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Thank you. Chairman Johnson and Ranking 
Member Shelby and other Members of the Committee, thank you for 
the opportunity to testify about the Federal Reserve's 
implementation of the Dodd-Frank Act.
    The Dodd-Frank Act addresses critical gaps and weaknesses 
in the U.S. regulatory framework, many of which were revealed 
by the recent financial crisis. The Federal Reserve is 
committed to working with the other U.S. financial regulatory 
agencies to implement the Act effectively and expeditiously. We 
are also cooperating with our international counterparts to 
further strengthen financial regulation, to ensure a level 
playing field across countries, and to enhance international 
supervisory cooperation. And we have revamped the supervisory 
function at the Federal Reserve to allow us to better meet the 
objectives of the Act.
    The Act gives the Federal Reserve important 
responsibilities both to make rules to implement the law and to 
apply the new rules. In particular, the Act requires the 
Federal Reserve to complete more than 50 rulemakings and sets 
the formal guidelines as well as the number of studies and 
reports. We have also been assigned formal responsibility to 
consult and collaborate with other agencies on a substantial 
number of additional rules, provisions, and studies.
    So that we meet our obligations on time, we are drawing on 
expertise and resources from across the Federal Reserve system 
in banking supervision, economic research, financial markets, 
consumer protection, payments, and legal analysis. In all, more 
than 300 members of the Federal Reserve staff are working on 
Dodd-Frank implementation projects. We have created a senior 
staff position to coordinate our efforts and have developed 
project reporting and tracking tools to facilitate management 
and oversight of all of our implementation responsibilities.
    We have made considerable progress in carrying out our 
assigned responsibilities. We have been providing significant 
support to the Financial Stability Oversight Council, of which 
the Federal Reserve is a member. We are assisting the Council 
in designing its systemic risk monitoring and evaluation 
process and in developing its analytical framework and 
procedures for identifying systemically important nonbank firms 
and financial market utilities.
    We also are helping the new Office of Financial Research at 
the Treasury Department develop potential data reporting 
standards to support the Council's systemic risk, monitoring, 
and evaluation duties.
    We contributed significantly to the Council's recent 
studies, one on the Volcker Rule's restrictions on banking 
entities' proprietary trading and private fund activities, and 
a second one on the Act's financial sector concentration limit, 
and we are now developing for public comment the necessary 
rules to implement these important restrictions and limits.
    Last week, the Board adopted a final rule to ensure that 
activities prohibited by the Volcker Rule are divested or 
terminated in the time period required by the Act.
    We also have been moving forward rapidly in other areas. 
Last fall, we issued a study on the potential effect of the 
Act's credit risk retention requirements on securitization 
markets as well as an Advanced Notice of Proposed Rulemaking on 
the use of credit ratings in the regulations of Federal banking 
agencies.
    In addition, in December, the Board and the other Federal 
banking agencies requested comment on a proposed rule that 
would implement the capital floors required by the Collins 
Amendment. In December, we also requested comment on proposed 
rules that would establish standards for debit card interchange 
fees and implement the Act's prohibition on network exclusivity 
arrangements and routing restrictions.
    In January, the Board, together with the OCC, FDIC, and 
OTS, provided the Congress a comprehensive report on the 
agency's progress and plans relating to the transfer of the 
supervisory authority of the OTS for thrifts and thrift holding 
companies. In addition, as provided by the Act, we in the 
Federal Reserve Banks each established offices to consolidate 
and build on our existing equal opportunity programs to promote 
diversity in management employment and business activities.
    We continue to work closely and cooperatively with other 
agencies to develop joint rules to implement the credit risk 
retention requirements for securitizations, resolution plans or 
living wills for large bank holding companies and counsel-
designated nonbank firms, and capital and margin requirements 
for swap dealers and major swap participants. We are consulting 
with the SEC and the CFTC on a variety of rules to enhance the 
safety and efficiency of the derivatives markets, including 
rules that would require most standardized derivatives to be 
centrally traded and cleared, require the registration and 
prudential regulation of swap dealers and major swap 
participants, and improve the transparency and reporting of 
derivatives transactions.
    We also are coordinating with the SEC and the CFTC on the 
agencies' respective rulemakings on risk management standards 
for financial market utilities, and we are working with market 
regulators and central banks in other countries to update the 
international standards for these types of utilities.
    The transfer of the Federal Reserve's consumer protection 
responsibilities specified in the Act to the new Bureau of 
Consumer Financial Protection is well underway. A team at the 
Board headed by Governor Duke is working closely with the staff 
at the CFPB and at the Treasury to facilitate the transition. 
We have provided technical assistance as well as staff members 
to the CFPB to assist it in setting up its functions. We have 
finalized funding agreements and provided initial funding to 
the CFPB. Moreover, we have made substantial progress toward a 
framework for transferring Federal Reserve staff members to the 
CFPB and integrating CFPB employees into the relevant Federal 
Reserve's benefit programs.
    One of the Federal Reserve's most important Dodd-Frank 
implementation projects is to develop more stringent prudential 
standards for all large banking organizations and for nonbank 
firms designated by the Council. Besides capital, liquidity, 
and resolution plans, these standards will include Federal 
Reserve and firm conducted stress tests, new counterparty 
credit limits, and risk management requirements. We are working 
to produce a well-integrated set of rules that will 
significantly strengthen the prudential framework for large, 
complex financial firms and the financial system.
    Complementing these efforts under Dodd-Frank, the Federal 
Reserve has been working for some time with other regulatory 
agencies and central banks around the world to design and 
implement a stronger set of prudential requirements for 
internationally active banking firms. These efforts resulted in 
the adoption in the summer of 2009 of more stringent regulatory 
capital standards for trading activities and securitization 
exposures.
    And, of course, it also includes the agreements reached in 
the past couple of months on the major elements of the new 
Basel III prudential framework for globally active banks. Basel 
III should make the financial system more stable and reduce the 
likelihood of future financial crises by requiring these banks 
to hold more and better quality capital and more robust 
liquidity buffers.
    We are committed to adopting the Basel III framework in a 
timely manner. In December 2010, we requested comment with the 
other U.S. banking agencies on proposed rules that would 
implement the 2009 trading book reforms, and we are already 
working to incorporate other aspects of the Basel III framework 
into U.S. regulations.
    To be effective, regulation must be supported by strong 
supervision. The Act expands the supervisory responsibilities 
of the Federal Reserve to include thrift holding companies and 
nonbank financial firms that the Council designates as 
systemically important, along with certain payment, clearing, 
and settlement utilities that are similarly designated.
    Reflecting the expansion of our supervisory 
responsibilities, we are working to ensure that we have the 
necessary resources and expertise to oversee a broader range of 
financial firms and business models. The Act also requires 
supervisors to take a macroprudential approach. That is, the 
Federal Reserve and other financial regulatory agencies are 
expected to supervise financial institutions and critical 
infrastructures with an eye toward not only the safety and 
soundness of each individual firm, but also taking into account 
risks to overall financial stability.
    We believe that a successful macroprudential approach to 
supervision requires both a multidisciplinary and a wide-
ranging perspective. Our experience in 2009 with the 
Supervisory Capital Assessment Program, popularly known as the 
bank stress test, demonstrated the feasibility and benefits of 
employing such a perspective. Building on that experience and 
other lessons learned from the recent financial crisis, we have 
reoriented our supervision of the largest, most complex banking 
firms to include greater use of horizontal or cross-firm 
evaluations of the practices and portfolios of firms, improved 
quantitative surveillance mechanisms, and better use of the 
broad range of skills of the Federal Reserve staff. And we have 
created a new Office of Financial Stability within the Federal 
Reserve which will monitor financial developments across a 
range of markets and firms and coordinate with the Council and 
with other agencies to strengthen systemic oversight.
    The Federal Reserve is committed to its longstanding 
practice of ensuring that all of its rulemakings are conducted 
in a fair, open, and transparent manner. Accordingly, we are 
disclosing on our public Web site summaries of all 
communications with members of the public, including banks, 
trade associations, consumer groups, and academics, regarding 
matters subject to a proposed or potential future rulemaking 
under the Act.
    We have also implemented measures within the Act to enhance 
the Federal Reserve's transparency. In December, we publicly 
released detailed information regarding individual transactions 
conducted between December 1, 2007, and July 20, 2010, across a 
wide range of Federal Reserve credit and liquidity programs and 
we are developing the necessary processes to disclose 
information concerning transactions conducted after July 20, 
2010, on a delayed basis as provided in the Act.
    To conclude, Mr. Chairman, the Dodd-Frank Act is a major 
step forward for financial regulation in the United States. The 
Federal Reserve will work closely with our fellow regulators, 
the Congress, and the Administration to ensure that the law is 
implemented expeditiously and in a manner that best protects 
the stability of our financial system and our economy.
    Chairman Johnson. Thank you, Chairman Bernanke.
    Ms. Bair.

    STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Ms. Bair. Chairman Johnson, Ranking Member Shelby, and 
Members of the Committee, thank you for the opportunity to 
testify today on the FDIC's progress in implementing the Dodd-
Frank Act.
    First, I would like to congratulate Senator Johnson on 
becoming Chairman, and it is a real honor to be called to 
testify at your first hearing as Chairman. We have appreciated 
your efforts in the past on issues like deposit insurance 
reform and we look forward to your leadership as we address 
future challenges in the financial industry.
    The recent financial crisis exposed grave shortcomings in 
private sector risk management and our framework for financial 
regulation. When the crisis hit, policy makers were faced with 
a choice of propping up large failing institutions or risking 
disruptive bankruptcies, as we saw with the Lehman failure. The 
landmark Dodd-Frank Act, enacted last year, created a 
comprehensive new regulatory and resolution regime to protect 
the American people from the severe economic consequences of 
financial instability. It gives regulators tools to curb 
excessive risk taking, enhance supervision, and facilitate the 
orderly liquidation of large banks and nonbank financial 
companies in the event of failure.
    The Act requires or authorizes the FDIC to implement some 
44 regulations, including 18 independent and 26 joint 
rulemakings, which we are doing as expeditiously and as 
transparently as possible. Many of the FDIC's rulemakings stem 
from the mandate to end ``too big to fail.'' First, in 
implementing our new orderly resolution authority, we are 
making clear that there will be no more bailouts of large 
financial institutions. Our goal is that market expectations 
and financial institution credit ratings should, over time, 
fully reflect this reality.
    Consistent with the Dodd-Frank mandate, our recent interim 
rule requires that creditors and shareholders, not taxpayers, 
bear the losses of a financial company failure and makes clear 
that the FDIC's resolution powers will not be used to bail out 
another institution. To make most effective use of these new 
resolution authorities, it is essential that we have access to 
the information we need to monitor the health of systemic 
entities and conduct advance planning to wind them down without 
disruption to the broader system.
    To this end, the FDIC and the Federal Reserve are working 
to establish requirements for these firms to maintain credible, 
actionable resolution plans that would facilitate their orderly 
resolution. If these entities are unable to demonstrate that 
they are, quote, ``resolvable,'' we should be prepared to 
require structural changes so that they can be wound down, and 
if they cannot make needed structural changes, we should 
require divestiture. The FDIC is working closely with its FSOC 
counterparts to develop criteria for designating systemically 
important institutions that will be subject to enhanced 
supervision and the need to maintain resolution plans.
    The FDIC Board has also implemented its authority under 
Dodd-Frank to strengthen and reform the Deposit Insurance Fund. 
The Act will enable us to maintain a positive fund balance 
during crisis periods while also maintaining steady and 
predictable assessment rates over time. We have expanded the 
assessment base used for Deposit Insurance assessments and we 
have removed reliance on credit ratings while also making large 
bank assessments more sensitive to risk.
    Also, under the Collins Amendment, capital requirements for 
bank holding companies and nonbanks will be made as strong as 
those applied to community banks. The Federal banking agencies 
are in the early stages of rulemaking to implement this 
provision and are also taking steps to implement Basel III 
proposals for strengthening capital and liquidity standards, as 
Chairman Bernanke mentioned.
    The Dodd-Frank Act addresses misaligned incentives in 
securitization by requiring the FSOC agencies to develop risk 
retention standards for loan securitizations and to define 
standards for qualifying residential mortgages that would not 
be subject to risk retention. As this interagency process moves 
forward, we believe the standards must include incentives to 
appropriately service securitized loans. Research and recent 
experience show the importance of servicing to mortgage 
performance and risk, but most securitizations currently do not 
provide the proper resources or incentives for servicers to 
effectively engage in loss mitigation.
    As implementation moves forward, the industry should 
understand that Dodd-Frank reforms are in no way intended to 
impede the ability of small and midsized institutions to 
compete in the marketplace. Instead, they should do much to 
restore competitive balance by subjecting systemically 
important institutions to greater market discipline and 
regulatory oversight.
    History reminds us that financial markets cannot function 
in an efficient and stable manner without strong, clear 
regulatory guidelines. Millions of Americans have lost their 
jobs, their homes, or both, even as so many of our largest 
financial institutions received Government assistance that 
enabled them to survive and recover. We have a clear obligation 
to members of the public who have suffered the greatest losses 
as a result of the crisis to prevent such a severe episode from 
ever recurring.
    Thank you very much.
    Chairman Johnson. Thank you, Chairman Bair.
    Ms. Schapiro.

    STATEMENT OF MARY L. SCHAPIRO, CHAIRMAN, SECURITIES AND 
                      EXCHANGE COMMISSION

    Ms. Schapiro. Chairman Johnson, Ranking Member Shelby, and 
Members of the Committee, thank you for the opportunity to 
testify today on behalf of the Securities and Exchange 
Commission regarding the implementation of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act. The Act is intended 
to fill a number of significant regulatory gaps, bring greater 
public transparency and market accountability to the financial 
system, and give the SEC important tools with which to better 
protect investors. It also assigns the SEC new authority for 
over-the-counter derivatives, hedge funds, and credit rating 
agencies, among others.
    To respond, we have brought together experts from across 
the agency, creating cross-disciplinary teams to draft rules 
and conduct the required studies. We put in place measures to 
ensure maximum input from the public and a highly transparent 
process. And we continue to consult frequently with our fellow 
regulators domestically and internationally.
    We have made significant progress to date. The Commission 
has issued 25 proposed rule releases, seven final rule 
releases, and two interim final rules. We have reviewed 
thousands of public comments, completed five studies, and 
hosted a number of public roundtables jointly with the CFTC.
    While my written testimony contains a detailed discussion 
of our work, I would like to highlight just a few areas of 
particular interest.
    A key portion of the Act seeks to reduce a source of 
financial instability by improving transparency in the 
derivatives markets and facilitating the centralized clearing 
of swaps. The SEC has proposed rules regarding swaps which 
together provide a clear blueprint for a more stable and 
transparent derivatives market. These include proposals that, 
to mention just a few, would lay out the reporting requirements 
for market participants and obligations of swap data 
repositories, seek to mitigate potential conflicts of interest 
to clearing agencies, and establish the duties and core 
principles of swap execution facilities. We are also working 
with the Federal Reserve, the CFTC, and the Financial Stability 
Oversight Council to develop a framework for supervising market 
utilities that are designated as systemically important.
    In addition to derivatives, the Dodd-Frank Act provides the 
agency with authority over hedge funds and private equity funds 
with assets under management in the U.S. of over $150 million. 
Here, we have proposed rules that would facilitate the 
registration of private fund advisors, and together with the 
CFTC, we have proposed rules to require advisors to hedge funds 
and other private funds to report information for use by the 
FSOC in monitoring systemic risk.
    The SEC also is acting to give investors more information 
about asset-backed securities, another focus of the 
legislation. In this area, we have adopted rules requiring ABS 
issuers to disclose the history of asset repurchase requests 
received and repurchases made, and we have also adopted rules 
requiring issuers to review the assets underlying the ABS, to 
disclose the nature of the reviews, and to provide reasonable 
assurances that the prospectus disclosures are accurate.
    The Dodd-Frank Act also includes provisions related to 
executive compensation. In furtherance of these provisions, 
last month, the Commission adopted rules requiring companies to 
allow shareholders to cast an advisory say-on-pay vote at least 
once every 3 years and requiring a separate advisory vote on 
the frequency of say-on-pay votes at least every 6 years.
    Additionally, the legislation substantially expands the 
agency's authority to compensate whistleblowers. In November, 
we proposed a rule mapping out a procedure for would-be 
whistleblowers to provide useful information to the agency. The 
rule makes it clear that whistleblowers play a critical role in 
protecting investors. At the same time, it is designed to 
complement, not circumvent, existing compliance regimes that 
companies operate.
    In recent weeks, the SEC also released two studies which 
examine ways of improving the investment advisor and broker-
dealer regulatory frameworks. First, the Commission published a 
staff study describing potential approaches for Congress to 
consider to increase examinations of investment advisors. And 
second, we issued a staff study looking at the differing 
standards of conduct required of investment advisors and 
broker-dealers. Most importantly, that study recommended that 
the Commission implement a uniform fiduciary standard of 
conduct for broker-dealers and investment advisors when they 
are providing personalized investment advice about securities 
to retail investors.
    In short, the Commission has moved steadily and responsibly 
to implement the Dodd-Frank Act. As we continue to make 
progress, we look forward to working closely with Congress, our 
fellow regulators, the financial community, and investors to 
craft rules that will strengthen the financial markets.
    Thank you for inviting me here today and I look forward to 
answering your questions.
    Chairman Johnson. Thank you, Chairman Schapiro.
    Chairman Gensler.

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING 
                           COMMISSION

    Mr. Gensler. Good morning. Thank you, Chairman Johnson, 
Ranking Member Shelby, Members of the Committee, and 
congratulations on assuming the Chair. Congratulations to the 
five new Members of the Committee, as well. I guess I am a 
little partial, having once staffed a chair of this Committee.
    I thank you for inviting me here today to testify on behalf 
of the Commodities Futures Trading Commission. I want to thank 
my fellow Commissioners and the staff for such hard work at the 
CFTC in fulfilling their statutory mission. I am also pleased 
to testify alongside the fellow regulators here today.
    In 2008, the financial system failed the American public, 
and the regulatory system, as well, failed the American public. 
The effects of that crisis have reverberated throughout America 
and the global economies. In the U.S., hundreds of billions of 
taxpayer money were used to bail out the financial system that 
was at the brink of failure, and millions of jobs have been 
lost and have yet to fully come back.
    The CFTC is working very closely with the SEC, the Federal 
Reserve, the FDIC, the Office of the Comptroller of the 
Currency, Treasury, and other regulators to implement the Dodd-
Frank Act and we are coordinating and consulting closely with 
international regulators to harmonize oversight of the swaps 
market and ensure that there is a level field. We have received 
thousands of comments from the public and had hundreds of 
meetings, which we all post on our Web site. For the vast 
majority of the proposed rulemakings, we have solicited public 
comments for a period of 60 days.
    One area where the CFTC is seeking input from the public 
relates to the timing and implementation of various 
requirements under the rules. Public comments will help inform 
the Commission as to what requirements can be met sooner and 
which can be phased and can be implemented later.
    We are also under the Act to propose rules, along with the 
other regulators here, with regard to margin requirements. The 
Congress recognized that there are different levels of risk 
posed by transactions between financial entities and those 
involving nonfinancial entities. This was the so-called end-
user exception from clearing. Consistent with this, proposed 
rules on margin requirements from the CFTC, we believe, should 
focus only on the transactions between financial entities 
rather than those transactions that involve nonfinancial end-
users, consistent with how Congress did the clearing 
requirement.
    Aside from proposing rulemakings to implement Dodd-Frank, 
the CFTC is also supporting the work of the Financial Stability 
Oversight Council, providing both data and expertise relating 
to a variety of systemic risks. We also have had the 
opportunity to coordinate with Treasury and the Council and the 
Office of Financial Research on the studies and proposed rules 
by the FSOC.
    To adequately fulfill our statutory mandate, the CFTC does 
require additional resources. The U.S. futures market which we 
currently oversee is about $40 trillion in size. The U.S. swaps 
market that we will jointly oversee with the SEC is about $300 
trillion in size, or roughly seven times the size of the U.S. 
Futures markets. We do not need seven times the people, but we 
do need more people and we need more technology.
    On Monday, the President submitted a fiscal year budget of 
$308 million for the Commission. This is essential for 
fulfilling our mission. In 1992, we had 634 staff at the CFTC. 
We are currently between 670 and 680. We actually shrank about 
23 percent in the prior decade, and with this Committee and 
Congress' help, we grew back to where we were in the 1990s. But 
only last year did we get back to where we were in the 1990s.
    Furthermore, the CFTC's funding, if it were returned to 
fiscal year 2008 levels, the agency would not be able to 
fulfill our statutory mission. Every program would be affected. 
We would be unable to pursue fraud and Ponzi schemes, market 
manipulations. Though it did take, Senator Shelby, time to fill 
the Office of Chief Economist, we would not even be able to 
fill any jobs. We would have to go the other way and have to 
unfortunately let people go. I do not think that is what the 
American people need us to do at this time after the crisis of 
2008.
    The CFTC fundamentally is a good investment. The mission is 
to promote transparent, open, and competitive markets so end-
users, hedgers, and investors can get the benefit of the 
markets and the transparency in those markets and the 
competition in those markets. The CFTC is also a cop on the 
beat to ensure against fraud and manipulation and other abuses.
    I thank you and I would be happy to answer any questions.
    Chairman Johnson. Thank you, Chairman Gensler.
    Mr. Walsh.

 STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE CURRENCY, 
           OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Walsh. Thank you, Chairman Johnson, Senator Shelby, and 
Members of the Committee. I appreciate the opportunity today to 
describe the activities the OCC has undertaken to implement the 
Dodd-Frank Act. Let me begin, as others have done, by saying 
what a pleasure it is to appear before Chairman Johnson for the 
first time and by expressing our hope for a continuing 
productive working relationship with my old committee, 
including with its five new Members.
    I am pleased to report that much has been accomplished 
during the past 6 months on implementation of the Dodd-Frank 
Act. Progress in a number of areas is discussed in my written 
statement. Our single largest task is integration of the 
employees and functions of OTS into our supervisory mission, 
and we are on track to complete all transfers by the target 
date of July 21. We firmly believe that the talent and 
experience of OTS staff will be essential for effective 
supervision of Federal savings associations going forward and 
we are fostering an environment that will maximize career 
opportunities while ensuring they enjoy the full protections 
afforded employees by the Dodd-Frank Act.
    We are also engaged in extensive outreach to the thrift 
industry, addressing concerns and clarifying expectations. We 
anticipate an orderly transfer of authority that will ensure 
the combined agency can continue to provide effective 
supervision of both national banks and Federal savings 
associations.
    In the area of rule writing, we are making progress on the 
many projects assigned to us, but a few present particular 
challenges. An issue I raised in testimony last September is 
the prohibition on use of credit ratings. We recognize that the 
misuse of credit ratings, especially in structured finance, 
contributed importantly to the financial crisis, but this was 
not true of corporate and municipal ratings, and after 
significant study and comment, we have found no practical 
alternative for such ratings that could be used across the 
banking sector. We have heard concerns from regional and 
community banks that attempting to replace ratings with 
internal assessments of creditworthiness would be prohibitively 
costly and complex for them. Although we certainly do not 
advocate a return to total reliance on credit ratings, their 
use within defined limits is essential for implementation of 
capital rules, including the Basel III capital framework, and 
we urge Congress to modify this prohibition.
    A more general concern is the need to coordinate 
implementation of Dodd-Frank requirements for capital and 
liquidity with Basel III. While the two share many common 
objectives, it is essential to implement these reforms in a 
coordinated, mutually reinforcing manner that enhances safety 
and soundness without damaging U.S. competitiveness or 
restricting access to credit. My testimony describes our 
efforts to enhance the capital and liquidity standards of U.S. 
financial companies with this coordination challenge in mind.
    Finally, I would like to update the Committee on steps the 
OCC has taken in response to the foreclosure crisis since I 
last testified on this issue. The Federal banking agencies have 
concluded examinations of foreclosure processing at the 14 
largest federally regulated mortgage servicers. The 
examinations, which we undertook in late 2010 with the Federal 
Reserve, the FDIC, and the OTS, found critical deficiencies and 
shortcomings that resulted in violations of State and local 
foreclosure laws, regulations, or rules. Despite these clear 
deficiencies, we found that loans subject to foreclosure were, 
in fact, seriously delinquent and that servicers had 
documentation and legal standing to foreclose.
    In addition, case reviews showed that servicers were in 
contact with troubled borrowers and had considered loss 
mitigation alternatives, including loan modifications. That 
said, our work identified a small number of foreclosure sales 
that should not have proceeded because of an intervening event 
or condition. We are now finalizing remedial requirements and 
sanctions appropriate to remedy comprehensively the problems 
identified. Our actions will address identified deficiencies 
and will hold servicers to standards that require effective and 
proactive risk management and appropriate remedies for 
customers who have been financially harmed.
    We are also discussing our supervisory actions with other 
Federal agencies and State Attorneys General with a view toward 
resolving comprehensively and finally the full range of legal 
claims arising from the mortgage crisis. Equally important, we 
are drawing on lessons from these examinations to develop 
mortgage servicing standards for the entire industry. The OCC 
developed a framework of standards that we shared with other 
agencies and we are now participating in an interagency process 
to establish nationwide requirements that are comprehensive, 
apply to all servicers, provide the same safeguards for all 
consumers, and are directly enforceable by the agencies. While 
we are still in a relatively early stage, we share the common 
objective to achieve significant reform in mortgage servicing 
practices.
    Thank you for the opportunity to testify. I would be happy 
to answer your questions.
    Chairman Johnson. Thank you, Mr. Walsh. Thank you for your 
testimony.
    I will remind my colleagues that we will keep the record 
open for statements, questions, and any other material you 
would like to submit. As we begin questioning of the witnesses, 
I will put 5 minutes on the clock for each Member's questions.
    Chairman Schapiro and Chairman Gensler, with the arrival of 
the President's budget to Congress this week and the failure 
yet to appropriate the funds authorized by the Dodd-Frank Act, 
please describe how you are addressing funding constraints in 
your respective agencies as you continue to implement the Dodd-
Frank Act.
    Ms. Schapiro. I am happy to go first with that, Mr. 
Chairman. For the purposes of conducting the studies and 
writing the rules that are required under Dodd-Frank, we are 
using cross-agency teams of employees who are already on board 
and have been long-time employees in many instances, and we are 
not really feeling the pressure of the Continuing Resolution 
with respect to that. In order to operationalize any of the 
rules that we are writing, we will require additional resources 
that are laid out in the President's budget request because we 
do not have the capacity now to, for example, take on the 
examination of hedge funds, the examination of municipal 
advisors which is required under the legislation, the 
registration and supervision of the new entities that are part 
of the over-the-counter swaps market.
    With respect to our current core functions, we are feeling 
the pressure of operating under a Continuing Resolution. We are 
making some difficult choices. We are restricting hiring across 
the agency and selectively hiring only very special positions. 
We have cut travel, and to me most importantly, we have delayed 
very significant technology programs that would help bring the 
SEC's technology up into at least this century, if not this 
year. That is having an impact on our ability, I believe, to 
achieve our core mission as effectively as we could, and quite 
frankly, at the level at which the American people have a right 
to respect.
    Chairman Johnson. Mr. Gensler, please elaborate.
    Mr. Gensler. Our agency just this past year, with the help 
of Congress, got back to our staffing levels of the 1990s, 
having been shrunk, unfortunately, in the prior decade. But 
today's staff is not enough to take on the implementation. We 
can write the rules and have the meetings. About a quarter of 
our staff right now is working in one way or another on the 
rule writing.
    This year under the Continuing Resolution have had to make 
hard choices. Our technology budget, only $31 million last 
year. This year, under the Continuing Resolution, we will 
probably have to cut it about 45 percent. We are cutting travel 
and all the other things to be efficient. But technology is the 
key to move forward.
    We are also working hand-in-glove with the self-regulatory 
organization, the NFA, to see what can they pick up, can they 
pick up registration and examination functions and so forth. To 
take on the task of overseeing a market that is about seven 
times the size of our current agency, it is a new task to take 
on something that large. This small agency needs to be larger. 
The President has asked for $308 million for next year. I know 
this Nation of ours has a great budget deficit that we all have 
to come together and understand better and grapple with, so I 
feel a little bit--it is daunting to ask for more money for 
this agency at this time, but I really do think this is a good 
investment for the American public to avoid crises like in 
2008.
    Chairman Johnson. Chairman Bernanke, Chairman Bair, and 
Comptroller Walsh, community banks and credit unions are the 
backbone of our economy, which is why we have worked hard to 
protect their viability in drafting the Dodd-Frank Act. As the 
regulators of depository institutions holding under $10 billion 
in assets, could you please speak to the impact of the Dodd-
Frank implementation on these small institutions, including the 
impact of the debt interchange rule and the qualified 
residential mortgage, QRM, rulemaking, to ensure that there are 
no unintended consequences moving forward.
    Mr. Bernanke. Chairman Johnson, we fully agree with you 
that community banks and small regional banks, play a very 
important role in our banking system and it is very important 
to minimize the excess regulatory burden on these institutions. 
We have tried to institutionalize that effort within the 
Federal Reserve. We have created a special committee that looks 
only at smaller banks and tries to ensure that rules that are 
written for the banking system broadly are not excessively 
burdensome on the smallest institutions. We have also created a 
Community Bank Council that meets three times a year with the 
Board of Governors to give us their views. And so we are trying 
to reach out and understand particular problems.
    Our rulemaking activities are focused primarily, given the 
nature of the crisis and the fact that most of the problems 
were with large institutions, on the largest institutions. We 
are currently developing, as Dodd-Frank requires, a new set of 
regulatory, capital, liquidity, risk management, and other 
rules that would apply primarily to those banks of $50 billion 
or larger, and even those banks, the rules are tighter the 
larger the bank. So we are very sensitive to this issue and are 
trying to do our best to minimize the impact on small banks.
    I will speak to the interchange rule. Perhaps Chairman Bair 
would like to say something about QRMs. The interchange 
provision has an exemption for banks, smaller banks, which we 
will put in the rule. I think this is something we are trying 
to better understand through the comments and through our 
outreach; we are not certain how effective that exemption will 
be. It is possible that because merchants will reject more 
expensive cards from smaller institutions or because networks 
will not be willing to differentiate the interchange fee for 
issuers of different sizes, it is possible that that exemption 
will not be effective in the marketplace. It is allowable, not 
a requirement. And so there is some risk that that exemption 
will not be effective and that the interchange fees available 
to smaller institutions will be reduced to the same extent that 
we would see for larger banks.
    Ms. Bair. Thank you. I welcome that question. I guess I 
would like to note, first of all, that one of the things Dodd-
Frank did was change the assessment base for deposit insurance 
premiums from one based on domestic deposits to one focused on 
assets. We just recently finalized rules on that and it will be 
effective in the third quarter, and that will reduce community 
banks--in aggregate, reduce community banks' deposit insurance 
premiums by about 30 percent. It tends to shift more of the 
burden to entities that rely less on deposit insurance and 
really hits those that rely on secured liabilities, which tend 
to be the larger institutions. So I think that is going to have 
a significant benefit for community banks.
    On the QRM rule, I do not want to front-run the rulemaking 
process, but that rule is close to being done and I think I can 
assure the Committee the direction on the QRM rule, it will be 
focused on issuers of securitizations, not small mortgage 
originators. So I think the impact will not be burdensome for 
community banks. I think we have all strived to realize 
community banks were not the problem, that the curing rules are 
trying to correct, and so I think that you will--if you are 
concerned about that, you will be pleased when you see the rule 
that goes out for public comment.
    I would also, back to my opening statement about orderly 
liquidation authority, I think robust implementation of Title 2 
and orderly liquidation authority will help further level the 
competitive playing field between small and large. I anticipate 
that funding costs for many of the large institutions will go 
up as that authority is implemented and that will also help the 
community banking sector.
    I would also share Chairman Bernanke's concerns about the 
effectiveness of the interchange rules and statutory provisions 
to truly protect community banks, particularly if networks are 
not required to have a two-tiered pricing structure, so the 
community banks can continue to charge the higher fees. So we 
are in consultations with the Fed on this and reviewing what 
the legal authorities might be there from a regulatory 
standpoint. But I do think this is a real issue for community 
banks.
    Chairman Johnson. Mr. Walsh, my time has expired, but 
please sum up quickly.
    Mr. Walsh. Just to echo some others on QRM and interchange, 
we are working with the other agencies there. I would just note 
that our community banking population is going to go up by half 
when we integrate the OTS, from 1,400 to 2,100 institutions. We 
have a division devoted to community banking. We have examiners 
around the country who are attentive to their concerns. We have 
been doing quite a bit of outreach to community banks to try to 
understand their concerns. As was noted, most of the 
significant changes in Dodd-Frank are aimed at larger 
institutions, but the smaller institutions do worry about the 
increasing weight of regulation that the changes imply. And as 
I noted, we have one concern with credit ratings, and if it 
were simplified could be of benefit to community banks.
    Chairman Johnson. Thank you, Mr. Walsh.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    I will direct this question first to Chairman Bernanke and 
then some others. In a recent Financial Times article, 
Secretary Geithner talked about the difficulty of designating 
nonbank financial institutions as systemic. He said, and I will 
quote, ``it depends too much on the state of the world at the 
time. You won't be able to make a judgment about what is 
systemic and what is not until you know the nature of the 
shock.''
    I find the Secretary's comments interesting given his 
strong support of Title 1 of Dodd-Frank when we went through 
this. If it is impossible to know what firms are systemic until 
a crisis occurs, the Financial Stability Oversight Council will 
have a very difficult time objectively selecting systemic banks 
and nonbanks for heightened regulation.
    Mr. Chairman, as a member of the Council, what is your view 
on whether firms can be designated as systemic without creating 
some type of arbitrary process here?
    Mr. Bernanke. Senator, it is a difficult problem.
    Senator Shelby. I know it is.
    Mr. Bernanke. You have different types of firms respond to 
different types of shocks. It is also true that an individual 
industry with small firms might be subject to a broad shock, as 
we saw with the money market mutual funds, for example.
    That being said, I think one of the sources of the crisis 
in 2008 was that there were very substantial gaps in the 
oversight of many large firms, like the AIG----
    Senator Shelby. Sure.
    Mr. Bernanke. ----which did not have strong consolidated 
oversight. And I think our task is to do the best we can to try 
to identify those firms which most likely pose a risk----
    Senator Shelby. What does ``do the best we can'' mean to 
us? What does that mean?
    Mr. Bernanke. Well, we do not want to be arbitrary, as you 
point out----
    Senator Shelby. OK.
    Mr. Bernanke. ----the FSOC, with the cooperation of all of 
the folks at this table, has already put out a request for 
input. But what we would like to do is provide relatively clear 
guidelines about the criteria that we will use to try to 
identify firms that are potentially systemic. Admittedly, those 
will not be exact numerical guidelines but I do think it is 
important that the fact that each agency at this table has a 
certain specific set of institutions for which it is 
responsible, that we do not allow that fact to create gaps 
where there are important firms that have no serious 
consolidated oversight. So I do think it is useful to do this, 
but I acknowledge your concerns that it will never be a perfect 
process.
    Senator Shelby. Chairwoman Bair, do you have a comment 
there?
    Ms. Bair. Yes, thank you. I do. I think it is perhaps 
easier to say what is not systemic. I think Congress said, at 
least for bank holding companies, if you are below $50 
billion----
    Senator Shelby. Let us talk about banks, then.
    Ms. Bair. Right. So----
    Senator Shelby. And you are defending the fund, so to 
speak.
    Ms. Bair. We are defending the fund, and so I think our 
concern about this is to make sure if we have to use our 
resolution authority, that we are prepared and we have 
resolution plans and have had information that we need for an 
orderly wind-down.
    So I think for me, Senator, the biggest--there are a number 
of factors that our NPR identifies. For me, it is 
interconnectedness more than anything. If you fail, what else 
happens? Who else gets hurt? And it may be that we need to do a 
type of a two-step process on some simple metrics based on size 
and counterparty exposures, take it to a second level, and ask 
those entities to do what is called a Credit Exposure Report in 
Title 2 and basically do an analysis, do a scenario. If you 
fail, what happens?
    So I think in terms of systemic, that is the most important 
factor to me. And there are some that will be obvious and that 
is why we need to know who they are in advance, to have 
prudential standards, to have them start reducing any 
concentrations they might have that would have broader 
collateral impact. There will be some gray areas. But at least 
in terms of resolution planning, I would err on the side of 
inclusiveness.
    Senator Shelby. Mr. Chairman--Chairman Bernanke--all of you 
are chairmen to a point. Do you believe that you are better 
positioned now than you were 2 years ago to deal with the 
failure of a large bank, for example, financial institution, or 
would that come as a shock to you still? In other words, would 
you be in a position to wind these institutions down?
    Mr. Bernanke. Well, of course----
    Senator Shelby. What about a manufacturing facility?
    Mr. Bernanke. As Chairman Bair discussed, the resolution 
regime and the other prudential requirements are aimed at 
financial firms which have the risk of bringing down the 
system. I think there is quite a bit more work to do to fully 
implement all that Dodd-Frank has put on the table in terms of 
living wills, resolution, prudential requirements, and so on.
    I think we are better off today than we were 2 years ago, 
but I would say that it will still be some time before we have 
completely implemented not only all of the rules in the context 
of Dodd-Frank, but I think, very importantly, and Chairman Bair 
has taken leadership on this, we have to negotiate and 
coordinate with international regulators because so many large 
institutions are across borders. So we will need to work 
together with other institutions.
    So we have not gotten to the point where this set of tools 
is fully implemented, but we are working very hard and it 
certainly is a focus of the Fed and the FDIC to get the 
resolution process up and running as effectively as possible.
    Senator Shelby. Do you believe the Fed as a regulator today 
is a lot more on top of things as to the capability of a bank 
to stand a lot of shocks as opposed to 2 years ago? In other 
words, are you more diligent than you were 2 years ago, the Fed 
as a regulator?
    Mr. Bernanke. Well, Senator, certainly we have all learned 
lessons from the crisis in terms of----
    Senator Shelby. What have you learned?
    Mr. Bernanke. Well, the importance of being very aggressive 
and not being willing to allow banks too much leeway when they 
are inadequate in areas like risk management, where it turned 
out to be such an important problem during the crisis. So we 
have done a lot to try to strengthen and improve our 
supervision from a day-to-day basis, but we have also done a 
good bit----
    Senator Shelby. It is important.
    Mr. Bernanke. ----to restructure the internal process so 
that we have a lot more interaction between the supervisors and 
economists and financial market specialists who have different 
skills they bring to the table to give us a broader perspective 
on what the bank or other institution is doing.
    Senator Shelby. How many banks today, just off the top of 
your head, still owe a lot of money because of TARP?
    Mr. Bernanke. Umm----
    Senator Shelby. I know a lot of them, but if you----
    Mr. Bernanke. Well, just a couple of larger banks. There 
still might be a couple hundred small banks. But the great 
majority of the money has been paid back, and in the end----
    Senator Shelby. I am getting to the point, the ones that 
have not paid back, is that a dangerous signal for you because 
the economy has picked up a little bit, or are you not worried 
about it?
    Mr. Bernanke. I do not think so, Senator. The relatively 
small banks have a relatively small number of smaller banks 
have not paid their dividends. But as you know, we have had a 
lot of failures of small institutions and a few of them had 
TARP money. But the great majority have either paid back or are 
on a track to pay back.
    Senator Shelby. Are we going to continue to lose a lot of 
banks, small banks, medium-sized banks, in this country? I see 
the decline. You can see the trend line down.
    Mr. Bernanke. Maybe Chairman Bair could take it.
    Ms. Bair. So, Senator, I think we peaked last year at 157 
failures. There will be an elevated number of failures, but it 
will be lower, significantly lower, than 157.
    Senator Shelby. How many are on the watch list now, 
roughly?
    Ms. Bair. I think we have got, oh, about 700, close to 800 
on the----
    Senator Shelby. Seven hundred banks on the watch list----
    Ms. Bair. ----and so--well, the troubled bank list is--most 
of those do not fail. Only about 23 percent ultimately fail, 
and that is cyclical. The economy is improving and I think our 
losses actually went down last year. It was about $22 billion 
last year. It was around $34 billion in 2009. So losses were 
down significantly last year. The banks that are failing are 
much smaller banks, which is why the losses are lower. So 
things are getting better. The banking sector is healing. At 
the community banks, that is very true of the community banks, 
as well.
    Senator Shelby. My last question, if I could direct it to 
Chairwoman Schapiro, on the importance of economic analysis. 
You have repeatedly stated that economic analysis is important 
to the SEC in its work, but it is my understanding that the SEC 
has about 4,000 employees but only has 25 Ph.D. financial 
economists. Considering the importance of economic analysis 
that you placed on what you are doing, how did you determine 
that 25 Ph.D. economists is the appropriate number, or have you 
done that, or are you trying to grow it or what?
    Ms. Schapiro. We are absolutely trying to grow it, Senator. 
And if I could also speak to your earlier comments, I think you 
know we are actively and aggressively recruiting for a Chief 
Economist at the SEC. But I want to note that we would like 
that person also to lead our Division of Risk, Strategy, and 
Financial Innovation, and the person who is acting head of that 
now is a Ph.D. economist. His Ph.D. is from the University of 
Chicago, from where he also has an MBA. So we are not without 
significant economic expertise within the agency. We have about 
30 staff economists and they are fully engaged, as you can 
imagine, on Dodd-Frank and other rules.
    Senator Shelby. But you do not feel like it is adequate 
yet, do you?
    Ms. Schapiro. No, I sure do not.
    Senator Shelby. OK.
    Ms. Schapiro. I think it is important for us to have more 
capacity in economic analysis. It is part of my view of how we 
have to shift the entire focus of the agency. We will always 
have lawyers. We are a law enforcement agency. That is 
important. But we also need--and have been very successful in 
recruiting--current market experience, new skill sets, new 
kinds of talent to the agency, and I view economic analysis and 
financial analysis to also be very key components of this. They 
are also very important to the support of our enforcement 
program, frankly, as well as our rule writing and the many 
studies we have to do. So my goal would be to try to 
significantly, if we have the resources, grow that area of our 
operations.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Bennet? Please abide by the 5-
minute rule.
    Senator Bennet. Thank you, Mr. Chairman. I will and----
    Chairman Johnson. Do, as they say, not as I do.
    Senator Bennet. I will.
    [Laughter.]
    Senator Bennet. Congratulations on your first hearing as 
Chairman. I also want to thank Senator Merkley for the 
amendment that he raised and withdrew and say that if it is any 
sign of things to come, we are delighted to have Senator 
Isakson on this side.
    [Laughter.]
    Senator Bennet. It is working out perfectly and we are 
enjoying it.
    Chairman Bernanke, I wanted to just get some clarity from 
you on the interchange issue, again, because there were, I 
think, a lot of representations made when this vote came up and 
when this bill was passed that institutions $10 million or 
below would be exempt, and what I took you to say is that there 
appears to be, or you are starting to hear feedback that there 
may actually be a real--some practical problems with 
implementing that.
    Mr. Bernanke. Well, Senator, I should first say that our 
rule is out for comment and we are still gathering information. 
By the statute, the smaller institutions will be exempt from 
these restrictions, but there is the possibility that either 
because merchants would not accept the more expensive cards or 
because networks would not be willing to have a two-tier 
pricing system, it is possible that in practice they would not 
be exempt from the lower interchange fee.
    Senator Bennet. And what would the result of that be if, in 
practice, they did not have the benefit of it?
    Mr. Bernanke. Well, the statute limits the interchange fee 
to the incremental cost associated with an individual 
transaction, which does not cover the full cost if you include 
some fixed costs associated with setting up a debit card 
program, for example. So it is certainly possible that some of 
those costs would get passed on to consumers in some way, for 
example, a charge for a debit card or something like that, and 
that would just mean that if the small banks do not have an 
effective exemption, it would mean that whatever economic 
forces are impinging on the larger banks would affect them as 
well.
    Senator Bennet. I wanted to follow up on some of the 
questions the Ranking Member was asking about the FSOC, asking 
it in a different way because it is both about the institutions 
themselves, which are the ones that are systemically risky, and 
it is also about the instruments, I would think. And I wonder 
if any of you would like to talk a little bit about what the 
priority setting looks like. How do you decide what the agenda 
is going to be for the Council and over what period of time? Is 
that something that the Treasury Secretary coordinates? How do 
you detect where you ought to be looking versus where you are 
not?
    Mr. Bernanke. Senator, if I may take it----
    Senator Bennet. And to the extent that you actually have 
agenda items already, what those might be.
    Mr. Bernanke. Senator, first, our agenda has two parts, in 
a sense. As you know, FSOC has to write a financial stability 
report once a year, and for that purpose, it makes sense that 
there be an annual review of all the major financial sectors to 
try to identify any emerging problems or developments in those 
sectors, and so that is part of our process.
    In addition, we want to remain flexible so that any ongoing 
problem, say the developments in Europe and the implications 
for U.S. banks or money markets, any developing event or 
situation can be brought quickly to the Council.
    The Council has set up committees of staff and deputies who 
are covering different areas and who are presenting to the 
Council short summaries of areas where they have identified 
potential developments of interest and then the Council members 
are giving feedback about what they would like to hear most in 
the discussions.
    Senator Bennet. Because I am under strict instructions from 
our Chairman, I am going to ask you, because you mentioned 
Europe, is our own domestic fiscal condition something that the 
Council is going to be taking up, and are you aware of any 
other systemic risks greater than our own debt and deficit?
    Mr. Bernanke. Well, that is a difficult question because 
obviously that falls somewhere between fiscal stability and 
financial stability, and so the question is whether that is 
more a Congressional responsibility or an FSOC responsibility. 
I do not think we have discussed anything related to that so 
far.
    Senator Bennet. I would encourage it, just because I think 
our financial stability is so closely linked to our fiscal 
stability.
    Thank you, Mr. Chairman. I have 3 seconds left. I yield 
back the balance of my time.
    [Laughter.]
    Chairman Johnson. Thank you. Senator Corker, we have a vote 
coming up at ten to 12 and I encourage you to abide by the 5-
minute rule.
    Senator Corker. I have got it. Thank you. I appreciate it.
    [Laughter.]
    Senator Corker. So I welcome all of you and I thank you for 
your service. We miss you. After Dodd-Frank, we have not heard 
from you and the phones quit ringing. We are glad to have you 
here today and appreciate the work each of you are doing. That 
is a sincere statement.
    I know there is a lot of talk about the budget issues. 
There is no question that is going to probably get even 
tighter, so there will be more of a limitation in funding. And 
I know we did receive some calls during the CR period about 
what you were going to be able to do, and I guess I would ask 
this question. I am hearing that some of you are not being able 
to invest in technology and there are some positions that are 
open in other areas, examination and that kind of thing. Would 
it make any sense--I know that you all have been really pushing 
out rules and regulations and I know people have been concerned 
at the rapidity of that. Would it make any sense for us to slow 
you guys down a little bit so that you have time to both invest 
in technology and hire people and actually be slightly more 
thoughtful on the rulemaking? I will ask that to Chairman 
Schapiro.
    Ms. Schapiro. Thank you. I think, as I said earlier, the 
real impacts of the Continuing Resolution on the SEC are on, 
frankly, our core mission, our ability to hire examiners, to 
travel for enforcement cases, and most particularly, to build 
the technology we need to really do the job that is right in 
front of us at this moment, putting Dodd-Frank aside.
    If you think back to May 6 and the flash crash and how long 
it took us after that to be able to generate the reports that 
gave the public an understanding of what happened on that day, 
that was largely because we lacked the technological capability 
to take in the kind of data we needed to take in and analyze it 
in a reasonable period of time. So for me, the budget impacts 
are really as much or more right now to core mission, than they 
are to Dodd-Frank implementation.
    Once the rules are in effect--and we will be very careful 
with how we sequence and implement the actual rules. We will, 
as Chairman Gensler said, seek comment from the industry about 
what is the right order--what do they need 6 months to be able 
to do, because they have to build a system? What do we need 
time to do, because we might need to build a system? And that 
will require additional funding in order to both build those 
systems and bring in the people needed to, for example, do 
hedge fund examinations or examine swap dealers or major swap 
participants or whatever. But I think getting the rules 
written, it is a stress, for sure, and it is a challenge. It is 
affecting all of our capacities to do other things. But I think 
the real crunch comes after the rules are in place and we 
actually have to operationalize them, and we lack the resources 
to do that.
    Senator Corker. OK. Thank you very much.
    Chairman Bernanke, I know that there are a lot of things 
that each of you sought and got, and then there were some 
things you did not ask for and got. I know one of the things 
you received was the interchange issue. I know you are being 
diplomatic, but it seems to me that it is an impossibility that 
if a rate is set for the larger institutions, it is not going 
to impact the smaller institutions as it relates to interchange 
rules. I mean, it does not seem to me to be a possibility.
    I know, again, you did not ask for this. It was an 
amendment that passed on the floor. But I was over the other 
day with Senator Kirk and we were watching a Fed auction take 
place at the Bureau of Debt. If you just looked at the cost of 
that transaction, the electronic auction itself, it is 
obviously very minimal. But there was a whole passel of folks 
paying attention and making sure that ethical guidelines were 
in place, and I am sure these--I know these institutions, these 
banking institutions, have those same things.
    So would you please--I mean, the fairness of us price 
setting at some rate that only is a transmission cost seems to 
me to be incredibly in error. We also are going to be forcing 
people into credit cards over time. I mean, people that do not 
have credit are going to be forced into credit cards, which is 
a debt instrument, not something that is coming out of their 
account. It just seems like, to me, the whole issue is very 
perverse and something that was very short-sighted on our part 
and sort of a populus move, and I wonder if you would 
editorialize about that.
    Mr. Bernanke. I do not know if I can editorialize about it. 
As I said before, it is true that the statute requires us to 
look only at the incremental costs and not necessarily the full 
cost and that is going to have various implications. One would 
be probably that some costs on the banking side will be passed 
on to consumers or will affect product offerings and so on. On 
the other side, merchants will be paying less, and depending on 
the state of competition in that part of the market, they may 
be passing those savings on to consumers. So there will be some 
transfers on both sides and the issue really is what Congress 
intended, what objects you had. Again, this process will 
certainly lead to lower interchange fees which will benefit 
some and impose costs on others.
    Senator Corker. And Mr. Chairman, I know my time is up. I 
thank you. But there is no question, our smaller institutions 
are going to be impacted in a big way, and I think we all know 
that and I hope that we will endeavor somehow to fix that here 
in Congress. Thank you, and congratulations on chairing.
    Chairman Johnson. Thank you.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Congratulations 
to your ascension to the Chairmanship. I look forward to 
working with you.
    Since I have 5 minutes, let me try to get succinct 
questions and succinct answers. One is I marvel at people who 3 
years after our financial crisis still do not have full 
regulation of the Wall Street derivatives and other key issues. 
I am always asked by New Jerseyans, why is it that no one has 
gone to jail? And so I marvel now that I hear that your 
response to the question of the funding ability to pursue what 
Congress passed and that the American people wanted to see is 
going to be sufficient to promote regulations but not 
sufficient to enforce them. Is that a fair statement of what 
you responded to the Chairman?
    Ms. Schapiro. I think that we will have a lot of 
responsibilities once the rules are written for examination and 
enforcement, registration, taking in massive amounts of data, 
particularly in the swaps area where we will not be able to 
rely on a self-regulatory organization, and it will be very 
difficult for us to do any of that without additional 
resources. So it is broader than just enforcing the law.
    Senator Menendez. A cop on the beat without any bullets?
    Mr. Gensler. I----
    Senator Menendez. Well, it is a concern that I have because 
if we are going to promote regulations pursuant to the law but 
not to be able to enforce them, then it is a hollow promise to 
the American people of what we said we were going to do so that 
they would never face the risk again of collectively assuming 
risk for the decisions of others. And so I appreciate your 
honest answer to that because I think that will dictate part of 
the debate as to how we go forward in the budget process to at 
least, largely derived from the industry, have the resources so 
that you can do the enforcement that the American people want 
to see. Otherwise, I would not be surprised if they send 
everybody home.
    Ms. Schapiro. I agree with that, Senator. I was just trying 
to say that it is broader than just enforcement. It is market 
analysis and market surveillance and all of those things, but--
--
    Senator Menendez. The technology side, as well----
    Ms. Schapiro. Yes, absolutely.
    Senator Menendez. Absolutely. I am in agreement with you.
    Second, I recently wrote to you, Madam Chair, about cyber 
security and attacks that have taken place against hacking at 
NASDAQ and what not. I hope you can give us some sense, because 
obviously market integrity is important in a variety of ways. 
One of the ways is that we are sure that we are not having 
markets being affected by those that are hacking it, and I hope 
you could give us some sense of where you are headed in that 
regard.
    And let me get my third question and you can answer it, to 
both of them, and that is both for you, Chairlady Schapiro and 
Mr. Gensler, with reference to Title 7 of Dodd-Frank requires 
that all swaps, whether cleared or uncleared, are reported to a 
swap data repository. I would like to know what your agencies 
are doing to ensure that the information being reported to 
multiple repositories is not so fragmented and ultimately 
allows you an accurate and complete view of the market 
activity. One of the provisions of Dodd-Frank allows the CFTC 
to designate one repository to provide direct electronic access 
to the Commission for all swap data repository information and 
I am wondering if you considered that.
    So if you can tell me what we are doing on cyber security 
and tell me what you are doing on that.
    Ms. Schapiro. Certainly. I do not want to comment 
specifically on the NASDAQ matter, which is obviously under 
scrutiny by regulators broadly. But let me just say that given 
the highly electronic nature of our markets and their highly 
fragmented nature, financial institutions broadly and exchanges 
are, I think, increasingly having to face cyber security 
threats.
    We work very closely with the exchanges. We have something 
called the Automated Review Program, where our examiners 
evaluate with the exchanges the quality of their information 
security that is in place and what vulnerabilities they might 
have. We recently asked all of the exchanges to provide us with 
an audit of their information security policies, practices, and 
systems so that we can have a baseline understanding of where 
the many different markets are with respect to that.
    We are taking this extremely seriously. We are working 
closely with the FBI, the Secret Service, and the Department of 
Justice, to make sure that we are pursuing all of these threats 
as aggressively as we can. I can tell you that the exchanges 
are taking it extremely seriously, as well. This is their 
franchise.
    With respect to the securities swap data repositories, we 
have asked questions in our proposing release on swap data 
repositories and their responsibilities and obligations and 
core principles about whether we should create some kind of a 
consolidated audit trail, so to the extent that multiple 
repositories are developed, we can link the data and have an 
adequate audit trail.
    Our vision is that, ultimately, this should be part of the 
Consolidated Audit Trail System that we proposed last year and 
hope to make final later this year that would have all of the 
markets provide to a central repository all of the 
transactional information in the life of an order, from 
inception through execution, that would give us the ability to 
reconstruct trading in markets and look for violations of 
Federal securities laws.
    Mr. Gensler. With regard to data, which is so critical to 
regulators to get an aggregate picture, Congress did say that 
we could have a direct electronic feed from the data 
repositories, which we appreciate. We have put that in the 
proposed rules. We are looking for public comment.
    One of the challenges is aggregating if there is more than 
one data repository in an asset class, more than one for 
interest rate swaps, for instance. And that is part of the 
reason why the CFTC, we believe, does need to be efficient and 
use technology. In the President's 2012 budget, it actually 
recommends doubling technology so we can be a more efficient 
agency and then aggregate that data with those direct 
electronic feeds that you referred to.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Johanns.
    Senator Johanns. Mr. Chairman, thank you.
    Chairman Bernanke, let me start with you, and I want to 
visit with you a little bit about the interchange rules that 
you put out. Let me just start out and offer an observation. I 
think you folks stunned everybody. I think you stunned the 
retailers. I think you stunned the banks. I do not think anyone 
ever expected something this dramatic, this Draconian.
    Do you agree with me that 80 percent of the transactions, 
interchange transactions, are actually done by about a percent 
and a half of the merchants out there? Is that an accurate 
statistic?
    Mr. Bernanke. I know it is very concentrated. Obviously, 
large national firms account for a lot of the transactions, but 
I do not know the exact number.
    Senator Johanns. I think that is the best available 
information I can find. Not only national firms, but 
multinational players are some of the biggest economic players 
in the world. This is not Joe's Hardware somewhere in Nebraska. 
Does it not occur to you that, really, what we have done there 
is we have taken money from this sector of the economy through 
Congressional price fixing and directed you to transfer that 
money to this sector of the economy, impacting the biggest 
players, really, in the world on this side of the equation?
    Mr. Bernanke. Well, Senator, let me react first to your 
comment about Draconian. We tried very hard to follow the 
language of the statute, which is pretty clear----
    Senator Johanns. Do not get me wrong. I am not beating up 
the messenger. If it feels that way, I am sorry about that. You 
are just trying to do what we told you to do. Now, not me. I 
voted against it, and I wish more of my colleagues would have. 
But the end result of this is that, really, what you are doing 
is moving money from here to here and it is the big players 
that are going to see the benefit of that, the big retailers. 
Would you agree with that?
    Mr. Bernanke. The retailers will benefit, as you say, 
according to the fraction of the total debit transactions that 
they have. A question is to what extent, those savings are 
passed on to customers, which is part of the objective.
    Senator Johanns. But there is the problem with price 
fixing. We cannot guarantee that, can we? We cannot guarantee 
that a single consumer will get any benefit from that 
legislation. I mean, we hope we do. You might even be able to 
make an economic argument that they will. But the reality is, 
we do not know, do we?
    Mr. Bernanke. No, Senator. There is no guarantee, 
certainly.
    Senator Johanns. Yes. Now, let me, if I might, just go a 
step further, because this sounds so preposterous to me. We are 
seeing commodity prices go up. There are a lot of complex 
reasons for that, just like the interchange fees. There is 
drought in China and et cetera, et cetera. But good economists 
are now saying, you are going to pay more at the grocery store 
for various products because the input costs are going up so 
dramatically. It is hard to argue against that at the moment.
    You would not suggest that it would be good economic policy 
that we pass a law that the price of a porterhouse steak or the 
price of a gallon of milk could only go high, would you?
    Mr. Bernanke. No.
    Senator Johanns. Yes. Mr. Gensler, let me go to you. You 
know, I have an interest in this end-user deal issue. We all 
do. One of the challenges I have, and I am guessing you 
probably have it, too, is how do we define end-user? I have got 
small community banks out there. They want to protect 
themselves, so they are in the derivatives market to protect 
themselves against the risks they are incurring. Are they end-
users or are they financial institutions that should be 
regulated here?
    Mr. Gensler. The statute says that they are financial 
companies and so most of those community banks are not swap 
dealers. In fact, I am not aware of any small community bank 
that would be a swap dealer. They have not come knocking on the 
door. I do not think any, probably, are swap dealers. So they 
would not be regulated that way.
    The question of the end-users is whether they are brought 
into clearing, whether they benefit and are brought into that 
clearinghouse, and Congress did give us authority to exempt 
them from that. We have asked the public a series of questions 
to help us on that. We are working with fellow regulators here, 
looking at that, not only for those community banks but also 
Farm Credit institutions and national credit unions, as well.
    Senator Johanns. Mr. Chairman, thank you.
    Chairman Johnson. Senator Reed.
    Senator Reed. Thanks very much, Mr. Chairman. Thank you, 
ladies and gentlemen.
    Chairman Bair, there has been a great deal of work over the 
last several months of trying to sort out the mortgage 
foreclosure issues. The State Attorneys General, the FSOC, 
everyone has been engaged. It seems from the reports that with 
respect to robosignings, liabilities have been established but 
penalties have not. Is that the crux of the debate at the 
moment?
    Ms. Bair. Well, I would defer to the Comptroller on this. 
They have been leading most of this. We are not the primary 
regulator of the large servicers. I think the way I envision 
this unfolding, I think all the agencies have been working 
hoping for some type of global settlement that would include 
robust enforcement actions as well as more appropriate remedial 
measures, including perhaps some type of very dramatically 
streamlined modification, not only to help borrowers get a fair 
shot at an affordable mortgage, but also to help clear the 
market, because there is such an increasing backlog here. So I 
would hope those would be key elements of any final package, 
but I think John might have something to add on that.
    Senator Reed. Mr. Walsh, what is your impression? Is this 
an issue of--what is holding up this settlement? Attorney 
General Miller was here months ago talking about how they were 
working and they were almost at the cusp, so could you 
elaborate briefly?
    Mr. Walsh. We have been at work actually since the last 
time we appeared here in the Committee on a series of 
examinations--we, the Fed, the OTS, and with FDIC participating 
to some extent in the exams to identify the problems and 
develop both the facts on the ground and then also to develop 
what the appropriate remedies were. Those remedies include both 
remedial actions that the servicers will have to take to fix 
what is broken, and there are clearly some things broken, as I 
mentioned in my testimony. There is also the question of the 
penalty phase, if you will, of that process.
    We have finished the work. We are getting to the point now 
where we will be delivering documents to the banks and talking 
about civil money penalties. But the comprehensive settlement 
that we are talking about is one that would also involve 
violations that are under the purview of other agencies. They 
are Department of Justice, the FTC, the State Attorneys 
General. And our effort has been to achieve a kind of 
comprehensive settlement that will put the problem to bed and 
let us get on with remediation. But the specific supervisory 
piece is kind of one piece of a broader effort.
    Senator Reed. Well, the Wall Street Journal has reported 
today that you are recommending rather modest fines in the 
penalty phase. Again, from following these revelations in the 
newspaper, it seems like there was some intentional activity 
and, in fact, I think if they are agreeing to some sort of 
penalty phase, there's some admission of something more than 
just negligence. Are you measuring these fines in terms of the 
overall impact on people who have lost their homes through this 
process in terms of the benefits that banks have derived and 
are deriving from, at least prior to detection, this type of 
operation and will that factor into your consideration?
    Mr. Walsh. Although one is amazed at what the Wall Street 
Journal finds out, in this case, we have not made decisions 
about the level of penalties. That is the next phase to come. 
We will be discussing that with the Federal Reserve and there 
will be penalties at the holding company and servicer levels. 
So that is a process that is still underway. But in terms of 
the sort of total penalties involved, they will include other 
things than just those we are looking at.
    Senator Reed. Well, I think you have to move with some 
expedition, because, again, the last time we were all here 
together visiting, we were talking about how much progress we 
were making in this global settlement. You have got to come to 
a conclusion very quickly, as Chairman Bair said, in terms of 
trying to settle the market and move forward.
    Just a quick question, because I have only a few seconds 
left, Mr. Chairman. Dodd-Frank creates the position of a Vice 
Chairman of Supervision, or Vice Chairwoman of Supervision, for 
the Fed. How close are we to getting that person in place, and 
in the interim, who is taking the lead in terms of what you now 
have as extraordinarily more complicated and vast supervisory 
responsibilities?
    Mr. Bernanke. Well, the Administration has not yet 
nominated anyone, so we are still nowhere in that respect. But 
Governor Tarullo, in particular, who has headed our bank 
supervision area and has testified before this Committee a 
number of times is taking the lead on the supervisory and 
relevant rule writing issues.
    Senator Reed. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. Welcome to the Committee, Senator Kirk.
    Senator Kirk. Thank you, Mr. Chairman. Congratulations and 
I look forward to working with you on the VA-Mil Con 
Subcommittee.
    Chairman Bernanke, I am an admirer of yours. I just 
finished Liaquat Ahamed's book, Lords of Finance, which is a 
very human story of what central bankers go through. A quick 
question on Dodd-Frank Titles 1 and 7, which creates the 
Oversight Council and talks about systemic risk, regulatory 
gap, and a key phrase, regardless of legal charter. So it is a 
broad authority to examine risk. You have now established this 
Office of Financial Security to look at any potential dangers 
out there. Would you be able to look at U.S. States as a source 
of systemic risk?
    Mr. Bernanke. Our Office of Financial Stability is a small 
office, which is just trying to look at different risks that 
might emerge. It does not have any examination authority.
    The risks arising from States or the municipal market would 
be something that the Federal Reserve would pay attention to, 
but I think probably the appropriate venue for that would be 
the FSOC, the Council, where we would discuss mutually any 
complications or ramifications of the developments there.
    Senator Kirk. I would just note that Illinois has the worst 
State-funded pension in the country, at 54 percent, but a new 
analysis could mean it is as low as 38. The Chicago Tribune 
reported this morning that the State deficit is $160 billion. 
And we have concerns about California. I would just note that a 
young State Representative from New Salem, Illinois, wrestled 
with this issue in 1840, named Abraham Lincoln. The Senate 
passed a resolution in 1841 advising Treasury Secretary Webster 
not to guarantee State debt to preserve the full credit of the 
United States. So it would appear that this could be a source 
of systemic risk and something that is fully within your 
capability to examine.
    One other question. The Wall Street Journal 2 days ago 
reported that our largest foreign creditor, China, had sold 
$11.2 billion in Treasuries in November and another $4 billion 
in December. A $15.2 billion unwinding is about a 1.7 percent 
reduction in their total holdings, now down to $892 billion. Do 
you see this movement by America's largest creditor abroad as a 
source of systemic risk?
    Mr. Bernanke. The international imbalances, the current 
account imbalances and reserve accumulations could in principle 
be a systemic risk and I think they contributed to the crisis. 
That being said, I would not make much of those data. First of 
all, they are actually incomplete data. And second, in the 
short run, the main determinant of Chinese accumulation of 
dollars is their need to keep the Renminbi pegged at the level 
that they choose, and so it is pretty much they take whatever 
they need to take in order to keep their currency at the 
desired level.
    Senator Kirk. Thank you, Mr. Chairman. I have reached out 
to Chairman Warner on one of our subcommittees hoping that we 
will look at continued dangers in Spain and Portugal and the 
adequacy and size of the IMF, which I think this Committee 
really needs to work on.
    Thank you, Mr. Chairman. I yield back.
    Chairman Johnson. Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman, and 
congratulations on becoming Chairman.
    Good morning to our witnesses. Your agencies have worked 
tirelessly on implementing this law. Your efforts have, I would 
say in large part, been prompt, thorough, and transparent, and 
we do appreciate that. Before I begin, I would like to thank 
each of you for your leadership and recognize your staffs for 
their extraordinary efforts.
    Chairman Schapiro, I was pleased with the Commission's 
staff study on the obligations of broker-dealers and investment 
advisors. I am also encouraged by its recommendations in favor 
of a uniform fiduciary standard. I know this is an area that 
you have been interested in, so I have two questions for you.
    First is how can confusion on the varying obligations of 
financial professionals harm investors seeking investment 
advice? And then second is how can a uniform fiduciary standard 
reduce investors' costs and improve portfolio performance?
    Ms. Schapiro. Thank you, Senator, and I know you share my 
great interest in financial literacy and investor protection 
and I have always appreciated your support. I think one of the 
things we learned, the SEC commissioned a study by the RAND 
Corporation several years ago that looked at this issue of 
whether investors understood the relationship that they had 
with a broker versus their relationship with an investment 
advisor and found that there was actually significant 
confusion, and our current study references much of the work 
that was done by RAND Corporation.
    The issue goes to whether the interests of the customer 
must be put ahead of the interests of the financial 
professional; whether the customer must come first, or whether 
the duty owed should be what is currently under the broker-
dealer regime--the duty to only provide suitable 
recommendations, understanding the net worth, the investment 
goals, the risk tolerance, and so forth of the investor. So it 
currently is a suitability standard of care under broker-
dealers, and a fiduciary duty to put the investor's interests 
first under the investment advisor regime.
    We felt that it really was not fair to leave customers to 
guess which standard of care they were receiving when they were 
dealing with a financial professional. It is just not something 
that is transparent to investors. And so the staff study does 
recommend, and the Dodd-Frank Act authorizes the Commission to 
study, that a uniform fiduciary standard of care no less 
stringent than the one that applies to investment advisors be 
applied across financial professionals when giving advice to 
retail investors about securities.
    I think that the standard will alleviate confusion for 
investors because it will become uniform, and I think while the 
costs are hard to quantify--the staff made attempts to do some 
of that, and we have asked for data in that context--I think 
the benefits to investors of having their interests put first 
are also hard to quantify but will be very real over time.
    And so our next step is for the Commission to consider the 
report carefully and make a determination about whether to move 
forward with specific rules that would create this fiduciary 
standard of care.
    Senator Akaka. Chairman Schapiro, through the Dodd-Frank 
Act, we provided the Commission with the authority to require 
meaningful disclosures prior to the purchase of an investment 
product or services. More effective and timely disclosures can 
greatly improve investor financial decision making. What is the 
Commission's plan to implement this specific provision and to 
promote more responsible investor behavior in general?
    Ms. Schapiro. Well, this is an area of long-time interest 
to me, that investors get decision-useful, accessible 
information at the right moment in the process of making a 
decision about whether or not to invest. And what we often see 
is that they get information after they have made the decision 
to invest. So it would be my hope that we could, when our 
calendar is a little bit more open after getting through many 
of the Dodd-Frank rule-writing provisions, turn our attention 
back to a point of sale disclosure inquiry and see if the 
Commission can do something that helps investors get really 
useful information, not pages and pages and pages of 
boilerplate, and get it at the time that will help them make 
the right decisions. And so it would be my hope that at some 
point later this year we will be able to turn our attention 
back to those issues.
    Senator Akaka. Thank you very much for your responses. 
Thank you, Mr. Chairman.
    Chairman Johnson. Welcome to the Committee, Senator Moran.
    Senator Moran. Mr. Chairman, thank you very much and 
congratulations to you. I want to be a good Member of this 
Committee. This is my first hearing and I want to impress you. 
I assume that is done by speaking less than 5 minutes.
    [Laughter.]
    Chairman Johnson. It would.
    Senator Moran. I have read the audience.
    I want to talk just a bit about a broad issue and then a 
very specific one. We have had lots of conversations about 
small community banks, credit unions, small financial 
institutions. They certainly dominate the economy in Kansas and 
communities across our State. And in all the responses to 
questions that have been given and in your testimony, you 
indicate an effort to treat differently, to recognize the 
difference between a community bank. I would assume that you 
would agree that they are not a cause of systemic risk to our 
economy. And yet the constant conversation with community 
bankers, with credit unions, is very much about the regulations 
that are coming our way. This conversation predates Dodd-Frank, 
but it is exacerbated by Dodd-Frank. And so while I hear the 
regulators saying, we understand the problem, we treat them 
differently, there does not seem to be a recognition on the 
part of bankers that that is the case.
    My question, in a general sense, are my bankers just 
normally complaining types who have it wrong, or are my 
regulators wrong in which they say, we are taking care of this 
issue. We are not overly regulating community banks.
    Mr. Shelby, in his question about the loss of small banks, 
the immediate response, Ms. Bair, by you was about the number 
of closures. That is a component, I suppose, of losing small 
banks, but what I have noticed in our economy is that it is 
happening by consolidation, and there are perhaps economic 
reasons that consolidation should occur, but my impression is 
that it is occurring because of the regulatory cost.
    In fact, I had a conversation with one of our large 
regional bankers who tells me, for the first time in their 
bank's history, they are receiving calls from small community 
bankers saying, are you interested in buying our bank, because 
we no longer can afford the regulations. It is no longer fun to 
be a banker. And the cost of being a small community bank now 
exceeds our ability to generate the revenues necessary to get a 
return on investment.
    So my question is, while we talk about treating differently 
community banks, the evidence, at least from my view, does not 
seem to be there. What are we missing? What needs to take 
place? I think there is great value in that community bank in 
making decisions and I would issue the caveat, I am not 
necessarily here advocating on behalf of the bankers, but I am 
here advocating on behalf of their customers, their borrowers, 
their clients who in a State like Kansas or like South Dakota, 
it is a place in which our farmers, ranchers, small businessmen 
and women have the opportunity to expand, and I think there is 
a tremendous consequence to our economy, including job 
creation, in the failure of our banks being comfortable in 
making loans.
    And finally, in that regard, particularly real estate 
loans. I have had half-a-dozen bankers tell me, we no longer 
make real estate loans. You cannot come to our bank and borrow 
money to buy a house because of all the regulations and our 
fear of the next examination that we have missed something that 
is going to then get us written up. Making a real estate loan 
is no longer worth it. That is a terrible circumstance in small 
town Kansas, small town America, in which the local bank is now 
fearful of making a real estate loan, a mortgage on a house. 
Your response?
    Ms. Bair. Well, I would say a couple of things. I think you 
are right. There has been consolidation. There are still over 
7,000 community banks out there, but there is consolidation. 
That is always a byproduct of a financial crisis. The stronger 
absorb the weak and that is what is happening here.
    We are very concerned about making sure that we have a 
vibrant community banking sector. It is not our job to serve 
community banks. It is our job to serve the public. But I think 
the public interest is served by having diversity in their 
choice of banking institutions, and I think, and I have said 
this repeatedly throughout the crisis, we saw the community 
banks were doing a better job of lending than the larger 
institutions and that is just a fact.
    We have very proactively tried to protect community banks 
from the brunt of the Dodd-Frank requirements, which I think 
are overwhelmingly targeted at large financial institutions. 
They, as I indicated earlier, are changing the assessment base. 
It has now reduced by 30 percent in aggregate, the premiums 
that community banks will be paying for their deposit 
insurance. They are, by and large, exempt from the compensation 
rules that we just put out. We have tried to insulate them from 
these QRM rules on securitizations, as you will see when those 
come out. So I think we have acted on a number of fronts to try 
to insulate them and strengthen their competitive position, and 
as I said, I think ending ``too big to fail'' and robust 
implementation of orderly liquidation authority will increase 
funding costs for many large institutions and provide better 
competitive parity.
    The interchange fee issue, I think, is a very real one. We 
are very concerned. We will be writing a comment letter. I 
think the likelihood of this hurting community banks and 
requiring them to increase the fees they charge for accounts is 
much greater than any tiny benefit retail customers may get for 
that, any savings to be passed along. I think that is just 
obvious to me.
    So we are very much hopeful that--I do not know if this 
could be dealt with by Congress, but what we are planning to do 
is work within the regulatory framework to see if there is 
greater discretion to provide better protection for community 
banks against discrimination and particularly by networks. But 
I do think this is a real issue and could have an adverse 
impact in a way that was clearly not intended by Congress in 
enacting Dodd-Frank.
    Senator Moran. I have set a standard for myself and the red 
light is on. I would like to follow up with you, Ms. Schapiro, 
about financial advisors, about community banks and lending 
to--or making perhaps advice to local units of Government. 
There is a new rule issued January 6 that has created great 
concern. And, Ms. Bair, I will be in your hometown a week from 
tomorrow. Thank you very much. Thank you, Mr. Chairman.
    Ms. Schapiro. I will make time to come and see you as soon 
as possible.
    Chairman Johnson. Senator Tester.
    Senator Tester. Yes. Thank you, Mr. Chairman. I, too, want 
to congratulate you on your Chairmanship and I want to thank 
everybody for being here today. I appreciate your efforts in a 
difficult time.
    Before I get to my questions on debit interchange rules 
directed at you, Chairman Bernanke, I just do want to say that 
the issues of regulation that Senator Moran brought up with 
community banks and credit unions is a big one. I brought it up 
with members of this panel at least on four different 
occasions. The inconsistencies with regulation and the ``not on 
my watch'' as it applies to community banks is a big concern to 
me and it continues to be a big concern to me and I do not know 
that consolidation in our financial system is a positive thing 
overall, especially for rural America.
    That aside, I want to talk about the debit interchange 
rules, and Chairman Bernanke, it is an issue that I am very 
concerned about. I was wondering, is there any way to actually 
ensure that community banks and credit unions are exempted in 
practice from this provision?
    Mr. Bernanke. I hesitate to give a final answer on that 
because we are still getting comments and a lot of input----
    Senator Tester. In your opinion.
    Mr. Bernanke. I think it may not be the case. It may not be 
the case that they will be in practice exempt, but I do not 
know for sure. Of course, one way to address it, if Congress 
wants to, would be to require the networks to differentiate.
    Senator Tester. Let us talk about that for a second. I 
mean, with the routing provisions that are in this bill, first 
of all, it is illegal to turn down a credit card, correct, just 
to say, I do not want to use that credit card. Have you got 
another one?
    Mr. Bernanke. I do not think so.
    Senator Tester. That is not illegal? OK. So if you go into 
a retailer and you have a card and they look at it and say, we 
do not want that, we would rather have a different one, that is 
OK?
    Mr. Bernanke. You certainly have the right to accept 
different types, Visa, American Express, and so on----
    Senator Tester. Yes, yes, yes. But what I am talking about 
in this particular case is one that has a bigger fee involved 
to it as far as interchange----
    Mr. Bernanke. The restrictions are more a function of 
requirements imposed by the Visa company, for example, as 
opposed to legal restrictions.
    Senator Tester. Yes, but if we have a two-tiered system, 
the amount charged by interchange fees by the smaller banks and 
credit unions will be higher than those by the big banks, 
correct?
    Mr. Bernanke. Correct.
    Senator Tester. So what stops a retailer from saying, I do 
not want to use that card because that is one of the small bank 
ones. I would rather use one of the bigger ones. What stops 
them from doing that, anything?
    Mr. Bernanke. Not now, unless the company requires 
acceptance of all its cards, which in many cases they do.
    Senator Tester. OK. So it is--OK. So in practice, I cannot 
imagine Visa is out there checking out--I mean, if it is a Visa 
card, it is a Visa card. They are going to do their thing 
anyway. It would seem to me that there is going to be undue 
harm done to smaller banks when the retailer looks at this and 
says, you know what? I am going with the smallest interchange 
possible because it is going to help my bottom line. Do you see 
it being that way?
    Mr. Bernanke. As I mentioned earlier, I think there are two 
reasons why this exemption might not work. One is exactly what 
you are saying, that merchants might turn down small bank 
cards, and the other is that the networks may not find it 
economical to have a two-tier system.
    Senator Tester. OK. Chairman Bair, from your point of view, 
how do you think it is going to impact the institutions that 
you supervise, particularly the small ones?
    Ms. Bair. Well, I think it remains to be seen whether they 
can be protected with this. I am skeptical for all the reasons 
Chairman Bernanke has articulated, and so I think if they are 
forced down to the 12-cent level, that is going to reduce the 
income that they get for debit cards, so I think they are going 
to have to make that up somewhere, probably by raising the fees 
that they have on transaction accounts.
    It could also have the unintended consequence of pushing 
them into prepaid cards as opposed to debit cards, and prepaid 
cards do not have the same level of protection as debit cards, 
for instance, under Reg E. It is important--it is more 
difficult with deposit insurance. You have to be very careful 
about how you structure those accounts to get deposit 
insurance. So I think that might be--that would not be helpful 
for consumers and that might be an unintended consequence.
    So we agree with you. This really needs to be fixed, and 
hopefully through the current regulatory authority, and that is 
what we are looking at right now.
    Senator Tester. Just let me ask this. You are not sitting 
on this side of the table and I am not sitting on your side of 
the table, but do you think it would be beneficial to delay 
this provision to take a look at unintended consequences?
    Ms. Bair. Yes, I--you know, it was--look, there are 
legitimate policy arguments on both sides of this, but it was 
done very quickly. I think the full policy ramifications, who 
is paying for what, who is going to pay more and who is going 
to pay less under this is something that maybe was not dealt 
with as thoroughly as it might have been.
    Senator Tester. Thank you all for being here. I wish we had 
another two or 3 hours just for my questions. Thank you, Mr. 
Chairman.
    Chairman Johnson. Senator Wicker, welcome to the Committee.
    Senator Wicker. Thank you, Mr. Chairman. I am delighted to 
be on the Committee and I have enjoyed the testimony, which I 
have watched on television from my office while trying to get a 
few other things done, so I am glad to be back in the room, and 
thank you all for your patience and for working with us today.
    Let me ask Chairman Schapiro, Dodd-Frank is a familiar 
term. Less familiar is Franken-Wicker, but it was an amendment 
that Al Franken and I authored which passed, actually, in the 
Senate by a vote of 64 to 35 with regard to the rating 
agencies. Now, as you know, there are many people, including 
me, who feel that the rating agencies were one of the principal 
reasons that we encountered the meltdown that we did in 2008. 
Our amendment would have required the securitized product to be 
assigned for rating by the SEC rather than having the companies 
themselves shop around for their favorite rating agency.
    When we got to conference, this Franken-Wicker language was 
dropped, but in the final version, the law does require the SEC 
to implement a study on credit rating agencies and gives the 
SEC the authority to implement Franken-Wicker if it is deemed 
to be beneficial to the public's interest. So how is that study 
coming and what are your thoughts on this?
    Ms. Schapiro. That is right, Senator. We actually have many 
studies on rating agencies, but this is certainly an important 
one. We should be going out shortly with a request for comments 
from the public on ways to--alternative ways to both structure 
a system for the assignment of ratings as well as the specifics 
of having the SEC do it or having a self-regulatory 
organization do it or having another entity do it.
    It has a 2-year time deadline, I believe, which is why we 
have not gotten it out the door yet in terms of seeking public 
comment, but the staff has worked on the notice and hopefully 
it will go very soon. That will kick off the study from our 
perspective and then we will be able, with the comments, begin 
to put together the different ideas.
    Senator Wicker. Do you share my conclusion that defective 
and improper ratings were a large part of the problem in 2007-
2008?
    Ms. Schapiro. I very much share that perspective and have 
spoken a lot over the last 2 years about the contribution of 
rating agencies to the financial crisis. And the SEC also gets 
much broader responsibility under Dodd-Frank with respect to 
rules and examinations of credit rating agencies, including a 
report to Congress on our annual examination findings and other 
issues, and we are well underway with all of those 
examinations.
    Senator Wicker. But under the law now, a company wishing to 
be rated still has completely free reign to go out and shop 
around and pick the rating agency of their choice?
    Ms. Schapiro. We have proposed rules to require--to try to 
discourage rating shopping, which would require disclosure that 
you did shop around for ratings and you ultimately selected the 
agency that gave you the highest rating in the preliminary 
rating. So we have done some disclosure rules in that regard 
and we have done a number of other rules to try to limit the 
conflicts of interest that are really inherent in this issuer-
pays model that is the predominant model among the rating 
agencies right now.
    Senator Wicker. Well, thank you, and I hope you will be 
attentive to this issue.
    Chairman Bernanke, I have a question about qualified 
residential mortgages and what the unintended consequences of 
the QRMs might be in actually forcing or directing housing 
finance toward the Government instead of toward the private 
sector. As you know, the Federal Government now dominates 
housing finance in this country, and I think it is the stated 
position of the Administration, and certainly my position, that 
we want private sector capital to return to the market to 
replace taxpayer guaranteed mortgages.
    Federal Housing Administration mortgages are exempt from 
the risk retention requirement, the 5 percent risk retention 
requirement, because they are considered by definition 
qualified residential mortgages. Might this cause FHA mortgages 
to grow and drive out the private sector and first-time 
homebuyer mortgages, and what steps might we take to ensure 
that the QRM rules do not artificially push even more borrowers 
into taxpayer guaranteed mortgages rather than the private 
market?
    Mr. Bernanke. Well, I believe part of the proposal that 
Treasury made was that FHA would become a smaller part of the 
housing market and be restricted to the appropriate group of 
people who are qualifying for that type of mortgage. Those 
mortgages are implicitly Government guaranteed and therefore, 
the securitization retention requirement is not necessarily 
relevant.
    I think the main purpose of the QRM is just to provide some 
standardized underwriting criteria that are sufficiently strong 
that the securitizer can be exempt from the retention 
requirement. But they are entirely consistent with a private 
market in securitization and a housing market where the 
Government's role is quite limited, and if it is other than 
through FHA and other special programs, it becomes relevant 
only during periods of crisis.
    Senator Wicker. Well, I know we are out of time, but have 
you received comments or has the Fed received comments from 
Americans expressing the view that this rule and the exemption 
of Federal Housing Administration mortgages might drive more 
and more mortgagors to the public rather than the private 
market? Is this something that has been brought to your----
    Mr. Bernanke. We have not issued a request yet for 
comments; so we will do that and then we will get the comments, 
but we have not gotten to that stage yet.
    Senator Wicker. Thank you.
    Chairman Johnson. Last but not least, Senator Isakson.
    Senator Isakson. Mr. Chairman, thank you very much, and 
thank you for including me, allowing me to sit at the dais 
today, and thanks to all that have testified. I appreciate your 
time and I will be brief.
    My question will be for Ms. Bair, but it really applies to 
all of you because all of you have some input on the qualified 
residential mortgage rule that is being written. Senator 
Wicker's comments could not be more appropriate.
    In your testimony, your printed testimony, Ms. Bair, you 
say that we will continue to work to move these rules forward 
without delay. We are determined to get them right the first 
time. And it is to that subject I want to speak.
    The QRM amendment which Senator Hagan, myself, and Senator 
Landrieu wrote, is very specific in what the theme of the 
requirements shall be in terms of underwriting--verified 
income, verified job, credit rating, ability to amortize the 
mortgage. On down payment, it did not specify an amount, but it 
specified that any amount of loan above 80 percent would have 
to be privately insured and carry private mortgage insurance.
    I have seen a letter written to you all by a large 
institution recommending a down payment requirement for a loan 
to be a QRM loan at 30 percent. What that would, in effect, do 
would put a handful of people in control of the entire mortgage 
market privately and force even more people into FHA than are 
already there. Our markets from the VA loans of the post-World 
War II until the beginning of the collapse, which was lending 
practices in 2000, carried mortgage insurance on 90 and 95 
percent loans that performed equally as well as larger down 
payment loans. Forty-one percent of all purchasers are first-
time homebuyers, 95 percent of whom do not have 20 percent or 
30 percent to put down.
    So my request is, when you address this subject, because 
you could protract what is already a protracted real estate 
recession by denying liquidity in the private markets, to 
reasonable mortgages underwritten properly. With that said, I 
just hope you will follow the guidelines and the parameters 
that were issued in a QRM amendment by Ms. Landrieu, Ms. Hagan, 
and myself on the down payment subject and the private mortgage 
insurance, as well. I hope you will be willing to do that.
    Ms. Bair. Well, Senator, I do think it is important to 
emphasize that the QRM standards will not be the standards for 
all mortgages. They do not apply to portfolio lenders. They do 
not apply for those who will have the 5 percent risk retention. 
And I think the intention of the agencies is that there will be 
multiple funding mechanisms for mortgages and for portfolio 
lenders, those who retain all the risk as well as those that 
just opt for the 5 percent risk retention, because there is 
some skin in the game. There is some natural economic incentive 
to have stronger underwriting standards. You can provide more 
flexibility.
    So the higher standards for QRMs are really just trying to 
compensate for the lack of skin in the game by the issuer, and 
so I do think we--I will have to be honest with you. I have 
talked a lot with my staff about this. We are very open. We 
want comment on this question. But we are unable to document 
that PMI lowers default risk. We just cannot find it. And if 
you have additional information, I would love to see it. We do 
have a lot of data that shows strong correlations between LTVs 
and loan performance.
    So this is the framework we are trying to come up with. I 
think we are absolutely consistent with Dodd-Frank as it was 
written and we will seek comment on this and I will remain 
open-minded on this, I commit to you. But I do want to make 
sure everyone understands that we do not anticipate the QRM 
standards to be the standards for all mortgages and that, 
again, this is just to compensate for the lack of economic 
incentive because there is no skin in the game on the part of 
the issuer for portfolio lenders, and those securitizers who 
want to retain the 5 percent, they will have much more 
flexibility.
    Senator Isakson. First of all, I will give you the 
historical data. I am old enough to have sold houses in 1968 
when 90 percent loans came into practice with MGIC and later in 
1972 when 95 percent loans came into effect and there is good 
historical data on the default rates being consistent with 
those with larger down payments if they are well underwritten, 
which is the whole intent of QRM.
    But the other point that I would also make is, I understand 
the 5 percent risk retention, but if QRM's down payment 
requirement is so restrictive that it takes out most of the 
marketplace, then you are going to have a very small number of 
people controlling conventional lending to everybody else 
because they will be risk retention lenders and they will be 
able to price it and they will be able to control it, which 
will dramatically raise the potential costs of the loans to the 
borrowers, somewhat like B, C, and D credits and subprime did. 
They began to push the rates up and securitized to sell a 
premium rate, but in fact underwrote poorly on the loans.
    So I want to--that is a very important decision you will 
all be making and I hope you will--I will get the data to you 
this afternoon, as a matter of fact. I have been working on it.
    Thank you very much, and Mr. Chairman, thank you very much 
for your time.
    Chairman Johnson. Thanks, Senator Isakson.
    We have a tough road ahead of us on the Committee, but I 
believe we have a stronger financial system because of Dodd-
Frank. Over the next weeks and months, we will continue to 
oversee the implementation of Dodd-Frank. I look forward to 
hearing more from my colleagues and the regulators. I am sure 
that we will continue to hear about numerous successes and 
challenges, and it is important for us to conduct thorough 
oversight.
    Thanks again to my colleagues and our panelists for being 
here today. This hearing is adjourned.
    [Whereupon, at 12:19 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

                 PREPARED STATEMENT OF BEN S. BERNANKE
       Chairman, Board of Governors of the Federal Reserve System
                           February 17, 2011

    Chairman Johnson, Ranking Member Shelby, and other Members of the 
Committee, thank you for the opportunity to testify about the Federal 
Reserve's implementation of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (Dodd-Frank Act). The Dodd-Frank Act 
addresses critical gaps and weaknesses in the U.S. regulatory 
framework, many of which were revealed by the recent financial crisis. 
The Federal Reserve is committed to working with the other U.S. 
financial regulatory agencies to implement the act effectively and 
expeditiously. We are also cooperating with our international 
counterparts to further strengthen financial regulation, to ensure a 
level playing field across countries, and to enhance international 
supervisory cooperation. And we have revamped the supervisory function 
at the Federal Reserve to allow us to better meet the objectives of the 
act.
    The act gives the Federal Reserve important responsibilities both 
to make rules to implement the law and to apply the new rules. In 
particular, the act requires the Federal Reserve to complete more than 
50 rulemakings and sets of formal guidelines, as well as a number of 
studies and reports. We have also been assigned formal responsibilities 
to consult and collaborate with other agencies on a substantial number 
of additional rules, provisions, and studies. So that we meet our 
obligations on time, we are drawing on expertise and resources from 
across the Federal Reserve System in banking supervision, economic 
research, financial markets, consumer protection, payments, and legal 
analysis. In all, more than 300 members of the Federal Reserve staff 
are working on Dodd-Frank implementation projects. We have created a 
senior staff position to coordinate our efforts and have developed 
project-reporting and tracking tools to facilitate management and 
oversight of all of our implementation responsibilities.
    We have made considerable progress in carrying out our assigned 
responsibilities. We have been providing significant support to the 
Financial Stability Oversight Council, of which the Federal Reserve is 
a member. We are assisting the council in designing its systemic risk 
monitoring and evaluation process and in developing its analytical 
framework and procedures for identifying systemically important nonbank 
firms and financial market utilities. We also are helping the new 
Office of Financial Research at the Treasury Department develop 
potential data reporting standards to support the council's systemic 
risk monitoring and evaluation duties. We contributed significantly to 
the council's recent studies--one on the Volcker rule's restrictions on 
banking entities' proprietary trading and private fund activities and a 
second one on the act's financial-sector concentration limit. And we 
are now developing for public comment the necessary rules to implement 
these important restrictions and limits. Last week, the Board adopted a 
final rule to ensure that activities prohibited by the Volcker rule are 
divested or terminated in the time period required by the act.
    We also have been moving forward rapidly in other areas. Last fall, 
we issued a study on the potential effect of the act's credit risk 
retention requirements on securitization markets, as well as an advance 
notice of proposed rulemaking on the use of credit ratings in the 
regulations of the Federal banking agencies. In addition, in December, 
the Board and the other Federal banking agencies requested comment on a 
proposed rule that would implement the capital floors required by the 
Collins Amendment. In December, we also requested comment on proposed 
rules that would establish standards for debit card interchange fees 
and implement the act's prohibition on network exclusivity arrangements 
and routing restrictions. In January, the Board, together with the 
Office of the Comptroller of the Currency, Federal Deposit Insurance 
Corporation, and Office of Thrift Supervision (OTS), provided the 
Congress a comprehensive report on the agencies' progress and plans 
relating to the transfer of the supervisory authority of the OTS for 
thrifts and thrift holding companies. In addition, as provided by the 
act, we and the Federal Reserve Banks each established offices to 
consolidate and build on our existing equal opportunity programs to 
promote diversity in management, employment, and business activities.
    We continue to work closely and cooperatively with other agencies 
to develop joint rules to implement the credit risk retention 
requirements for securitizations, resolution plans (or ``living 
wills'') for large bank holding companies and council-designated 
nonbank firms, and capital and margin requirements for swap dealers and 
major swap participants. We are consulting with the Securities and 
Exchange Commission (SEC) and the Commodity Futures Trading Commission 
(CFTC) on a variety of rules to enhance the safety and efficiency of 
the derivatives markets, including rules that would require most 
standardized derivatives to be centrally traded and cleared, require 
the registration and prudential regulation of swap dealers and major 
swap participants, and improve the transparency and reporting of 
derivatives transactions. We also are coordinating with the SEC and the 
CFTC on the agencies' respective rulemakings on risk-management 
standards for financial market utilities, and we are working with 
market regulators and central banks in other countries to update the 
international standards for these types of utilities.
    The transfer of the Federal Reserve's consumer protection 
responsibilities specified in the act to the new Bureau of Consumer 
Financial Protection (CFPB) is well under way. A team at the Board, 
headed by Governor Duke, is working closely with the staff at the CFPB 
and at the Treasury to facilitate the transition. We have provided 
technical assistance as well as staff members to the CFPB to assist it 
in setting up its functions. We have finalized funding agreements and 
provided initial funding to the CFPB. Moreover, we have made 
substantial progress toward a framework for transferring Federal 
Reserve staff members to the CFPB and integrating CFPB employees into 
the relevant Federal Reserve benefit programs.
    One of the Federal Reserve's most important Dodd-Frank 
implementation projects is to develop more-stringent prudential 
standards for all large banking organizations and nonbank firms 
designated by the council. Besides capital, liquidity, and resolution 
plans, these standards will include Federal Reserve- and firm-conducted 
stress tests, new counterparty credit limits, and risk-management 
requirements. We are working to produce a well-integrated set of rules 
that will significantly strengthen the prudential framework for large, 
complex financial firms and the financial system.
    Complementing these efforts under Dodd-Frank, the Federal Reserve 
has been working for some time with other regulatory agencies and 
central banks around the world to design and implement a stronger set 
of prudential requirements for internationally active banking firms. 
These efforts resulted in the adoption in the summer of 2009 of more 
stringent regulatory capital standards for trading activities and 
securitization exposures. And, of course, it also includes the 
agreements reached in the past couple of months on the major elements 
of the new Basel III prudential framework for globally active banks. 
Basel III should make the financial system more stable and reduce the 
likelihood of future financial crises by requiring these banks to hold 
more and better-quality capital and more-robust liquidity buffers. We 
are committed to adopting the Basel III framework in a timely manner. 
In December 2010, we requested comment with the other U.S. banking 
agencies on proposed rules that would implement the 2009 trading book 
reforms, and we are already working to incorporate other aspects of the 
Basel III framework into U.S. regulations.
    To be effective, regulation must be supported by strong 
supervision. The act expands the supervisory responsibilities of the 
Federal Reserve to include thrift holding companies and nonbank 
financial firms that the council designates as systemically important, 
along with certain payment, clearing, and settlement utilities that are 
similarly designated. Reflecting the expansion of our supervisory 
responsibilities, we are working to ensure that we have the necessary 
resources and expertise to oversee a broader range of financial firms 
and business models.
    The act also requires supervisors to take a macroprudential 
approach; that is, the Federal Reserve and other financial regulatory 
agencies are expected to supervise financial institutions and critical 
infrastructures with an eye toward not only the safety and soundness of 
each individual firm, but also taking into account risks to overall 
financial stability.
    We believe that a successful macroprudential approach to 
supervision requires both a multidisciplinary and wide-ranging 
perspective. Our experience in 2009 with the Supervisory Capital 
Assessment Program (popularly known as the bank stress tests) 
demonstrated the feasibility and benefits of employing such a 
perspective. Building on that experience and other lessons learned from 
the recent financial crisis, we have reoriented our supervision of the 
largest, most complex banking firms to include greater use of 
horizontal, or cross-firm, evaluations of the practices and portfolios 
of firms, improved quantitative surveillance mechanisms, and better use 
of the broad range of skills of the Federal Reserve staff. And we have 
created a new Office of Financial Stability within the Federal Reserve, 
which will monitor financial developments across a range of markets and 
firms and coordinate with the council and with other agencies to 
strengthen systemic oversight.
    The Federal Reserve is committed to its long-standing practice of 
ensuring that all of its rulemakings are conducted in a fair, open, and 
transparent manner. Accordingly, we are disclosing on our public Web 
site summaries of all communications with members of the public--
including banks, trade associations, consumer groups, and academics--
regarding matters subject to a proposed or potential future rulemaking 
under the act. We also have implemented measures within the act to 
enhance the Federal Reserve's transparency. In December, we publicly 
released detailed information regarding individual transactions 
conducted between December 1, 2007, and July 20, 2010, across a wide 
range of Federal Reserve credit and liquidity programs, and we are 
developing the necessary processes to disclose information concerning 
transactions conducted after July 20, 2010, on a delayed basis as 
provided in the act.
    To conclude, the Dodd-Frank Act is a major step forward for 
financial regulation in the United States. The Federal Reserve will 
work closely with our fellow regulators, the Congress, and the 
Administration to ensure that the law is implemented expeditiously and 
in a manner that best protects the stability of our financial system 
and our economy.
                                 ______
                                 
                  PREPARED STATEMENT OF SHEILA C. BAIR
            Chairman, Federal Deposit Insurance Corporation
                           February 17, 2011

    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for the opportunity to testify today on the 
Federal Deposit Insurance Corporation's (FDIC) progress in implementing 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act).
    The recent financial crisis exposed grave shortcomings in our 
framework for regulating the financial system. Insufficient capital at 
many financial institutions, misaligned incentives in securitization 
markets, and the rise of a largely unregulated shadow banking system 
bred excess and instability in our financial system that led directly 
to the crisis of September 2008. When the crisis hit, regulatory 
options for responding to distress in large, nonbank financial 
companies left policy makers with a no-win dilemma: either prop up 
failing institutions with expensive bailouts or allow destabilizing 
liquidations through the normal bankruptcy process. The bankruptcy of 
Lehman Brothers Holdings Inc. (Lehman) in September 2008 triggered a 
liquidity crisis at AIG and other institutions that froze our system of 
intercompany finance and made the 2007-09 recession the most severe 
since the 1930s.
    The landmark Dodd-Frank Act enacted last year created a 
comprehensive new regulatory and resolution regime that is designed to 
protect the American people from the severe economic consequences of 
financial instability. The Dodd-Frank Act gave regulators tools to 
limit risk in individual financial institutions and transactions, 
enhance the supervision of large nonbank financial companies, and 
facilitate the orderly closing and liquidation of large banking 
organizations and nonbank financial companies in the event of failure. 
Recognizing the urgent need for reform and the importance of a 
deliberative process, the Act directed the FDIC and the other 
regulatory agencies to promulgate implementing regulations under a 
notice and comment process and to do so within specified time frames. 
The FDIC is required or authorized to implement some 44 regulations, 
including 18 independent and 26 joint rulemakings. The Dodd-Frank Act 
also grants the FDIC new or enhanced enforcement authorities, new 
reporting requirements, and responsibility for numerous other actions.
    We are now in the process of implementing the provisions of the 
Dodd-Frank Act as expeditiously and transparently as possible. The 
lessons of history--recent and distant--remind us that financial 
markets cannot function for long in an efficient and stable manner 
without strong, clear regulatory guidelines. We know all too well that 
the market structures in place prior to the crisis led to misaligned 
incentives, a lack of transparency, insufficient capital, and excessive 
risk taking. As a result, the U.S. and global economies suffered a 
grievous blow. Millions of Americans lost their jobs, their homes, or 
both, even as almost all of our largest financial institutions received 
assistance from the Government that enabled them to survive and 
recover. Memories of such events tend to be short once a crisis has 
passed, but we as regulators must never forget the enormous economic 
costs of the inadequate regulatory framework that allowed the crisis to 
occur in the first place. At the same time, our approach must also 
account for the potential high cost of needless or ill-conceived 
regulation--particularly to those in the vital community banking sector 
whose lending to creditworthy borrowers is necessary for a sustained 
economic recovery.
    My testimony will review the FDIC's efforts to date to implement 
the provisions of Dodd-Frank and highlight what we see as issues of 
particular importance.

Implementing the Resolution Authority and Ending ``Too Big To Fail''
    A significant number of the FDIC's rulemakings stem from the Dodd-
Frank Act's mandate to end ``Too Big to Fail.'' This includes our 
Orderly Liquidation Authority under Title II of the Act, our joint 
rulemaking with the Board of Governors of the Federal Reserve System 
(FRB) on requirements for resolution plans (or living wills) that will 
apply to systemically important financial institutions (SIFIs), and the 
development of criteria for determining which firms will be designated 
as SIFIs by the Financial Stability Oversight Council (FSOC).

Orderly Liquidation Authority
    The Lehman bankruptcy in September 2008 demonstrated the confusion 
and chaos that can result when a large, highly complex financial 
institution collapses into bankruptcy. The Lehman bankruptcy had an 
immediate and negative effect on U.S. financial stability and has 
proven to be a disorderly, time-consuming, and expensive process. 
Unfortunately, bankruptcy cannot always provide the basis for an 
orderly resolution of a SIFI or preserve financial stability. To 
overcome these problems, the Dodd-Frank Act provides for an Orderly 
Liquidation Authority with the ability to: plan for a resolution and 
liquidation, provide liquidity to maintain key assets and operations, 
and conduct an open bidding process to sell a SIFI and its assets and 
operations to the private sector as quickly as possible.
    While Title I of the Dodd-Frank Act significantly enhances 
regulators' ability to conduct advance resolution planning for SIFIs, 
Title II vests the FDIC with legal resolution authorities similar to 
those that it already applies to insured depository institutions 
(IDIs).
    If the FDIC is appointed as receiver, it is required to carry out 
an orderly liquidation of the financial company. Title II also requires 
that creditors and shareholders ``bear the losses of the financial 
company'' and instructs the FDIC to liquidate a failing SIFI in a 
manner that maximizes the value of the company's assets, minimizes 
losses, mitigates risk, and minimizes moral hazard. Under this 
authority, common and preferred stockholders, debt holders and other 
unsecured creditors will know that they will bear the losses of any 
institution placed into receivership, and management will know that it 
could be replaced.
    The new requirements will ensure that the largest financial 
companies can be wound down in an orderly fashion without taxpayer 
cost. Under Title II of the Dodd-Frank Act, there are no more bailouts. 
In implementing the Act's requirements, our explicit goal is that all 
market players should share this firm expectation and that financial 
institution credit ratings should, over time, fully reflect this fact. 
By developing a credible process for resolving a troubled SIFI, market 
discipline will be reinforced and moral hazard reduced.
    From the FDIC's more than 75 years of bank resolution experience, 
we have found that clear legal authority and transparent rules on 
creditor priority are important elements of an orderly resolution 
regime. To that end, the FDIC issued an interim final rule implementing 
certain provisions of our Orderly Liquidation Authority on January 25, 
2011. In the interim rule, the FDIC posed questions to solicit public 
comment on such issues as reducing moral hazard and increasing market 
discipline. We also asked for comment on guidelines that would create 
increased certainty in establishing fair market value of various types 
of collateral for secured claims. The rule makes clear that similarly 
situated creditors would never be treated in a disparate manner except 
to preserve essential operations or to maximize the value of the 
receivership as a whole. Importantly, this discretion will not be used 
to favor creditors based on their size or interconnectedness. In other 
words, there is no avenue for a backdoor bailout.
    Comments on the interim rule and the accompanying questions will 
help us further refine the rule and bring more certainty to the 
industry as it navigates the recalibrated regulatory environment. This 
summer we expect to finalize other rules under our Title II authority 
that will govern the finer details of how the FDIC will wind down 
failed financial companies in receivership.

Resolution Plans
    Even with the mechanism of the Orderly Liquidation Authority in 
place, ending ``Too Big to Fail'' requires that regulators obtain 
critical information and shape the structure and behavior of SIFIs 
before a crisis occurs. This is why the Dodd-Frank Act firms to 
maintain credible, actionable resolution plans that will facilitate 
their orderly resolution if they should fail. Without access to 
critical information contained in credible resolution plans, the FDIC's 
ability to implement an effective and orderly liquidation process could 
be significantly impaired.
    As noted in my September testimony, the court-appointed trustee 
overseeing the liquidation of Lehman Brothers Inc. found that the lack 
of a disaster plan ``contributed to the chaos'' of the Lehman 
bankruptcy and the liquidation of its U.S. broker-dealer. Recognizing 
this, the Dodd-Frank Act created critical authorities designed to give 
the FDIC, the FRB, and the FSOC information from the largest 
potentially systemic financial companies that will allow for extensive 
advance planning both by regulators and by the companies themselves.
    The Dodd-Frank Act requires the FDIC and the FRB jointly to issue 
regulations within 18 months of enactment to implement new resolution 
planning and reporting requirements that apply to bank holding 
companies with total assets of $50 billion or more and nonbank 
financial companies designated for FRB supervision by the FSOC.
    Importantly, the statute requires both periodic reporting of 
detailed information by these financial companies and the development 
and submission of resolution plans that allow ``for rapid and orderly 
resolution in the event of material financial distress or failure.'' 
The resolution plan requirement in the Dodd-Frank Act appropriately 
places the responsibility on financial companies to develop their own 
resolution plans in coordination with the FDIC and the FRB.
    The Dodd-Frank Act lays out steps that must be taken with regard to 
the resolution plans. First, the FRB and the FDIC must review each 
company's plan to determine whether it is both credible and useful for 
facilitating an orderly resolution under the Bankruptcy Code. Making 
these determinations will necessarily involve the agencies having 
access to the company and relevant information. This new resolution 
plan regulation will require financial companies to look critically at 
the often highly complex and interconnected corporate structures that 
have emerged within the financial sector.
    If a plan is found to be deficient, the company will be asked to 
submit a revised plan to correct any identified deficiencies. The 
revised plan could include changes in business operations and corporate 
structure to facilitate implementation of the plan. If the company 
fails to resubmit a plan that corrects the identified deficiencies, the 
Dodd-Frank Act authorizes the FRB and the FDIC jointly to impose more 
stringent capital, leverage or liquidity requirements. In addition, the 
agencies may impose restrictions on growth, activities, or operations 
of the company or any subsidiary. In certain cases, divestiture of 
portions of the financial company may be required. Just last month, 
Neil Barofsky, the Special Inspector General for the Troubled Asset 
Relief Program, recognized that this regulatory authority, including 
the ability to require divestiture, provides an avenue to convincing 
the marketplace that SIFIs will not receive Government assistance in a 
future crisis. \1\ The FDIC is working with the FRB to develop 
requirements for these resolution plans. It is essential that we 
complete this joint rule as soon as possible.
---------------------------------------------------------------------------
     \1\ Transcript of interview with Neil Barofsky, National Public 
Radio, January 27, 2011. http://www.npr.org/2011/01/27/133264711/
Troubled-Asset-Relief-Program-Update
---------------------------------------------------------------------------
SIFI Designation
    The Dodd-Frank Act created the FSOC to plug important gaps between 
existing regulatory jurisdictions where financial risks grew in the 
years leading up to the recent crisis. An important responsibility of 
the FSOC is to develop criteria for designating SIFIs that will be 
subject to enhanced FRB supervision and the requirement to maintain 
resolution plans. To protect the U.S. financial system, it is essential 
that we have the means to identify which firms in fact qualify as SIFIs 
so we do not find ourselves with a troubled firm that is placed into a 
Title II liquidation without having a resolution plan in place.
    Since enactment of the Dodd-Frank Act, experienced and capable 
staff from each of the member agencies have been collaborating in 
implementing the FSOC's responsibilities, including establishing the 
criteria for identifying SIFIs. The Dodd-Frank Act specifies a number 
of factors that can be considered when designating a nonbank financial 
company for enhanced supervision, including: leverage; off-balance-
sheet exposures; and the nature, scope, size, scale, concentration, 
interconnectedness, and mix of activities. The FSOC will develop a 
combination of qualitative and quantitative measures of potential risks 
posed by an individual nonbank institution to U.S. financial stability.
    The nonbank financial sector encompasses a multitude of financial 
activities and business models, and potential systemic risks vary 
significantly across the sector. A staff committee working under the 
FSOC has segmented the nonbank sector into four broad categories: (1) 
the hedge fund, private equity firm, and asset management industries; 
(2) the insurance industry; (3) specialty lenders; and (4) broker-
dealers and futures commission merchants. The Council has begun 
developing measures of potential risks posed by these firms. Once these 
measures are agreed upon, the FSOC may need to request data or 
information that is not currently collected or otherwise available in 
public filings.
    Recognizing the need for accurate, clear, and high quality 
information, Congress granted the FSOC the authority to gather and 
review financial data and reports from nonbank financial companies and 
bank holding companies, and if appropriate, request that the FRB 
conduct an exam of the company for purposes of making a systemic 
designation. By collecting more information in advance of designation, 
the FSOC can be much more judicious in determining which firms it 
designates as SIFIs. This will minimize both the threat of an 
unexpected systemic failure and the number of firms that will be 
subject to additional regulatory requirements under Title I.
    Last October, the FSOC issued an Advance Notice of Proposed 
Rulemaking regarding the criteria that should inform the FSOC's 
designation of nonbank financial companies. The FSOC received 
approximately 50 comments from industry trade associations, individual 
firms, and individuals. On January 26, the FSOC issued a Notice of 
Proposed Rulemaking, with a 30-day comment period, describing the 
criteria that will inform--and the processes and procedures established 
under the Dodd-Frank Act--the FSOC's designation of nonbank financial 
companies. The FDIC would welcome comments particularly on whether the 
rule can offer more specificity on criteria for SIFI designation. The 
FSOC is committed to adopting a final rule on this issue later this 
year, with the first designations to occur shortly thereafter.

Strengthening and Reforming the Deposit Insurance Fund
    Prior to 2006, statutory restrictions prevented the FDIC from 
building up the Deposit Insurance Fund (DIF) balance when conditions 
were favorable in order to withstand losses under adverse conditions 
without sharply increasing premiums. The FDIC was also largely unable 
to charge premiums according to risk. In fact, it was unable to charge 
most institutions any premium as long as the DIF balance exceeded $1.25 
per $100 of insured deposits. Congress enacted reforms in 2006 that 
permitted the FDIC to charge all banks a risk-based premium and 
provided additional, but limited, flexibility to the FDIC to manage the 
size of the DIF. The FDIC changed its risk-based pricing rules to take 
advantage of the new law, but the onset of the recent crisis prevented 
the FDIC from increasing the DIF balance. In this crisis, as in the 
previous one, the balance of the DIF became negative, hitting a low of 
negative $20.9 billion in December 2009. The DIF balance has improved 
in each subsequent quarter, and stood at negative $8.0 billion as of 
last September. Through a special assessment and the prepayment of 
premiums, the FDIC took the necessary steps to ensure that it did not 
have to rely on taxpayer funds during the crisis to protect insured 
depositors.
    In the Dodd-Frank Act, Congress revised the statutory authorities 
governing the FDIC's management of the DIF. The FDIC now has the 
ability to achieve goals for deposit insurance fund management that it 
has sought to achieve for decades but has lacked the tools to 
accomplish. The FDIC has increased flexibility to manage the DIF to 
maintain a positive fund balance even during a banking crisis while 
maintaining steady and predictable assessment rates throughout economic 
and credit cycles.
    Specifically, the Dodd-Frank Act raised the minimum level for the 
Designated Reserve Ratio (DRR) from 1.15 percent to 1.35 percent and 
removed the requirement that the FDIC pay dividends of one-half of any 
amount in the DIF above a reserve ratio of 1.35 percent. The 
legislation allows the FDIC Board to suspend or limit dividends when 
the reserve ratio exceeds 1.50 percent.
    FDIC analysis has shown that the dividend rule and the reserve 
ratio target are among the most important factors in maximizing the 
probability that the DIF will remain positive during a crisis, when 
losses are high, and in preventing sharp upswings in assessment rates, 
particularly during a crisis. This analysis has also shown that at a 
minimum the DIF reserve ratio (the ratio of the DIF balance to 
estimated insured deposits) should be about 2 percent in advance of a 
banking crisis in order to avoid high deposit insurance assessment 
rates when banking institutions are strained and least able to pay.
    Consequently, the FDIC Board completed two rulemakings, one in 
December 2010, and one earlier this month, that together form the basis 
for a long-term strategy for DIF management and achievement of the 
statutorily required 1.35 percent DIF reserve ratio by September 30, 
2020. The FDIC Board adopted assessment rates that will take effect on 
April 1, 2011. The Board also adopted lower rates that will take effect 
when the DIF reserve ratio reaches 1.15 percent, which we expect will 
approximate the long-term moderate, steady assessment rate that would 
have been needed to maintain a positive fund balance throughout past 
crises. The DRR was set at 2 percent, consistent with our analysis of a 
long-term strategy for the DIF, and dividends were suspended 
indefinitely. In lieu of dividends, the rules set forth progressively 
lower assessment rate schedules when the reserve ratio exceeds 2 
percent and 2.5 percent.
    These actions increase the probability that the fund reserve ratio 
will reach a level sufficient to withstand a future crisis, while 
maintaining moderate, steady, and predictable assessment rates. Indeed, 
banking industry participants at an FDIC Roundtable on deposit 
insurance last year emphasized the importance of stable, predictable 
assessments in their planning and budget processes. Moreover, actions 
taken by the FDIC's current Board of Directors as a result of the Dodd-
Frank Act should make it easier for future Boards to resist inevitable 
calls to reduce assessment rates or pay larger dividends at the expense 
of prudent fund management and countercyclical assessment rates.
    The Dodd-Frank Act also requires the FDIC to redefine the base used 
for deposit insurance assessments as average consolidated total assets 
minus average tangible equity. Earlier this month, the FDIC Board 
issued a final rule implementing this requirement. The rule establishes 
measures for average consolidated total assets and average tangible 
equity that draw on data currently reported by institutions in their 
Consolidated Report of Condition and Income or Thrift Financial Report. 
In this way, the FDIC has implemented rules that minimize the number of 
new reporting requirements needed to calculate deposit insurance 
assessments. As provided by the Dodd-Frank Act, the FDIC's rule 
adjusted the assessment base for banker's banks and custodial banks.
    Using the lessons learned from the most recent crisis, our rule 
changed the large bank pricing system to better differentiate for risk 
and better take into account losses from large institution failures 
that the FDIC may incur. This new system goes a long way toward 
reducing the procyclicality of the risk-based assessment system by 
calculating assessment payments using more forward-looking measures. 
The system also removes reliance on long-term debt issuer ratings 
consistent with the Dodd-Frank Act.
    The FDIC projects that the change to a new, expanded assessment 
base will not materially change the overall amount of assessment 
revenue that the FDIC would have collected prior to adoption of these 
rules. However, the change in the assessment base, in general, will 
result in shifting more of the overall assessment burden away from 
community banks and toward the largest institutions, which rely less on 
domestic deposits for their funding than do smaller institutions, as 
Congress intended.
    Under the new assessment base and large bank pricing system, the 
share of the assessment base held by institutions with assets greater 
than $10 billion will increase from 70 percent to 78 percent, and their 
share of overall dollar assessments will increase commensurately from 
70 percent to 79 percent. However, because of the combined effect of 
the change in the assessment base and increased risk differentiation 
among large banks in the new large bank pricing system, many large 
institutions will experience significant changes in their overall 
assessments. The combined effect of changes in this final rule will 
result in 59 large institutions paying lower dollar assessments and 51 
large institutions paying higher dollar assessments (based upon 
September 30, 2010 data). In the aggregate, small institutions will pay 
30 percent less, due primarily to the change in the assessment base, 
thus fewer than 100 of the 7,600 plus small institutions will pay 
higher assessments.

Strengthening Capital Requirements
    One of the most important mandates of the Dodd-Frank Act is Section 
171--the Collins Amendment--which we believe will do more to strengthen 
the capital of the U.S. banking industry than any other section of the 
Act.
    Under Section 171 the capital requirements that apply to thousands 
of community banks will serve as a floor for the capital requirements 
of our largest banks, bank holding companies and nonbanks supervised by 
the FRB. This is important because in the years before the crisis, U.S. 
regulators were embarking down a path that would allow the largest 
banks to use their own internal models to set, in effect, their own 
risk-based capital requirements, commonly referred to as the ``Basel II 
Advanced Approach.''
    The premise of the Advanced Approach was that the largest banks, 
because of their sophisticated internal-risk models and superior 
diversification, simply did not need as much capital in relative terms 
as smaller banks. The crisis demonstrated the fallacy of this thinking 
as the models produced results that proved to be grossly optimistic.
    Policy makers from the Basel Committee to the U.S. Congress have 
determined that this must not happen again. Large banks need the 
capital strength to stand on their own. The Collins Amendment assures 
that whatever advances in risk modeling may come to pass, they will not 
be used to allow the largest banks to operate with less capital than 
our Nation's Main Street banks.
    The Federal banking agencies currently have out for comment a 
Notice of Proposed Rulemaking to implement Section 171 by replacing the 
transitional floor provisions of the Advanced Approach with a permanent 
floor equal to the capital requirements computed under the agencies' 
general risk-based capital requirements. The proposed rule would also 
amend the general risk-based capital rules in way designed to give 
additional flexibility to the FRB in crafting capital requirements for 
designated nonbank SIFIs.
    The Collins Amendment, moreover, does more than this. While 
providing significant grandfathering and exemptions for smaller banking 
organizations, the amendment also mandates that the holding company 
structure for larger organizations not be used to weaken consolidated 
capital below levels permitted for insured banks. That aspect of the 
Collins Amendment, which ensures that bank holding companies will serve 
as a source of strength for their insured banks, will be addressed in a 
subsequent rulemaking.
    The Dodd-Frank Act also required regulators to eliminate reliance 
on credit ratings in our regulations. As you know, our regulatory 
capital rules and Basel II currently rely extensively on credit 
ratings. Last year, the banking agencies issued an Advance Notice of 
Proposed Rulemaking seeking industry comment on how we might design an 
alternative standard of credit worthiness. Unfortunately, the comments 
we received, for the most part, lacked substantive suggestions on how 
to approach this question. While we have removed any reliance on credit 
ratings in our assessment regulation, developing an alternative 
standard of creditworthiness for regulatory capital purposes is proving 
more challenging. The use of credit ratings for regulatory capital 
covers a much wider range of exposures; we cannot rely on nonpublic 
information, and the alternative standard should be usable by banks of 
all sizes. We are actively exploring a number of alternatives for 
dealing with this problem.
    Separately and parallel to the Dodd-Frank Act rulemakings, the 
banking agencies are also developing rules to implement Basel III 
proposals for raising the quality and quantity of regulatory capital 
and setting new liquidity standards. The agencies issued a Notice of 
Proposed Rulemaking in January that proposes to implement the Basel 
Committee's 2009 revisions to the Market Risk Rule. We expect to issue 
a Notice of Proposed Rulemaking that will seek comment on our plans to 
implement Basel III later this year.

Reforming Asset-Backed Securitization
    The housing bust and the financial crisis arose from a historic 
breakdown in U.S. mortgage markets. While emergency policies enacted at 
the height of the crisis have helped to stabilize the financial system 
and plant the seeds for recovery, mortgage markets remain deeply mired 
in credit distress and private securitization markets remain largely 
frozen. Moreover, serious weaknesses identified with mortgage servicing 
and foreclosure are now introducing further uncertainty into an already 
fragile market.
    It is clear that the mortgage underwriting practices that led to 
the crisis, which frequently included loans with low or no 
documentation in addition to other risk factors such as impaired credit 
histories or high loan-to-value ratios, must be significantly 
strengthened. To this point, this has largely been accomplished through 
the heightened risk aversion of lenders, who have significantly 
tightened standards, and investors, who have largely shunned private 
securitization deals. Going forward, however, risk aversion will 
inevitably decline and there will be a need to ensure that lending 
standards do not revert to the risky practices that led to the last 
crisis.
    In the case of portfolio lenders, underwriting policies are subject 
to scrutiny by Federal and State regulators. While regulators apply 
standards of safe and sound lending, they typically do not take the 
form of prespecified guidelines for the structure or underwriting of 
the loans. For these portfolio lenders, the full retention of credit 
risk by the originating institution tends to act as a check on the 
incentive to take risks. Provided that the institution is otherwise 
well capitalized, well run, and well regulated, the owners and managers 
of the institution will bear most of the consequences for risky lending 
practices. By contrast, the crisis has illustrated how the mortgage 
securitization process is somewhat more vulnerable to the misalignment 
of incentives for originators and securities issuers to limit risk 
taking, because so much of the credit risk is passed along to investors 
who may not exercise due diligence over loan quality.
    The excessive risk-taking inherent in the originate-to-distribute 
model of lending and securitization was specifically addressed in the 
Dodd-Frank Act by two related provisions. One provision, under Section 
941 of the Act, mandates that the FSOC agencies write rules that 
require the securitizers (and, in certain circumstances, originators) 
of asset-backed securities to retain not less than 5 percent of the 
credit risk of those securities. The purpose of this provision is to 
encourage more careful lending behavior by preventing securitizers from 
avoiding the consequences of their risk-taking. Section 941 also 
mandates that the agencies define standards for Qualifying Residential 
Mortgages (QRMs) that will be exempt from risk retention when they are 
securitized. An interagency committee is working to define both the 
mechanism for risk retention and standards for QRMs.
    Defining an effective risk retention mechanism and QRM requirements 
are somewhat complex tasks that have required extensive deliberation 
among the agencies. Because securitization structures and the 
compensation of securitizers can take many alternate forms, it is 
important that the rule be structured in a way that will minimize the 
ability of issuers to circumvent its intent. While we continue to work 
to move these rules forward without delay, we are also determined to 
get them right the first time. The confidence of the marketplace in 
these rules may well determine the extent to which private 
securitization will return in the wake of the crisis.
    Long-term confidence in the securitization process cannot be 
restored unless the misalignment of servicing incentives that 
contributed to the present crisis is also addressed through these 
rules. There is ample research showing that servicing practices are 
critically important to mortgage performance and risk. \2\ Regulators 
must use both their existing authorities and the new authorities 
granted under the Dodd-Frank Act to establish standards for future 
securitizations to help assure that, as the private securitization 
market returns, incentives for loss mitigation and value maximization 
in mortgage servicing are appropriately aligned.
---------------------------------------------------------------------------
     \2\ For example, see, Ashcraft, Adam B. and Til Schuermann, 
``Understanding the Securitization of Subprime Mortgage Credit'', Staff 
Report No. 318, Federal Reserve Bank of New York, March 2008, p. 8. 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1071189 and ``Global 
Rating Criteria for Structured Finance Servicers'', Fitch Ratings/
Structured Finance, August 16, 2010, p. 7.
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    The FDIC took a significant step in this regard when updating our 
rules for safe harbor protection with regard to the treatment of 
securitized assets in failed bank receiverships. Our final rule, 
approved in September, established standards for loan level disclosure, 
loan documentation, compensation, and oversight of servicers. It 
includes incentives to assure that loans are made and managed in a way 
that achieves sustainable lending and maximizes value for all 
investors. There is already evidence of market acceptance of these 
guidelines in the $1.2 billion securitization issue by Ally Bank 
earlier this month, which fully conformed to the FDIC safe harbor rules 
for risk retention.
    In short, the desired effect of the risk retention and QRM rules 
will be to give both loan underwriting and Administration and loan 
servicing much larger roles in credit risk management. Lenders and 
regulators need to embrace the lessons learned from this crisis and 
establish a prudential framework for extending credit and servicing 
loans on a sounder basis. Servicing provisions that should be part of 
the QRM rule include disclosure of ownership interests in second-liens 
by servicers of a first mortgage and appropriate compensation 
incentives.
    Better alignment of economic incentives in the securitization 
process will not only address key safety-and-soundness and investor 
concerns, but will also provide a stronger foundation for the new 
Consumer Financial Protection Bureau (CFPB) as it works to improve 
consumer protections for troubled borrowers in all products and by all 
servicers.

Additional Implementation Activities
    While we have focused on the important ongoing reforms where the 
Dodd-Frank Act assigned a significant role to the FDIC, we have been 
pleased to work closely with the other regulators on several other 
critical aspects of the Act's implementation.
    Earlier this month, the FDIC Board approved a draft interagency 
rule to implement Section 956 of the Dodd-Frank Act, which sets forth 
rules and procedures governing the awarding of incentive compensation 
in covered financial institutions. Implementing this section will help 
address a key safety-and-soundness issue that contributed to the recent 
financial crisis--namely, that poorly designed compensation structures 
and poor corporate governance can misalign incentives and induce 
excessive risk taking within financial organizations. The proposed rule 
is proportionate to the size and complexity of individual banks and 
does not apply to banks with less than $1 billion in assets. For the 
largest firms, those with over $50 billion in assets, the proposal 
requires deferral of a significant portion of the incentive 
compensation of identified executive officers for at least 3 years and 
board-level identification and approval of the incentive compensation 
of employees who can expose the firm to material loss.
    Another important reform under the Dodd-Frank Act is the Volcker 
Rule, which prohibits proprietary trading and acquisition of an 
interest in hedge or private equity funds by IDIs. The FSOC issued its 
required study of proprietary trading in January of this year, and 
joint rules implementing the prohibition on such trading are due by 
October of this year. The Federal banking agencies will be working 
together, with the FSOC coordinating, to issue a final rule by the 
statutory deadline.
    In addition to these rulemakings, the FDIC has a number of other 
implementation responsibilities, including new reporting requirements 
and mandated studies. Among the latter is a study to evaluate the 
definitions of core and brokered deposits. As part of this study, we 
are hosting a roundtable discussion next month to gather valuable input 
from bankers, deposit brokers, and other market participants.

Preparation for Additional Responsibilities
    The FDIC Board of Directors has recently undertaken a number of 
organizational changes to ensure the effective implementation of our 
responsibilities pursuant to the Dodd-Frank Act.
    As I previously described in my September testimony before this 
Committee, the FDIC has made organizational changes in order to enhance 
our ability to carry out the Dodd-Frank Act responsibilities, as well 
as our core responsibilities for risk management supervision of insured 
depository institutions and consumer protection. The new Office of 
Complex Financial Institutions (OCFI) will be responsible for orderly 
liquidation authority, resolution plans, and monitoring risks in the 
SIFIs. The Division of Depositor and Consumer Protection will focus on 
the FDIC's many responsibilities for depositor and consumer protection.
    In response to the Committee's request for an update about the 
transfer of employees to the new CFPB, I can report that we continue to 
work with the Treasury Department and the other banking agencies on the 
transfer process of employees to ensure a smooth transition. The number 
of FDIC employees detailed to the CFPB will necessarily be limited 
since the FDIC retains the compliance examination and enforcement 
responsibilities for most FDIC-regulated institutions with $10 billion 
or less in assets. Nonetheless, there are currently seven FDIC 
employees being detailed to the Treasury Department and the CFPB to 
work on a wide range of examination and legal issues that will confront 
the CFPB at its inception. There are also several more employees who 
have expressed interest in assisting the CFPB and are being evaluated 
by the Treasury Department. Recognizing that FDIC employees have 
developed expertise, skills, and experience in a number of areas of 
benefit to the CFPB, our expectation has been that a number of 
employees would actively seek an opportunity to assist the CFPB in its 
earliest stages, or on a more permanent basis.
    Finally, consistent with the requirements of Section 342, the FDIC 
in January established a new Office of Minority and Women Inclusion 
(OMWI). Transferring the existing responsibilities and employees of the 
FDIC's former Office of Diversity and Economic Opportunity into the new 
OMWI has allowed for a smooth transition and no disruption in the 
FDIC's ongoing diversity and outreach efforts. Our plans for the OMWI 
include the addition of a new Senior Deputy Director and other staff as 
needed to ensure that the new responsibilities under Section 342 are 
carried out, as well as an OMWI Steering Committee which will promote 
coordination and awareness of OMWI responsibilities across the FDIC and 
ensure that they are managed in the most effective manner.

Regulatory Effectiveness
    The FDIC recognizes that while the changes required by the Dodd-
Frank Act are necessary to establish clear rules that will ensure a 
stable financial system, these changes must be implemented in a 
targeted manner to avoid unnecessary regulatory burden. We are working 
on a number of fronts to achieve that necessary balance. An example is 
the recent rule to change the deposit insurance assessment system, 
which relied as much as possible on the current regulatory reporting 
structure. Although some additional reporting will be required for some 
institutions, most institutions should see their reporting burden 
unchanged or slightly reduced as some items that were previously 
required will no longer be reported.
    At the January 20 meeting of the FDIC's Advisory Committee on 
Community Banking, we engaged the members--mostly bankers themselves--
in a full and frank discussion of other ways to ease the regulatory 
burden on small institutions. Among the ideas discussed at that meeting 
were:

    Conduct a community bank impact analysis with respect to 
        implementation of regulations under the Dodd-Frank Act,

    Identify which questionnaires and reports can be 
        streamlined through automation,

    Review ways to reduce the total amount of reporting 
        required of banks,

    Impose a moratorium on changes to reporting obligations 
        until some level of regulatory burden reduction has been 
        achieved,

    Develop an approach to bank reporting requirements that is 
        meaningful and focuses on where the risks are increasing, and

    Ensure that community banks are aware that senior FDIC 
        officials are available and interested in receiving their 
        feedback regarding our regulatory and supervisory process.

    The FDIC is particularly interested in finding ways to eliminate 
unnecessary regulatory burden on community banks, whose balance sheets 
are much less complicated than those of the larger banks. Our goal is 
to facilitate more effective and targeted regulatory compliance. To 
this end, we have established as a corporate performance goal for the 
first quarter of 2011 to modify the content of our Financial 
Institution Letters (FILs)--the vehicle used to alert banks to any 
regulatory changes or guidance--so that every FIL issued will include a 
section making clear the applicability to smaller institutions (under 
$1 billion). In addition, by June 30 we plan to complete a review of 
all of our recurring questionnaires and information requests to the 
industry and to develop recommendations to improve the efficiency and 
ease of use and a plan to implement these changes.
    The FDIC has challenged its staff to find additional ways of 
translating some of these ideas into action. This includes launching an 
intensive review of existing reporting requirements to identify areas 
for streamlining. We have also initiated a process whereby, as part of 
every risk management examination, we will solicit the views of the 
institution on aspects of the regulatory and supervisory process that 
may be adversely affecting credit availability.
    Above all, it is important to emphasize to small and midsized 
financial institutions that the Dodd-Frank reforms are not intended to 
impede their ability to compete in the marketplace. On the contrary, we 
expect that these reforms will do much to restore competitive balance 
to the marketplace by restoring market discipline and appropriate 
regulatory oversight to systemically important financial companies, 
many of which received direct Government assistance in the recent 
crisis.

Conclusion
    In implementing the Dodd-Frank Act, it is important that we 
continue to move forward with dispatch to remove unnecessary regulatory 
uncertainties faced by the market and the industry. In passing the Act, 
the Congress clearly recognized the need for a sounder regulatory 
framework within which banks and other financial companies could 
operate under rules that would constrain the excessive risk taking that 
caused such catastrophic losses to our financial system and our economy 
during the financial crisis.
    In the wake of the passage of the Act, it is essential that this 
implementation process move forward both promptly and deliberately, in 
a manner that resolves uncertainty as to what the new framework will be 
and that promotes long-term confidence in the transparency and 
stability of our financial system. Throughout this process, regulators 
must maintain a clear view of the costs of regulation--particularly to 
the vital community banking sector--while also never forgetting the 
enormous economic costs of the inadequate regulatory framework that 
allowed the crisis to occur in the first place. We have a clear 
obligation to members of the public who have suffered the greatest 
losses as a result of the crisis to prevent such an episode from ever 
recurring again.
    Thank you for the opportunity to testify.
                                 ______
                                 
                 PREPARED STATEMENT OF MARY L. SCHAPIRO
              Chairman, Securities and Exchange Commission
                           February 17, 2011

    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee: Thank you for inviting me to testify today on behalf of the 
Securities and Exchange Commission regarding our implementation of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act'' or ``Act''). The Act includes over 100 rulemaking provisions 
applicable to the SEC, and also requires the SEC to conduct more than 
twenty studies and create five new offices.
    Last September, I testified about our progress and plans for 
implementing the Act. Among other things, I described our new internal 
processes and cross-disciplinary working groups, the expanded 
opportunities for public comment we are providing, our emphasis on 
increased transparency in dealings with the public, the frequent and 
collaborative consultations we were undertaking with other financial 
regulators, and the priorities we created to assist us in complying in 
a timely manner with the Act's mandates. My prior testimony also 
provided an overview of the principal areas of Commission 
responsibility under the Act.
    Since that time, the Commission has made significant progress. To 
date, in connection with the Dodd-Frank Act, the Commission has issued 
25 proposed rule releases, seven final rule releases, and two interim 
final rule releases. We have received thousands of public comments, 
completed five studies, and hosted five roundtables. My testimony today 
will provide an overview of these activities.

OTC Derivatives
    Among the key provisions of the Act are those that will establish a 
new oversight regime for the over-the-counter (OTC) derivatives 
marketplace. Title VII of the Act requires the SEC to work with other 
regulators--the Commodity Futures Trading Commission (CFTC) in 
particular--to write rules that address, among other things, capital 
and margin requirements, mandatory clearing, the operation of trade 
execution facilities and data repositories, business conduct standards 
for security-based swap dealers, and public transparency for 
transactional information. These rulemakings are intended to improve 
transparency and facilitate the centralized clearing of swaps, helping, 
among other things, to reduce counterparty risk. In addition, they 
should enhance investor protection by increasing disclosure regarding 
security-based swap transactions and helping to mitigate conflicts of 
interest involving security-based swaps. Finally, these rulemakings 
should serve our broader objective of providing a framework that allows 
the OTC derivatives market to continue to develop in a more 
transparent, efficient, accessible, and competitive manner.
    Title VIII of the Act provides for increased regulation of 
financial market utilities and financial institutions that engage in 
payment, clearing and settlement activities that are designated as 
systemically important. The purpose of Title VIII is to mitigate 
systemic risk in the financial system and promote financial stability.
    To date, the SEC has proposed nine rulemakings required by Title 
VII:

    Antifraud and antimanipulation rules for security-based 
        swaps that would subject market conduct in connection with the 
        offer, purchase, or sale of any security-based swap to the same 
        general antifraud provisions that apply to all securities and 
        would explicitly reach misconduct in connection with ongoing 
        payments and deliveries under a security-based swap; \1\
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     \1\ See, Release No. 34-63236, ``Prohibition Against Fraud, 
Manipulation, and Deception in Connection with Security-Based Swaps'' 
(November 3, 2010), http://www.sec.gov/rules/proposed/2010/34-
63236.pdf.

    Rules regarding trade reporting, data elements, and real-
        time public dissemination of trade information for security-
        based swaps that would lay out who must report security-based 
        swaps, what information must be reported, and where and when it 
        must be reported; \2\
---------------------------------------------------------------------------
     \2\ See, Release No. 34-63346, ``Regulation SBSR--Reporting and 
Dissemination of Security-Based Swap Information'' (November 19, 2010), 
http://www.sec.gov/rules/proposed/2010/34-63346.pdf.

    Rules regarding the obligations of security-based swap data 
        repositories that would require them to register with the SEC 
        and specify other requirements with which they must comply; \3\
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     \3\ See, Release No. 34-63347, ``Security-Based Swap Data 
Repository Registration, Duties, and Core Principles'' (November 19, 
2010), http://www.sec.gov/rules/proposed/2010/34-63347.pdf.

    Rules relating to mandatory clearing of security-based 
        swaps that would set out the way in which clearing agencies 
        provide information to the SEC about security-based swaps that 
        the clearing agencies plan to accept for clearing; \4\
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     \4\ See, Release No. 34-63557, ``Process for Submissions for 
Review of Security-Based Swaps for Mandatory Clearing and Notice Filing 
Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 
and Form 19b-4 Applicable to All Self-Regulatory Organizations'' 
(December 15, 2010), http://www.sec.gov/rules/proposed/2010/34-
63557.pdf.

    Rules regarding the exception to the mandatory clearing 
        requirement for hedging by end-users that would specify the 
        steps that end-users must follow, as required under the Act, to 
        notify the SEC of how they generally meet their financial 
        obligations when engaging in security-based swap transactions 
        exempt from the mandatory clearing requirement; \5\
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     \5\ See, Release No. 34-63556, ``End-User Exception of Mandatory 
Clearing of Security-Based Swaps'' (December 15, 2010), http://
www.sec.gov/rules/proposed/2010/34-63556.pdf.

    Rules regarding registration and regulation of security-
        based swap execution facilities that would define them, specify 
        their registration requirements, and establish their duties and 
        implement the core principles for security-based swap execution 
        facilities laid out in the Act; \6\
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     \6\ See, Release No. 34-63825, ``Registration and Regulation of 
Security-Based Swap Execution Facilities'' (February 2, 2011), http://
www.sec.gov/rules/proposed/2011/34-63825.pdf.

    Joint rules with the CFTC regarding the definitions of swap 
        and security-based swap dealers, and major swap and security-
        based swap participants; \7\
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     \7\ See, Release No. 34-63452, ``Further Definition of ``Swap 
Dealer'', ``Security-Based Swap Dealer'', ``Major Swap Participant'', 
``Major Security-Based Swap Participant'', and ``Eligible Contract 
Participant'' (December 7, 2010), http://www.sec.gov/rules/proposed/
2010/34-63452.pdf.

    Rules regarding the confirmation of security-based swap 
        transactions that would govern the way in which certain of 
        these transactions are acknowledged and verified by the parties 
        who enter into them; \8\ and
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     \8\ See, Release No. 34-63727, ``Trade Acknowledgment and 
Verification on Security-Based Swap Transactions'' (January 14, 2011), 
http://www.sec.gov/rules/proposed/2011/34-63727.pdf.

    Rules intended to address conflicts of interest at 
        security-based swap clearing agencies, security-based swap 
        execution facilities, and exchanges that trade security-based 
        swaps. \9\
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     \9\ See, Release No. 34-63107, ``Ownership Limitations and 
Governance Requirements for Security-Based Swap Clearing Agencies, 
Security-Based Swap Execution Facilities, and National Securities 
Exchanges with Respect to Security-Based Swaps under Regulation MC'' 
(October 14, 2010), http://www.sec.gov/rules/proposed/2010/34-
63107.pdf.

    We also adopted interim final rules regarding the reporting of 
outstanding security-based swaps entered into prior to the date of 
enactment of the Dodd-Frank Act. \10\ These interim final rules require 
certain security-based swap dealers and other parties to preserve and 
report to the SEC or a registered security-based swap data repository 
certain information pertaining to any security-based swap entered into 
prior to the July 21, 2010, passage of the Dodd-Frank Act and whose 
terms had not expired as of that date.
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     \10\ See, Release No. 34-63094, ``Reporting of Security-Based Swap 
Transaction Data'' (October 13, 2010), http://www.sec.gov/rules/
interim-final-temp.shtml.
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    As required by Title VIII of the Act, our staff also is working 
closely with the Federal Reserve Board and CFTC to develop a common 
framework to supervise financial market utilities, such as clearing 
agencies registered with the SEC, that the Financial Stability 
Oversight Council (FSOC) designates as systemically important. For 
example, last December we coordinated with the other agencies to 
propose rules under Title VIII regarding the filing of notices of 
material changes to rules, procedures, or operations by systemically 
important financial market utilities. In addition, in December the FSOC 
issued an advance notice of proposed rulemaking regarding the criteria 
and analytical framework that should be applied in designating 
financial market utilities under the Dodd-Frank Act. \11\
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     \11\ The FSOC's advance notice of proposed rulemaking can be found 
at http://www.treasury.gov/initiatives/Documents/VIII%20-
%20ANPR%20on%20FMU%20Designations%20111910.pdf.
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    Our staff also has been actively coordinating with the other 
agencies on the new authority granted to the SEC and CFTC to develop 
standards for these financial market utilities. Moreover, the SEC and 
CFTC staffs have begun working with staff from the Federal Reserve 
Board to develop a framework for consulting and working together on 
supervision and examination of systemically important financial market 
utilities consistent with Title VIII.

Private Fund Adviser Registration and Reporting
    Under Title IV of the Dodd-Frank Act, large hedge fund advisers and 
private equity fund advisers will be required to register with the 
Commission beginning in July of this year. Under the Act, venture 
capital fund advisers and private fund advisers with less than $150 
million in assets under management in the United States will be exempt 
from the new registration requirements. In addition, family offices 
will not be subject to registration. To implement these provisions, the 
Commission has proposed:

    Amendments to Form ADV, the investment adviser registration 
        form, to facilitate the registration of advisers to hedge funds 
        and other private funds and to gather information about these 
        private funds, including identification of the private funds' 
        auditors, custodians and other ``gatekeepers;'' \12\
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     \12\ See Release No. IA-3110, Rules Implementing Amendments to the 
Investment Advisers Act of 1940 (November 19, 2010), http://
www.sec.gov/rules/proposed/2010/ia-3110.pdf.

    To implement the Act's mandate to exempt from registration 
        advisers to private funds with less than $150 million in assets 
        under management in the United States; \13\
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     \13\ See, id.

    A definition of ``venture capital fund'' that distinguishes 
        these funds from other types of private funds; \14\ and
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     \14\ See, Release No. IA-3111, ``Exemptions for Advisers to 
Venture Capital Funds, Private Fund Advisers With Less Than $150 
Million in Assets Under Management and Foreign Private Advisers'' 
(November 19, 2010), http://www.sec.gov/rules/proposed/2010/ia-
3111.pdf.

    A definition of ``family office'' that focuses on firms 
        that provide investment advice only to family members (as 
        defined by the rule), certain key employees, charities and 
        trusts established by family members and entities wholly owned 
        and controlled by family members. \15\
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     \15\ See, Release No. IA-3098, ``Family Offices'' (October 12, 
2010); http://www.sec.gov/rules/proposed/2010/ia-3098.pdf.

    In addition, following consultation with staff of the FSOC member 
agencies, the Commission and CFTC jointly proposed rules to implement 
the Act's mandate to require advisers to hedge funds and other private 
funds to report information for use by the FSOC in monitoring for 
systemic risk to the U.S. financial system. \16\ The proposal, which 
builds on coordinated work on hedge fund reporting conducted with 
international regulators, would institute a ``tiered'' approach to 
gathering the systemic risk data which would remain confidential. Thus, 
the largest private fund advisers--those with $1 billion or more in 
hedge fund, private equity fund, or ``liquidity fund'' assets--would 
provide more comprehensive and more frequent systemic risk information 
than other private fund advisers.
---------------------------------------------------------------------------
     \16\ See, Release No. IA-3145, ``Reporting by Investment Advisers 
to Private Funds and Certain Commodity Pool Operators and Commodity 
Trading Advisors on Form PF'' (January 26, 2011), http://www.sec.gov/
rules/proposed/2011/ia-3145.pdf.
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Asset-Backed Securities
    Section 943 of the Dodd-Frank Act requires the Commission to adopt 
rules on the use of representations and warranties in the market for 
asset-backed securities (ABS). In January, the Commission adopted final 
rules \17\ that require ABS issuers to disclose the history of 
repurchase requests received and repurchases made relating to their 
outstanding ABS. Issuers will be required to make their initial filing 
on February 14, 2012, disclosing the repurchase history for the 3 years 
ending December 31, 2011. The disclosure requirements will apply to 
issuers of registered and unregistered ABS, including municipal ABS, 
though the rules provide municipal ABS an additional 3-year phase-in 
period.
---------------------------------------------------------------------------
     \17\ See, Release No. 33-9175, ``Disclosure for Asset-Backed 
Securities Required by Section 943 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act'' (January 20, 2011), http://www.sec.gov/
rules/final/2011/33-9175.pdf.
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    Section 945 requires the Commission to issue rules requiring an 
asset-backed issuer in a Securities Act registered transaction to 
perform a review of the assets underlying the ABS and disclose the 
nature of such review. In January, the Commission adopted final rules 
to implement Section 945. \18\ Under the final rules, the type of 
review conducted may vary, but at a minimum must be designed and 
effected to provide reasonable assurance that the prospectus disclosure 
about the assets is accurate in all material respects. The final rule 
provides a phase-in period to allow market participants to adjust their 
practices to comply with the new requirements.
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     \18\ See, Release No. 33-9176, ``Issuer Review of Assets in 
Offerings of Asset-Backed Securities'' (January 20, 2011), http://
www.sec.gov/rules/final/2011/33-9176.pdf.
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    Section 942(a) of the Dodd-Frank Act eliminated the automatic 
suspension of the duty to file reports under Section 15(d) of the 
Exchange Act for ABS issuers and granted the Commission authority to 
issue rules providing for the suspension or termination of this duty to 
file reports. The Commission has proposed rules in connection with this 
provision of the Act which would permit suspension of the reporting 
obligations for ABS issuers when there are no longer asset-backed 
securities of the class sold in a registered transaction held by 
nonaffiliates of the depositor. \19\
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     \19\ See, Release No. 34-63652, ``Suspension of the Duty to File 
Reports for Classes of Asset-Backed Securities Under Section 15(d) of 
the Securities Exchange Act of 1934'' (January 6, 2011), http://
www.sec.gov/rules/proposed/2011/34-63652.pdf.
---------------------------------------------------------------------------
    We are working closely with other regulators to jointly create the 
risk retention rules required by Section 941 of the Act, which will 
address the appropriate amount, form and duration of required risk 
retention for ABS securitizers, and will define qualified residential 
mortgages. We expect that the Commission will consider proposed risk 
retention rules in the near future.

Credit Rating Agencies
    Under the Dodd-Frank Act, the Commission is required to undertake 
approximately a dozen rulemakings related to nationally recognized 
statistical rating organizations (NRSROs). The Act requires the SEC to 
address, among other things, internal controls and procedures, 
conflicts of interest, credit rating methodologies, transparency, 
ratings performance, analyst training, credit rating symbology, and 
disclosures accompanying the publication of credit ratings. The staff 
plans to recommend rule proposals to the Commission on these matters in 
the near future. \20\
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     \20\ In addition, last September the Commission issued an 
amendment to Regulation FD that implements Section 939B of the Act, 
which requires that the SEC amend Regulation FD to remove the specific 
exemption from the rule for disclosures made to NRSROs and credit 
rating agencies for the purpose of determining or monitoring credit 
ratings. See Release No. 33-9146, Removal from Regulation FD of the 
Exemption for Credit Rating Agencies (September 29, 2010), http://
www.sec.gov/rules/final/2010/33-9146.pdf.
---------------------------------------------------------------------------
    In addition, the Act requires every Federal agency to review its 
regulations that require use of credit ratings as an assessment of the 
credit worthiness of a security and undertake rulemakings to remove 
these references and replace them with other standards of credit 
worthiness that the agency determines are appropriate. \21\ On February 
9, 2011, the Commission proposed rule amendments that would remove 
credit ratings as conditions for companies seeking to use short-form 
registration when registering securities for public sale. \22\ Under 
the proposed rules, the new test for eligibility to use Form S-3 or 
Form F-3 short-form registration would be tied to the amount of debt 
and other nonconvertible securities a particular company has sold in 
registered primary offerings within the previous 3 years. Additional 
rule proposals in response to Section 939A will be forthcoming.
---------------------------------------------------------------------------
     \21\ See, Section 939A of the Dodd-Frank Act.
     \22\ See, Release No. 33-9186, ``Removing Security Ratings as 
Condition for Short-Form Registration'' (February 9, 2011), http://
www.sec.gov/rules/proposed/2011/33-9186.pdf.
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    The Act also requires the SEC to conduct three studies relating to 
credit rating agencies. In December, the Commission requested comment 
on the feasibility and desirability of standardizing credit rating 
terminology. \23\ The additional NRSRO-related studies concern (1) 
alternative compensation models for rating structured finance products 
and (2) NRSRO independence. Given the complexity of the issues it 
raises, we likely will seek comment on the compensation study in the 
near future so as to provide commentators an extended period in which 
to communicate their views.
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     \23\ See, Release No. 34-63573, ``Credit Rating Standardization 
Study'' (December 17, 2010), http://www.sec.gov/rules/other/2010/34-
63573.pdf.
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Corporate Governance and Executive Compensation
    Section 951 of the Act requires public companies subject to the 
Federal proxy rules to provide a shareholder advisory ``say-on-pay'' 
vote on executive compensation at least once every 3 years and a 
separate advisory vote at least once every 6 years on whether the say-
on-pay resolution will be presented for shareholder approval every 1, 
2, or 3 years. In addition, Section 951 requires disclosure about--and 
a shareholder advisory vote to approve--compensation related to merger 
or similar transactions, known as ``golden parachute'' arrangements. In 
January, the Commission adopted rules to implement these provisions of 
Section 951. \24\ The rules provide smaller reporting companies a 2-
year delayed compliance period for the say-on-pay and ``frequency'' 
votes. Section 951 also requires that institutional investment managers 
report their votes on these matters at least annually. The Commission 
proposed rules to implement this requirement last October, and we 
expect that these rules will be finalized shortly. \25\
---------------------------------------------------------------------------
     \24\ See, Release No. 33-9178, ``Shareholder Approval of Executive 
Compensation and Golden Parachute Compensation'' (January 25, 2011), 
http://www.sec.gov/rules/final/2011/33-9178.pdf.
     \25\ See, Release No. 34-63123, ``Reporting of Proxy Votes on 
Executive Compensation and Other Matters'' (October 18, 2010), http://
www.sec.gov/rules/proposed/2010/34-63123.pdf.
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    Section 957 of the Act requires the rules of each national 
securities exchange to be amended to prohibit brokers from voting 
uninstructed shares on the election of directors (other than 
uncontested elections of directors of registered investment companies), 
executive compensation matters, or any other significant matter, as 
determined by the Commission by rule. To date, the Commission has 
approved changes to the rules of the New York Stock Exchange, the 
Nasdaq Stock Market and the International Securities Exchange. \26\ We 
anticipate that corresponding changes to the rules of other national 
securities exchanges will be considered by the Commission in the near 
future.
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     \26\ See, Release No. 34-62874 (September 9, 2010), http://
www.sec.gov/rules/sro/nyse/2010/34-62874.pdf; Release No. 34-62992 
(September 24, 2010), http://www.sec.gov/rules/sro/nasdaq/2010/34-
62992.pdf; Release No. 34-63139 (October 20, 2010), http://www.sec.gov/
rules/sro/ise/2010/34-63139.pdf.
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    The Commission also is required by the Act to adopt several 
additional rules related to corporate governance and executive 
compensation. We anticipate that the staff will recommend proposed 
rules for the Commission's consideration in the near future, which will 
mandate new listing standards relating to the independence of 
compensation committees and establish new disclosure requirements and 
conflict of interest standards that boards must observe when retaining 
compensation consultants. \27\ In addition, Section 956 requires the 
Commission, jointly with other financial regulators, to adopt 
incentive-based compensation regulations or guidelines that apply to 
covered financial institutions, including broker-dealers and investment 
advisers, with assets of $1 billion or more. The Commission staff has 
been working closely with the other regulators to prepare a proposal 
implementing this provision.
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     \27\ See, Section 952 of the Dodd-Frank Act. Under the Act, these 
rules are to be adopted by the Commission within 360 days from the date 
of enactment of the Act.
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    The Act also requires the Commission to adopt rules mandating new 
listing standards relating to specified ``clawback'' policies \28\ and 
rules requiring new disclosures about executive compensation and 
company performance, \29\ executive pay ratios, \30\ and employee and 
director hedging. \31\ These provisions of the Act do not contain 
rulemaking deadlines, but are being considered and assessed by the 
staff.
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     \28\ See, Section 954 of the Dodd-Frank Act.
     \29\ See, Section 953(a) of the Dodd-Frank Act.
     \30\ See, Section 953(b) of the Dodd-Frank Act.
     \31\ See, Section 955 of the Dodd-Frank Act.
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Investment Adviser Rulemaking and Investment Adviser Related Studies
    In consultation with the State securities regulators, the 
Commission proposed rules and amendments to Form ADV (the adviser 
registration form) to implement the new threshold for registering 
advisers with the SEC rather than State regulators. Under the Act, the 
threshold increased from $25 million to $100 million in assets under 
management. \32\ As a result of this change, we expect that 
approximately 4,100 investment advisers will switch from SEC to State 
registration. In addition, approximately 750 large private fund 
advisers will newly register with the Commission as a result of the 
Act's private fund adviser provisions.
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     \32\ See, Release No. IA-3110, ``Rules Implementing Amendments to 
the Investment Advisers Act of 1940'' (November 19, 2010), http://
www.sec.gov/rules/proposed/2010/ia-3110.pdf.
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    In addition, the SEC recently released three Dodd-Frank-mandated 
staff studies related to improving the investment adviser and broker-
dealer regulatory frameworks.
    First, the Commission published a staff study on enhancing 
investment adviser examinations. \33\ The study concludes that the 
Commission's investment adviser examination program requires a source 
of funding sufficiently stable to prevent examination resources from 
being outstripped by future growth in the number of registered advisers 
(i.e., that the resources are scalable to any future increase--or 
decrease--in the number of registered investment advisers). The study 
identified three options for Congress to consider:
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     \33\ ``Staff Study on Enhancing Investment Adviser Examinations'' 
(January 19, 2011), http://www.sec.gov/news/studies/2011/
914studyfinal.pdf; See also, ``Commissioner Elisse B. Walter, Statement 
on Study Enhancing Investment Adviser Examinations'' (Required by 
Section 914 of Title IX of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act) (Jan. 2010), http://www.sec.gov/news/speech/
2011/spch011911ebw.pdf. I did not participate in the study or the vote 
authorizing its publication.

    Impose ``user fees'' on SEC-registered investment advisers 
        that could be retained by the Commission to fund the investment 
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        adviser examination program;

    Authorize one or more SROs to examine, subject to SEC 
        supervision, all SEC-registered investment advisers; or

    Authorize FINRA to examine dual registrants for compliance 
        with the Advisers Act.

    Second, we published a staff study on the obligations of investment 
advisers and broker-dealers. \34\ That study made two primary 
recommendations: that the Commission (1) exercise its discretionary 
rulemaking authority under the Act to implement a uniform fiduciary 
standard of conduct for broker-dealers and investment advisers when 
they are providing personalized investment advice about securities to 
retail investors; and (2) consider harmonization of broker-dealer and 
investment adviser regulation when retail investors obtain the same or 
substantially similar services and when such harmonization adds 
meaningfully to investor protection. Under the Act, the uniform 
fiduciary standard to which broker-dealers and investment advisers 
would be subject would be ``no less stringent'' than the standard that 
applies to investment advisers today.
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     \34\ See, ``Study on Investment Advisers and Broker-Dealers'' 
(January 21, 2011), http://www.sec.gov/news/studies/2011/
913studyfinal.pdf; See also, ``Statement by SEC Commissioners Kathleen 
L. Casey and Troy A. Paredes Regarding Study on Investment Advisers and 
Broker-Dealers'' (January 21, 2011), http://www.sec.gov/news/speech/
2011/spch012211klctap.htm.
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    Third, we published a staff study on investor access to information 
about investment professionals. Today, investors must search two 
separate databases for information about broker-dealers and investment 
advisers. The primary recommendation was to centralize access to these 
two databases to enable investors to simultaneously search both 
databases and receive unified search results. \35\
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     \35\ See, ``Study and Recommendations on Improved Investor Access 
to Registration Information About Investment Advisers and Broker-
Dealers'' (January 26, 2011), http://www.sec.gov/news/studies/2011/
919bstudy.pdf.
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Specialized Disclosure Provisions
    Title XV of the Act contains specialized disclosure provisions 
related to conflict minerals, coal or other mine safety, and payments 
by resource extraction issuers to foreign or U.S. Government entities.
    The conflict minerals provision of the Act, Section 1502, requires 
issuers to disclose annually whether any conflict minerals that are 
necessary to the functionality or production of a product originated in 
the Democratic Republic of the Congo or an adjoining country. If so, 
issuers are further required to provide a report describing, among 
other matters, the measures taken to exercise due diligence on the 
source and chain of custody of those minerals. The report must include 
an independent private sector audit that is certified by the person 
filing the report.
    Section 1503 of the Act, which relates to mine safety, requires 
mining companies to disclose information about health and safety 
violations in their periodic reports filed with the Commission. It also 
requires issuers to file Form 8-K reports disclosing receipt of 
specified orders or notices from the Mine Safety and Health 
Administration. The disclosure requirement currently is in effect by 
operation of the Act.
    Section 1504 of the Act requires resource extraction issuers that 
are required to file annual reports with the Commission and that engage 
in commercial development of oil, natural gas, and minerals to disclose 
annually information about any payment made by the issuer or its 
subsidiaries, or an entity under the control of the issuer, to the U.S. 
or a foreign Government for the purpose of the commercial development 
of oil, natural gas, or minerals.
    The Commission published rule proposals relating to these three 
provisions of the Act in December. \36\ The comment periods were 
scheduled to close on January 31, 2011, but the Commission recently 
extended the comment periods for all three rule proposals for 30 days, 
to March 2, 2011. \37\ The nature of the proposed disclosure 
requirements differs from the disclosure traditionally required by the 
Exchange Act, and comments were requested on a variety of significant 
aspects of the proposed rules. After receiving requests for extensions 
of the public comment period for all three rule proposals, we 
determined that providing the public additional time to consider 
thoroughly the matters addressed by the releases and to submit 
comprehensive responses would benefit the Commission in its 
consideration of final rules.
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     \36\ See, Release No. 34-63547, ``Conflict Minerals'' (December 
15, 2010), http://www.sec.gov/rules/proposed/2010/34-63547.pdf; Release 
No. 33-9164, ``Mine Safety Disclosure'' (December 15, 2010), http://
www.sec.gov/rules/proposed/2010/33-9164.pdf, Release No. 34-63549, 
``Disclosure of Payments by Resource Extraction Issuers'' (December 15, 
2010), http://www.sec.gov/rules/proposed/2010/34-63549.pdf.
     \37\ See, Release No. 34-63793, ``Conflict Minerals'' (extension 
of comment period) (January 28, 2011), http://www.sec.gov/rules/
proposed/2011/34-63793.pdf; Release No. 33-9179, ``Mine Safety 
Disclosure'' (extension of comment period) (January 28, 2011), http://
www.sec.gov/rules/proposed/2011/33-9179.pdf; Release No. 34-63795, 
``Disclosure of Payments by Resource Extraction Issuers'' (extension of 
comment period) (January 28, 2011), http://www.sec.gov/rules/proposed/
2011/34-63795.pdf.
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Whistleblower
    Section 922 of the Act requires the SEC, under regulations 
prescribed by the Commission, to pay awards to individuals who 
voluntarily provide the Commission with original information that leads 
to the successful enforcement of (1) an SEC action that results in 
monetary sanctions exceeding $1 million or (2) certain related actions. 
The Dodd-Frank Act substantially expands the agency's authority to 
compensate individuals who provide the SEC with information about 
violations of the Federal securities laws. Prior to the Act, the 
agency's bounty program was limited to insider trading cases, and the 
amount of an award was capped at 10 percent of the penalties collected 
in the action.
    Last November, the Commission proposed rules mapping out the 
procedure for would-be whistleblowers to provide critical information 
to the agency. \38\ The proposed rules convey how eligible 
whistleblowers can qualify for an award through a transparent process 
that provides them an opportunity to assert their claim to an award. We 
also have fully funded the SEC Investor Protection Fund, which will be 
used to pay awards to qualifying whistleblowers. Pending the adoption 
of final rules, Enforcement staff has been reviewing and tracking 
whistleblower complaints submitted to the Commission.
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     \38\ See, Release No. 34-63237, ``Proposed Rules for Implementing 
the Whistleblower Provisions of Section 21F of the Securities Exchange 
Act of 1934'' (November 3, 2010), http://www.sec.gov/rules/proposed/
2010/34-63237.pdf. In addition, last October, the Commission provided 
its first annual report to Congress on the Whistleblower Program as 
provided by the Act.
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    The Act requires the Commission to create a separate office within 
the SEC to administer and enforce whistleblower provisions of the Act. 
Soon, we plan to announce the selection of a Whistleblower Coordinator 
to oversee the whistleblower program.

Exempt Offerings
    Section 413(a) of the Act requires the Commission to exclude the 
value of an individual's primary residence when determining if that 
individual's net worth exceeds the $1 million threshold required for 
``accredited investor'' status. This change was effective upon 
enactment of the Act, but the Commission is also required to revise its 
rules to reflect the new standard. The Commission proposed rule 
amendments in January that would implement this provision, and would 
clarify the treatment of any indebtedness secured by the residence in 
the net worth calculation. \39\
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     \39\ See, Release No. 33-9177, ``Net Worth Standard for Accredited 
Investors'' (January 25, 2011), http://www.sec.gov/rules/proposed/2011/
33-9177.pdf.
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    In addition, under Section 926 of the Act, the Commission is 
required to adopt rules that disqualify securities offerings involving 
certain ``felons and other `bad actors' '' from relying on the safe 
harbor from Securities Act registration provided by Rule 506 of 
Regulation D. We expect that the staff will recommend proposed rules 
for the Commission's consideration soon.

Volcker Rule
    On January 18, 2011, the FSOC approved and released to the public a 
study formalizing its findings and recommendations for implementing 
section 619 of the Dodd-Frank Act, commonly referred to as the Volcker 
Rule. \40\ Commission staff actively participated in the study. We 
recently solicited public comments in advance of our rule proposal 
concerning the SEC's implementation of the Volcker Rule. \41\
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     \40\ The FSOC Volcker Rule study and recommendations can be found 
at http://www.treasury.gov/initiatives/Documents/
Volcker%20sec%20%20619%20study%20final%201%2018%2011%20rg.pdf.
     \41\ See, http://sec.gov/spotlight/dodd-frank/volckerrule.htm.
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Procedural Rules for SRO Filings
    Section 916 of the Act amended Section 19(b) of the Securities 
Exchange Act of 1934, which governs the handling of proposed rule 
changes submitted by SROs. Among other things, Section 916 required the 
Commission to promulgate rules setting forth the procedural 
requirements of proceedings to determine whether a proposed rule change 
should be disapproved. In satisfaction of this requirement, the 
Commission adopted new Rules of Practice to formalize the process it 
will use when conducting proceedings to determine whether an SRO's 
proposed rule change should be disapproved under Section 19(b)(2) of 
the Exchange Act. \42\ The new rules are intended to add transparency 
to the Commission's conduct of those proceedings, to address the 
process the Commission will follow to institute proceedings and provide 
notice of the grounds for disapproval under consideration, and to 
provide interested parties with an opportunity to submit written 
materials to the Commission.
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     \42\ See, Release No. 34-63049, ``Delegation of Authority to the 
Director of the Division of Trading and Markets'' (Effective Date: 
October 12, 2010), http://www.sec.gov/rules/final/2010/34-63049.pdf; 
Release No. 34-63699, ``Delegation of Authority to the Chief 
Accountant'' (Effective Date: January 18, 2011), http://www.sec.gov/
rules/final/2011/34-63699.pdf; and Release No. 34-63723, ``Rules of 
Practice'' (Effective Date: January 24, 2011), http://www.sec.gov/
rules/final/2011/34-63723.pdf.
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Creation of SEC Offices
    Beyond the whistleblower office, the Act requires the Commission to 
create four new offices within the Commission, specifically, the Office 
of Credit Ratings, \43\ Office of the Investor Advocate, \44\ Office of 
Minority and Women Inclusion, \45\ and Office of Municipal Securities. 
\46\ As each of these offices is statutorily required to report 
directly to the Chairman, the creation of these offices is subject to 
approval by the Commission's appropriations subcommittees to reprogram 
funds for this purpose. Until approval is received, the initial 
functions of the offices are being performed on a limited basis by 
other divisions and offices. Below is a summary of our plans for each 
office, as well as the current status as to each.
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     \43\ See, Section 932 of the Dodd-Frank Act.
     \44\ See, Section 915 of the Dodd-Frank Act.
     \45\ See, Section 342 of the Dodd-Frank Act.
     \46\ See, Section 979 of the Dodd-Frank Act.

    Office of Credit Ratings--The office will be responsible 
        for administering the rules of the Commission with respect to 
        the practices of NRSROs in determining ratings; promoting 
        accuracy in credit ratings issued by NRSROs; ensuring that such 
        ratings are not unduly influenced by conflicts of interest; and 
        conducting examinations of each NRSRO at least annually. 
        Currently, the NRSRO-related rulemaking functions remain with 
        staff within the Commission's Division of Trading and Markets, 
        and the examination functions continue to be performed by the 
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        existing Office of Compliance Inspections and Examination.

    Office of the Investor Advocate--The office will assist 
        retail investors in resolving significant problems they may 
        have with the Commission or with SROs; identify areas in which 
        investors would benefit from changes in Commission regulations 
        or SRO rules; identify problems that investors have with 
        financial service providers and investment products; and 
        analyze the potential impact on investors of proposed 
        Commission regulations and SRO rules. The office will include 
        an Ombudsman as required by the Act. Currently, activities 
        regarding investor perspectives in rulemaking continue to be 
        performed by staff in the existing Office of Investor Education 
        and Advocacy.

    Office of Minority and Women Inclusion--The Office of 
        Minority and Women Inclusion will be responsible for all 
        matters of the agency relating to diversity in management, 
        employment, and business activities. The director of this 
        office will advise the Chairman on the impact of the policies 
        and regulations of the SEC on minority-owned and women-owned 
        businesses. The director also will develop and implement 
        standards for: equal employment opportunity and the racial, 
        ethnic, and gender diversity of the workforce and senior 
        management of the SEC; increased participation of minority-
        owned and women-owned businesses in the programs and contracts 
        of the agency, including standards for coordinating technical 
        assistance to such businesses; and assessing the diversity 
        policies and practices of entities regulated by the SEC. 
        Currently, activities regarding diversity in hiring and small 
        business contracting continue to be performed by staff in the 
        existing EEO Office.

    Office of Municipal Securities--The office will administer 
        the rules pertaining to broker-dealers, advisors, investors, 
        and issuers of municipal securities, \47\ as well as coordinate 
        with the Municipal Securities Rulemaking Board on rulemaking 
        and enforcement actions. Currently, those functions continue to 
        be assigned to staff within the Division of Trading and 
        Markets.
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     \47\ Section 975 of the Act also requires the registration of 
municipal advisors with the Commission. This new registration 
requirement became effective on October 1, 2010, making it unlawful for 
any municipal advisor to provide advice to a municipality unless 
registered with the Commission. Last September, the Commission adopted 
an interim final rule establishing a temporary means for municipal 
advisors to satisfy the registration requirement. In December, the 
Commission proposed a permanent rule creating a new process by which 
municipal advisors must register with the SEC.
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Internal Operations
    In the past 2 years the SEC has taken significant and comprehensive 
steps to reform the way it operates. We have brought in new leadership 
and senior management, revitalized and restructured our enforcement, 
examination and corporation finance operations, revamped our handling 
of tips and complaints, taken steps to break down internal silos and 
create a culture of collaboration, improved our risk assessment 
capabilities, recruited more staff with specialized expertise and real 
world experience, and enhanced safeguards for investors' assets, among 
other things. Despite these changes, much work remains, and we continue 
to seek ways to improve our operations.
    To assist the SEC in assessing its operational efficiency, Section 
967 of the Dodd-Frank Act directed the agency to engage the services of 
an independent consultant to study a number of specific areas of SEC 
internal operations and of the SEC's relationship with SROs. On October 
15, 2010, the Commission engaged Boston Consulting Group (BCG) to 
perform the organizational study. During the past four months, our 
staff has been fully engaged with BCG, participating in interviews, 
providing documentation, and responding to questions. BCG's report is 
due March 14, and we expect it will include recommendations that will 
identify additional efficiencies for SEC operations.

Funding for Implementation of the Dodd-Frank Act
    The provisions of the Dodd-Frank Act represent a major expansion of 
the SEC's responsibilities and will require significant additional 
resources for full implementation. To date, the SEC has proceeded with 
the first stages of implementation of the Dodd-Frank Act without 
additional funding. As described above, implementation up to this point 
has largely involved performing studies, analysis, and the writing of 
rules. These tasks have taken staff time from other responsibilities, 
and have been done almost entirely with existing staff and without 
additional expenses in areas such as information technology.
    The budget justification I recently submitted \48\--provided in 
connection with the President's fiscal year 2012 (FY2012) budget 
request--estimates that, over time, full implementation of the Dodd-
Frank Act will require a total of approximately 770 new staff, of which 
many will need to be expert in derivatives, hedge funds, data 
analytics, credit ratings, or other new or expanded responsibility 
areas. The SEC also will need to invest in technology, to facilitate 
the registration of additional entities and capture and analyze data on 
these new markets.
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     \48\ In accordance with past practice, the budget justification of 
the agency was submitted by the Chairman of the Commission and was not 
voted on by the full Commission.
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    Sixty percent, or 468, of the new staff positions requested are 
necessary initially to implement Dodd-Frank responsibilities. This 
number includes positions that I anticipate are needed to fully staff 
the five new offices at adequate levels. The agency also will need to 
invest in technology to facilitate the registration of additional 
entities and capture and analyze data on the new markets. It is 
estimated the costs of these new positions and technology investments 
will be approximately $123 million. The remaining positions requested 
in the budget will be used to strengthen and support core SEC 
operations and to continue reforming its operations and fostering 
stronger protections for investors.
    In addition to the new positions requested in FY2012, I also 
anticipate that an additional 296 positions will be required in FY2013 
for full implementation of the Dodd-Frank Act. It is important to note 
that the SEC's FY2012 funding will be fully offset by matching 
collections of fees on securities transactions. Currently, the 
transaction fees collected by the SEC are approximately 2 cents per 
$1,000 of transactions. Under the Dodd-Frank Act, beginning with 
FY2012, the SEC is required to adjust fee rates so that the amount 
collected will match the total amount appropriated for the agency by 
Congress. Under this mechanism, SEC funding will be deficit-neutral, as 
any increase or decrease in the SEC's budget would result in a 
corresponding rise or fall in offsetting fee collections.

Conclusion
    Though the SEC's efforts to implement the Dodd-Frank Act have been 
extensive, our work is far from over. As we proceed with 
implementation, we look forward to continuing to work closely with 
Congress, our fellow regulators and members of the financial and 
investing public. Thank you for inviting me here today to share with 
you our progress on and plans for implementation. I look forward to 
answering your questions.
                                 ______
                                 
                   PREPARED STATEMENT OF GARY GENSLER
             Chairman, Commodity Futures Trading Commission
                           February 17, 2011

    Good morning Chairman Johnson, Ranking Member Shelby, and Members 
of the Committee. I thank you for inviting me to today's hearing on 
implementing the Dodd-Frank Wall Street Reform and Consumer Protection 
Act. I am pleased to testify on behalf of the Commodity Futures Trading 
Commission (CFTC). I also thank my fellow Commissioners and CFTC staff 
for their hard work and commitment on implementing the legislation.
    I am honored to appear at today's hearing alongside fellow 
regulators with whom we are working so closely to implement the Dodd-
Frank Act. We have consulted and coordinated closely with the 
Securities and Exchange Commission (SEC), Federal Reserve Board, 
Treasury Department, Federal Deposit Insurance Corporation (FDIC), 
Office of the Comptroller of the Currency and other regulators on 
rulemakings to oversee the swaps markets. Throughout this process, 
interagency cooperation has been extraordinary and has improved our 
proposed rulemakings.
    Before I move into the testimony, I want to congratulate Chairman 
Johnson on becoming Chairman of the Committee. I look forward to 
working with you and all Members of the Committee.

The Dodd-Frank Act
    On July 21, 2010, President Obama signed the Dodd-Frank Act. The 
Act amended the Commodity Exchange Act (CEA) to establish a 
comprehensive new regulatory framework for swaps and security-based 
swaps. Title VII of the Act, which relates to swaps, was enacted to 
reduce risk, increase transparency and promote market integrity within 
the financial system by, among other things:

  1.  Providing for the registration and comprehensive regulation of 
        swap dealers and major swap participants;

  2.  Imposing clearing and trade execution requirements on 
        standardized derivatives products;

  3.  Creating robust record keeping and real-time reporting regimes; 
        and

  4.  Enhancing the Commission's rulemaking and enforcement authorities 
        with respect to, among others, all registered entities and 
        intermediaries subject to the Commission's oversight.

    The reforms mandated by Congress will reduce systemic risk to our 
financial system and bring sunshine and competition to the swaps 
markets. Markets work best when they are transparent, open and 
competitive. The American public has benefited from these attributes in 
the futures and securities markets since the great regulatory reforms 
of the 1930s. The reforms of Title VII will bring similar features to 
the swaps markets. Lowering risk and improving transparency will make 
the swaps markets safer and improve pricing for end-users.
    Title VIII of the Dodd-Frank Act gives the Financial Stability 
Oversight Council (FSOC) and the Federal Reserve Board important roles 
in clearinghouse oversight by authorizing the Council to designate 
certain clearinghouses as systemically important and by permitting the 
Federal Reserve to recommend heightened prudential standards in certain 
circumstances. It also gives the CFTC heightened authorities with 
respect to those clearinghouses that are deemed systemically important 
by the FSOC.

Implementation
    The Dodd-Frank Act is very detailed, addressing all of the key 
policy issues regarding regulation of the swaps marketplace. To 
implement these regulations, the Act requires the CFTC and SEC, working 
with our fellow regulators, to write rules generally within 360 days. 
At the CFTC, we initially organized our effort around 30 teams who have 
been actively at work. We have recently added another team. We had our 
first meeting with the 30 team leads the day before the President 
signed the law.
    The CFTC is working deliberatively and efficiently to promulgate 
rules required by Congress. The talented and dedicated staff of the 
CFTC has stepped up to the challenge and has recommended thoughtful 
rules--with a great deal of input from each of the five Commissioners--
that would implement the Act. Thus far, the CFTC has approved 39 
notices of proposed rulemaking, two interim final rules, four advanced 
notices of proposed rulemaking and one final rule.
    The CFTC's process to implement the rulemakings required by the Act 
includes enhancements over the agency's prior practices in five 
important areas. Our goal was to provide the public with additional 
opportunities to inform the Commission on rulemakings, even before 
official public comment periods. I will expand on each of these five 
points in my testimony.

  1.  We began soliciting views from the public immediately after the 
        Act was signed and prior to approving proposed rulemakings. 
        This allowed the agency to receive input before the pens hit 
        the paper.

  2.  We hosted a series of public, staff-led roundtables to hear ideas 
        from the public prior to considering proposed rulemakings.

  3.  We engaged in significant outreach with other regulators--both 
        foreign and domestic--to seek input on each rulemaking.

  4.  Information on both staff's and Commissioners' meetings with 
        members of the public to hear their views on rulemakings has 
        been made publicly available at cftc.gov.

  5.  The Commission held public meetings to consider proposed 
        rulemakings. The meetings were webcast so that the Commission's 
        deliberations were available to the public. Archive webcasts 
        are available on our Web site as well.

    Two principles are guiding us throughout the rule-writing process. 
First is the statute itself. We intend to comply fully with the 
statute's provisions and Congressional intent to lower risk and bring 
transparency to these markets.
    Second, we are consulting heavily with both other regulators and 
the broader public. We are working very closely with the SEC, the 
Federal Reserve, the FDIC, the OCC and other prudential regulators, 
which includes sharing many of our memos, term sheets and draft work 
product. We also are working closely with Treasury and the new Office 
of Financial Research. As of Tuesday, CFTC staff has had 422 meetings 
with other regulators on implementation of the Act.
    In addition to working with our American counterparts, we have 
reached out to and are actively consulting and coordinating with 
international regulators to harmonize our approach to swaps oversight. 
As we are with domestic regulators, we are sharing many of our memos, 
term sheets and draft work product with international regulators as 
well. Our discussions have focused on clearing and trading 
requirements, clearinghouses more generally and swaps data reporting 
issues, among many other topics.
    Specifically, we have been consulting directly and sharing 
documentation with the European Commission, the European Central Bank, 
the UK Financial Services Authority and the new European Securities and 
Markets Authority. We also have shared documents with the Japanese 
Financial Services Authority and consulted with Members of the European 
Parliament and regulators in Canada, France, Germany, and Switzerland.
    Through this consultation, we are working to bring consistency to 
regulation of the swaps markets. In September of last year, the 
European Commission released its swaps proposal. As we had in the Dodd-
Frank Act, the E.C.'s proposal covers the entire derivatives 
marketplace--both bilateral and cleared--and the entire product suite, 
including interest rate swaps, currency swaps, commodity swaps, equity 
swaps and credit default swaps. The proposal includes requirements for 
central clearing of swaps, robust oversight of central counterparties 
and reporting of all swaps to a trade repository. The E.C. also is 
considering revisions to its existing Markets in Financial Instruments 
Directive (MiFID), which includes a trade execution requirement, the 
creation of a report with aggregate data on the markets similar to the 
CFTC's Commitments of Traders reports and accountability levels or 
position limits on various commodity markets.
    We also are soliciting broad public input into the rules. On July 
21st, we listed the 30 rule-writing teams and set up mailboxes for the 
public to comment directly. We determined it would be best to engage 
the public as broadly as possible even before publishing proposed 
rules. As of Tuesday, we have received 2,856 submissions from the 
public through the e-mail inboxes as well as 1,258 official comments in 
response to notices of proposed rulemaking. The CFTC and the SEC in 
December proposed a joint rule to further define the terms ``swap 
dealer'' and ``major swap participant.'' The comment period on this 
proposal is open until February 22. To the extent that members of the 
public have comments on other rules that apply to swap dealers and 
major swap participants and have not yet submitted them, they may 
include those comments within their submissions on this rule. The CFTC 
will use its discretion to include those in the comment files and 
consider them for the related rules.
    We also have organized nine roundtables to hear specifically on 
particular subjects. We have coordinated the majority of our 
roundtables with the SEC and have joined with other regulators on 
several of them as well. These meetings have allowed us to hear 
directly from investors, market participants, end-users, academics, 
exchanges and clearinghouses on key topics including governance and 
conflicts of interest, real time reporting, swap data record keeping 
and swap execution facilities, among others. The roundtables have been 
open to the public, and we have established call-in numbers for each of 
them so that anyone can listen in.
    Additionally, many individuals have asked for meetings with either 
our staff or Commissioners to discuss swaps regulation. As of Tuesday, 
we have had more than 540 such meetings. We are now posting on our Web 
site a list of all of the meetings CFTC staff and I have with outside 
organizations, as well as the participants, issues discussed and all 
materials given to us.
    We began publishing proposed rulemakings at our first public 
meeting to implement the Act on October 1, 2010. We have sequenced our 
proposed rulemakings over 11 public meetings thus far. Our next meeting 
is scheduled for February 24.
    Public meetings have allowed us to discuss proposed rules in the 
open. For the vast majority of proposed rulemakings, we have solicited 
public comments for a period of 60 days. On a few occasions, the public 
comment period lasted 30 days. As part of seeking public comment on 
each of the individual rules, we also have asked a question within many 
of the proposed rulemakings relating to the timing for the 
implementation of various requirements under these rules. In looking 
across the entire set of rules and taking into consideration the costs 
of cumulative regulations, public comments will help inform the 
Commission as to what requirements can be met sooner and which ones 
will take a bit more time.
    We have thus far proposed rulemakings in 26 of the 30 areas 
established last July. We still must propose rules on capital and 
margin requirements, product definitions (jointly with the SEC) and the 
Volcker Rule. We also are considering comments received in response to 
advanced notices of proposed rulemaking with regard to disruptive 
trading practices and segregation of funds for cleared swaps.
    A number of months ago we also set up a 31st rulemaking team tasked 
with developing conforming rules to update the CFTC's existing 
regulations to take into account the provisions of the Act.

End-User Margin
    One of the rules on which the CFTC is working closely with the SEC, 
the Federal Reserve and other prudential regulators will address margin 
requirements for swap dealers and major swap participants.
    Congress recognized the different levels of risk posed by 
transactions between financial entities and those that involve 
nonfinancial entities, as reflected in the nonfinancial end-user 
exception to clearing. Transactions involving nonfinancial entities do 
not present the same risk to the financial system as those solely 
between financial entities. The risk of a crisis spreading throughout 
the financial system is greater the more interconnected financial 
companies are to each other. Interconnectedness among financial 
entities allows one entity's failure to cause uncertainty and possible 
runs on the funding of other financial entities, which can spread risk 
and economic harm throughout the economy. Consistent with this, 
proposed rules on margin requirements should focus only on transactions 
between financial entities rather than those transactions that involve 
nonfinancial end-users.

Existing Derivatives Contracts
    Congress provided for the legal certainty for swaps entered into 
prior to the date of enactment of the Dodd-Frank Act. Questions also 
have been raised regarding the clearing mandate and margin 
requirements. With respect to the clearing requirement and margin, I 
believe that the new rules should apply on a prospective basis only as 
to transactions entered into after the rules take effect.

Financial Stability Oversight Council
    The Dodd-Frank Act established the FSOC to ensure protections for 
the American public. I am honored to serve on the Council. The 
financial system should allow people who want to hedge their risk to do 
so without concentrating risk. One of the challenges for this Council 
and for the American public is that like so many other industries, the 
financial industry has gotten very concentrated. Adding to our 
challenge is the perverse outcome of the financial crisis, which may be 
that some in the markets have come to believe that large financial 
firms will--if in trouble--have the backing of the taxpayers. As it is 
unlikely that we could ever ensure that no financial institution will 
fail--because surely, some will in the future--we must do our utmost to 
ensure that when those challenges arise, the taxpayers are not forced 
to stand behind those institutions and that these institutions are free 
to fail.
    There are very important decisions that the Council will make, such 
as determinations about systemically important nonbank financial 
companies and systemically important financial market utilities and 
clearinghouses, resolving disputes between agencies and completing 
important studies as dictated by the Dodd-Frank Act. Though these 
specific decisions are significant, it is essential that we make sure 
that the American public doesn't bare the risk of the financial system 
and that the system works for the American public, investors, small 
businesses, retirees, and homeowners.
    The Council's eight current voting members have coordinated 
closely. Treasury's leadership has been invaluable. To support the 
FSOC, the CFTC is providing both data and expertise relating to a 
variety of systemic risks, how those risks can spread through the 
financial system and the economy and potential ways to mitigate those 
risks. We also have had the opportunity to coordinate with Treasury and 
the Council on each of the studies and proposed rules issued by the 
FSOC.

Conclusion
    Before I close, I will briefly address the resource needs of the 
CFTC. The futures marketplace that the CFTC currently oversees is 
approximately $40 trillion in notional amount. The swaps market that 
the Act tasks the CFTC with regulating has a notional amount roughly 
seven times the size of that of the futures market and is significantly 
more complex. Based upon figures compiled by the Office of the 
Comptroller of the Currency, the largest 25 bank holding companies 
currently have $277 trillion notional amount of swaps.
    The CFTC's current funding is far less than what is required to 
properly fulfill our significantly expanded mission. Though we have an 
excellent, hardworking and talented staff, we just this past year got 
back to the staff levels that we had in the 1990s. To take on the 
challenges of our expanded mission, we will need significantly more 
staff resources and--very importantly--significantly more resources for 
technology. Technology is critical so that we can be as efficient as an 
agency as possible in overseeing these vast markets.
    The CFTC currently is operating under a continuing resolution that 
provides funding at an annualized level of $169 million. The President 
requested $261 million for the CFTC in his proposed fiscal year (FY) 
2011 budget. This included $216 million and 745 full-time equivalent 
employees for prereform authorities and $45 million to provide half of 
the staff estimated at that time needed to implement the Act. Under the 
continuing resolution, the Commission has operated in FY2011 at its 
FY2010 level. In the budget released on Monday, the President requested 
$308 million for the CFTC for FY2012 that would provide for 983 full-
time equivalent employees.
    Given the resource needs of the CFTC, we are working very closely 
with self regulatory organizations, including the National Futures 
Association, to determine what duties and roles they can take on in the 
swaps markets. Nevertheless, the CFTC has the ultimate statutory 
authority and responsibility for overseeing these markets. Therefore, 
it is essential that the CFTC have additional resources to reduce risk 
and promote transparency in the swaps markets.
    Thank you, and I'd be happy to take questions.
                                 ______
                                 
                    PREPARED STATEMENT OF JOHN WALSH
 Acting Comptroller of the Currency, Office of the Comptroller of the 
                                Currency
                           February 17, 2011

Statement Required by 12 U.S.C. 250: The views expressed herein are 
those of the Office of the Comptroller of the Currency and do not 
necessarily represent the views of the President.

    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, I appreciate the opportunity to describe the initiatives the 
Office of the Comptroller of the Currency (OCC) has undertaken to 
implement the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act). My testimony reports on the OCC's work to date to 
implement Dodd-Frank in the following key areas:

    The OCC's progress integrating the staff and functions of 
        the Office of Thrift Supervision (OTS) into the OCC, and 
        identifying employees for transfer to the Consumer Financial 
        Protection Bureau (CFPB);

    Highlights of our work to date in implementing important 
        policy and rulemaking initiatives required by Dodd-Frank, 
        including the OCC's participation on the Financial Stability 
        Oversight Council (FSOC or Council), and the challenges of 
        ensuring that these initiatives are appropriately coordinated 
        with other participating agencies and with international 
        efforts to reform capital and liquidity standards for financial 
        institutions; and the Council's achievements thus far; and

    Provides an update on a significant issue that was just 
        emerging at the time of the Committee's last hearing on Dodd-
        Frank implementation by reporting on the steps that the OCC, 
        working with our fellow regulators, has taken to identify and 
        address irregularities in institutions' foreclosure processes 
        and our efforts to foster development and implementation of 
        comprehensive and nationally applicable mortgage servicing 
        standards.

I. Implementation of Agency Restructuring

A. OTS/OCC Integration
    As the Committee is aware, the Dodd-Frank Act transfers from OTS to 
the OCC supervisory responsibilities for Federal savings associations, 
as well as rulemaking authority relating to all savings associations. 
Under the statute, all OTS employees will be transferred to either the 
OCC or the Federal Deposit Insurance Corporation (FDIC) no later than 
90 days after the ``transfer date,'' which is 1 year after enactment 
unless extended for an additional six months by the Secretary of the 
Treasury. The allocation is to be based generally on the proportion of 
Federal versus State savings associations regulated by the OTS.
    When I testified before this Committee in September of last year, 
\1\ I described the steps the OCC had begun to take to prepare for our 
expanded supervisory responsibilities and for the integration of OTS 
staff that is so essential to the success of that effort. Since then, 
we have continued to work closely with the OTS, the Board of Governors 
of the Federal Reserve System (FRB), and the FDIC to prepare for the 
smooth and effective transfer of OTS staff, authority and 
responsibilities, and property and other assets. Much remains to be 
done, but I am pleased to report that the agencies are on track to 
complete the transfer of functions and staff by the target date of July 
21, 2011. The following summarizes key elements of this progress. A 
detailed description of all our activities is set forth in the 
interagency Joint Implementation Plan (Plan) submitted to the Committee 
on Banking, Housing, and Urban Affairs of the Senate, the Committee on 
Financial Services of the House of Representatives, and the Inspectors 
General of the Department of the Treasury, the FDIC, and the FRB on 
January 25, 2011. \2\
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     \1\ Testimony of John Walsh, Acting Comptroller of the Currency, 
Before the Committee on Banking, Housing, and Urban Affairs of the 
United States Senate, September 30, 2010.
     \2\ The Plan was submitted pursuant to section 327 of the Dodd-
Frank Act. See, ``Interagency Joint Implementation Plan'' at 
www.occ.gov/publications/publications-by-type/other-publications/pub-
other-jointimplementation-plan.pdf. The Plan provides additional detail 
about the agencies' progress in implementing the employee protections 
that Dodd-Frank provides to transferring OTS employees, including 
retirement benefits; health, dental, vision, and long-term care; and 
life insurance. The Plan also discusses the integration of OTS 
employees into the OCC's pay structure.
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    Because Dodd-Frank transfers the vast majority of OTS 
responsibilities to the OCC on the transfer date, most of the OTS's 
approximately 1,000 employees will transfer to the OCC. \3\ The OCC 
recognizes that retaining the unique talent and experience of OTS staff 
is essential for the effective supervision of Federal savings 
associations going forward. Our work in preparing for the full 
integration of the OTS staff is focused on: ensuring that the 
protections afforded by the legislation are fully and equitably 
implemented; building a sustainable organizational structure that will 
successfully accomplish supervision and regulation of both national 
banks and Federal savings associations; fostering an environment that 
will maximize opportunities for staff; and promoting communication with 
all employees throughout the transition. Pursuant to section 314(b) of 
Dodd-Frank, on November 3, 2010, I designated Timothy T. Ward to be 
Deputy Comptroller for Thrift Supervision. Mr. Ward, who joined the OCC 
after 26 years at the OTS and its predecessor agency, reports to the 
Senior Deputy Comptroller for the OCC's Midsize/Community Bank 
Supervision (M/CBS) and is leading the planning process for integration 
of the OTS's examination and supervision functions and staff. He serves 
as a key senior management group member, and will coordinate the 
nationwide network of Senior Thrift Advisors and function as the key 
advisor to other Deputy Comptrollers on large and problem thrifts.
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     \3\ The final number of staff who transfer to the OCC will include 
those personnel who do not transfer to the FDIC to support functions 
transferred to that agency, those personnel who do not transfer to the 
CFPB, and those personnel who do not choose to leave the agency for 
other reasons prior to the transfer date.
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            Realignment of Staffing To Prepare for Expanded Supervisory 
                    Responsibilities
    The OCC will assign OTS employees, to the extent practicable, to 
OCC positions performing the same functions and duties that the OTS 
employees performed prior to the transfer. To assist in this effort, 
the OCC has reached out to OTS employees in a number of ways at the 
agency and business unit level. For example, because most OTS employees 
will transfer into the OCC's M/CBS organization, the Senior Deputy 
Comptroller for M/CBS has held four OTS-wide conference calls 
explaining its organizational structure and the decisions that are 
being made to accommodate the transfer of OTS staff. Similar 
conversations are occurring for other functional areas.
    Approximately 670 Federal savings associations will be transferred 
to the OCC on the transfer date. OCC's Community Bank Supervision staff 
will supervise the vast majority of them, while the Midsize and Large 
Bank Supervision programs will supervise Federal savings associations 
with profiles that align with those units. The Special Supervision 
portfolio will also expand to include certain troubled Federal savings 
associations. The OCC is working with the OTS to execute an orderly 
transfer of authority and responsibilities that will ensure the 
effective supervision of both national banks and Federal savings 
associations.
    To provide thrift supervision leadership continuity and facilitate 
the integration of the OTS into the OCC, five senior OTS managers 
responsible for thrift supervision already have accepted positions in 
OCC's M/CBS organization. Although they will not officially assume 
these positions until the transfer date, they are actively 
participating in the OCC's planning activities. Their extensive 
knowledge of the OTS organization, the staff, and Federal savings 
associations is an invaluable resource as we prepare for the 
transition. The OCC is in the process of filling the remaining 
positions created by the OCC's structural changes through a competitive 
posting process open to both qualified OTS and OCC staff.
            Training and Certification of Employees
    Training will be critical to the combined success of the OCC and 
the OTS. Ultimately, the OCC's National Bank Examiner commission will 
expand to ensure that each commissioned examiner has the skill set and 
credentials to lead examinations of both national banks and Federal 
savings associations. Initially, the agencies are reviewing each of 
their training and certification programs to identify where OCC and OTS 
training programs overlap and where gaps need to be addressed.
            Review and Continuation of OTS Regulations
    Dodd-Frank requires the OCC, the FDIC, and the FRB to identify 
those continued OTS regulations that each agency will enforce. The OCC 
and the FDIC must consult with each other in identifying these 
regulations, and the OCC, the FRB, and the FDIC must publish a list of 
these identified regulations in the Federal Register not later than the 
transfer date. The agencies have begun the task of identifying these 
OTS regulations and will publish the lists required by the legislation 
on or before the transfer date.
    Working together with OTS staff, the OCC is considering how to 
integrate the OTS's regulations with the OCC's regulations. This 
process is expected to include certain changes that would be effective 
as of the July 21, 2011, transfer date and to continue in phases after 
that date. Any substantive changes proposed to either the OCC's or the 
OTS's regulations affecting savings associations will be published in 
the Federal Register.
            Thrift Industry Outreach
    The OCC recognizes the importance of communicating regularly with 
the industry throughout this process to address concerns, clarify 
expectations, and promote effective supervision of Federal savings 
associations. The communication process began with a personal letter 
that I sent to the chief executive officer of each Federal savings 
association in September. Two additional letters have been sent since 
that time to share further information about the integration process. 
Senior OCC leaders have also accepted numerous invitations to 
participate in industry-sponsored events that provide an opportunity to 
speak directly with management representatives of Federal savings 
associations. Additionally, the OCC has developed a day-long program 
for thrift executives to provide information and perspective on the 
agency's approach to supervision and regulation. The OCC District 
Deputy Comptrollers and OTS Regional Directors are cohosting 17 of 
these sessions in locations around the country during the first quarter 
of 2011. More than 1,000 thrift industry representatives have 
registered to attend one of these sessions. The feedback received from 
attendees at the first seven sessions has been very positive.

B. Transfers of Specified Functions to the CFPB
    OCC has continued to provide extensive assistance to Treasury and 
the CFPB to support the stand up of the CFPB. We have provided 
extensive information about our human resources policies and practices, 
compensation structure and OCC-unique benefits, and copies of all of 
our position descriptions. We have worked with Treasury and CFPB staff 
and our payroll provider, the National Finance Center, to enable the 
CFPB to replicate the OCC's NB pay plan and compensation system, 
accelerating its ability to hire employees under their own authorities 
and provide the compensation and benefits allowed for under the Dodd-
Frank Act.
    In the late fall, OCC established an Expression of Interest process 
for employees who may be interested in pursuing work with the CFPB, 
either on a temporary basis (detail) or permanently. Having a cadre of 
interested employees has allowed us to respond to requests for 
assistance with targeted OCC resources with unique skill sets.
    The OCC has met with the CFPB implementation team several times 
over the past few months to discuss a mutually agreeable transfer 
process for OCC employees who are interested in going to the CFPB and 
have the requisite skills and experience to perform the work. We are 
committed to following through on the development and execution of this 
process.
    In addition to human resource related matters, the OCC has 
responded to numerous data requests, held informational meetings, and 
provided technical support to assist the CFPB as it develops processes 
to fulfill its consumer protection function. Informational meetings 
have been held to discuss OCC processes relating to the Equal Credit 
Opportunity Act (ECOA), the CARD Act, and general bank supervision as 
well as enforcement authorities and practices. Consumer compliance 
policies and training materials have been provided. Extensive meetings 
have been held with the OCC's Customer Assistance Group and a team 
leader from this group was detailed to help the CFPB develop its 
consumer complaints function. Most recently in response to a request 
for information on the CARD Act, the OCC agreed to make a presentation 
at the CFPB's seminar on the effects of the CARD Act.

II. Implementation of Dodd-Frank Policy and Rulemaking Initiatives
    In my September 2010 testimony, I described the OCC's early 
postenactment efforts to support the organization and operation of the 
FSOC and our participation in the important interagency rulemaking 
projects that were just then starting up. The OCC now is actively 
working on approximately 85 Dodd-Frank projects ranging in scope from 
our extensive efforts to prepare to integrate the OTS's staff and 
supervisory responsibilities to consultation on a variety of 
rulemakings being undertaken by other agencies. While significant 
progress has occurred on a number of these policy and rulemaking 
initiatives, the OCC continues to face substantial challenges in the 
implementation of some of Dodd-Frank's provisions. This portion of my 
testimony provides highlights the progress we have made thus far in 
implementing key Dodd-Frank initiatives and describes the most 
significant challenges to implementation that we have identified.

A. Rulemaking and Policy Initiatives: Milestones Achieved
            Financial Stability Oversight Council
    The OCC actively participates in the FSOC. The FSOC's mission is to 
identify risks to financial stability that could arise from the 
activities, material financial distress, or failure of large, 
interconnected financial companies; to recommend standards for 
implementation by the agencies in specified areas; to promote market 
discipline; and to respond to emerging threats to the stability of the 
U.S. financial system.
    The FSOC already has undertaken a number of significant actions. At 
its first meeting in October 2010, the FSOC approved publication of an 
advance notice of proposed rulemaking (ANPR) seeking public comments 
regarding the criteria and analytical framework for designation of 
nonbank financial firms for enhanced supervision by the FRB pursuant to 
section 113 of the Dodd-Frank Act. Based on a review of comments 
received and consideration by the members of the FSOC, at its January 
2011 meeting the FSOC approved a notice of proposed rulemaking relating 
to section 113. The proposed rule lays out the framework that the FSOC 
proposes to use to determine whether a nonbank financial company could 
pose a threat to the financial stability of the United States. It also 
implements the process that the FSOC would use when considering whether 
to subject a firm to supervision by the FRB and heightened prudential 
standards.
    The FSOC has also taken steps to implement the provisions of the 
Dodd-Frank Act known as the ``Volcker Rule,'' which prohibit banking 
entities from engaging in proprietary trading and from maintaining 
certain relationships with hedge funds and private equity funds. The 
Volcker Rule requires the FSOC to study and make recommendations on 
implementing its restrictions. Under section 619, the OCC and other 
agencies must consider the recommendations of the FSOC study in 
developing and adopting regulations to implement the Volcker Rule. To 
assist the FSOC in conducting the study and formulating its 
recommendations, in October 2010 the FSOC issued a request for 
information through public comment. Based on a review of comments 
received and consideration by the members of the FSOC, the FSOC issued 
the Volcker Rule study and recommendations in January 2011. Informed by 
the study, the rulemaking agencies have begun the process of drafting 
regulations to implement the Volcker Rule. The statute sets a deadline 
of October 2011 for completion of that work.
            Establishment of the Office of Minority and Women Inclusion
    Pursuant to section 342 of the Dodd-Frank Act, the OCC has 
established an Office of Minority and Women Inclusion. On January 19, 
2011, I named Joyce Cofield Director of this office. Ms. Cofield, who 
has 28 years of experience in human capital management, workforce 
diversity and business operations, will report to the Comptroller and 
provide executive direction, set policies, and oversee all matters of 
the OCC relating to diversity in management, employment, and business 
activities. The establishment of this office and the appointment of Ms. 
Cofield will ensure that the OCC will continue to be atop the list of 
``Best Places To Work'' in the Federal Government for issues relating 
to the broadest definition of diversity.
            Incentive Compensation Rulemaking
    The OCC, FRB, FDIC, OTS, National Credit Union Administration 
(NCUA), Securities Exchange Commission (SEC), and Federal Housing 
Finance Agency (FHFA) (the Agencies) are in the process of issuing a 
proposal to implement the incentive-based compensation provisions in 
Section 956 of the Dodd-Frank Act. The proposed rule will require the 
reporting of certain incentive-based compensation arrangements by a 
covered financial institution \4\ and prohibit incentive-based 
compensation arrangements at a covered financial institution that 
provide excessive compensation or that could expose the institution to 
inappropriate risks that could lead to a material financial loss.
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     \4\ Section 956(e)(2) defines a ``covered financial institution'' 
to mean a depository institution or depository institution holding 
company; a registered broker-dealer; a credit union; an investment 
adviser; Fannie Mae; Freddie Mac; and ``any other financial 
institution'' that the regulators jointly determine, by rule, should be 
covered by section 956. Institutions with less than $1 billion in 
assets are not subject to section 956.
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    The material financial loss provisions of the proposed rule 
establish general requirements applicable to all covered institutions 
and additional requirements applicable to larger covered financial 
institutions. The generally applicable requirements provide that an 
incentive-based compensation arrangement, or any feature of any such 
arrangement, established or maintained by any covered financial 
institution for one or more covered persons must balance risk and 
financial rewards and be compatible with effective controls and risk 
management and supported by strong corporate governance.
    The proposed rule includes two additional requirements for ``larger 
financial institutions,'' which for the Federal banking agencies, NCUA, 
and the SEC means those covered financial institutions with total 
consolidated assets of $50 billion or more. First, a larger financial 
institution must defer 50 percent of incentive-based compensation for 
its executive officers for a period of at least 3 years. Second, the 
board of directors (or committee thereof) of a larger financial 
institution also must identify, and approve the incentive-based 
compensation arrangements for, individuals (other than executive 
officers) who have the ability to expose the institution to possible 
losses that are substantial in relation to the institution's size, 
capital, or overall risk tolerance. These individuals may include, for 
example, traders with large position limits relative to the 
institution's overall risk tolerance and other individuals that have 
the authority to place at risk a substantial part of the capital of the 
covered financial institution.
            Credit Risk Retention
    Section 941 of the Dodd-Frank Act requires the OCC, FRB, FDIC, and 
SEC to issue joint regulations requiring securitizers of asset-backed 
securities to retain an economic interest in a portion of the credit 
risk for assets that the securitizer packages into the securitization 
for sale to others. Where these regulations address the securitization 
of residential mortgage assets, the Department of Housing and Urban 
Development and the FHFA are also part of the joint rulemaking group. 
The Treasury Secretary, as Chairperson of FSOC, is directed to 
coordinate the joint rulemaking.
    In order to correct adverse market incentive structures revealed by 
the crisis, section 941 requires the securitizer to retain a portion of 
the credit risk on assets it securitizes, unless those assets are 
originated in accordance with conservative underwriting standards 
established in regulation. This new regulatory regime will give 
securitizers direct financial disincentives against packaging loans 
that are underwritten poorly.
    As the FRB has noted in its recent study of the securitization 
markets (also required by section 941), the securitization markets 
provide an important mechanism for making credit available for 
businesses, households, and governments. \5\ In drafting the proposed 
rules mandated by section 941, the agencies are taking a number of 
priorities into account. These include incorporating appropriate 
incentives that encourage high-quality underwriting of loans included 
in securitizations; designing robust forms of risk retention that 
reflect the diversity of securitization structures used in the 
marketplace; and recognizing the diversity of asset classes commonly 
securitized. The statute requires the agencies not only to create low-
risk underwriting standards for certain asset classes used in 
securitizations, but also to define the appropriate form and amount of 
risk retention interests, consider circumstances in which it might be 
appropriate to shift the retention obligation to the originator of the 
securitized assets, and create rules addressing complex securitizations 
backed by other asset-backed securities. Various exemptions from the 
risk retention requirements also must be implemented. In particular, 
the banking agencies, SEC, HUD and the FHFA are directed to define 
``qualified residential mortgages'' with underwriting and product 
features that historical loan performance data indicate result in a 
lower risk of default. Securitizations of QRMs are specifically 
exempted from the credit risk retention requirements.
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     \5\ Board of Governors of the Federal Reserve System, Report to 
Congress on Risk Retention, (October 2010).
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    Work on the notice of proposed rulemaking is nearing completion and 
the agencies hope to be able to publish a proposal in the next month.
B. Implementation Challenges
            Capital and Liquidity: Coordination of Dodd-Frank 
                    Initiatives With International Reforms
    The Dodd-Frank Act focused considerable attention on enhancing the 
capital and liquidity standards of U.S. financial companies. The 
banking agencies and FSOC are called upon to develop and publish 
numerous studies and regulations that will materially affect the level 
and composition of capital and liquidity for both banks and certain 
nonbank financial companies. As I have indicated in previous testimony 
to this Committee \6\ and reiterated in a recent speech, \7\ one of the 
main challenges facing supervisors in this area is the need to 
coordinate Dodd-Frank implementation efforts with agency actions to 
adopt recent reforms announced by the Basel Committee on Banking 
Supervision (Basel Committee), the so-called Basel III reforms. While 
these two significant public policy initiatives are not identical in 
their design and standards, they share many common objectives and 
address many of the same underlying issues. It is incumbent on the 
agencies to consider these reforms in a coordinated, mutually 
reinforcing manner, so as to enhance the safety and soundness of the 
U.S. and global banking system, while not damaging competitive equity 
or restricting access to credit.
---------------------------------------------------------------------------
     \6\ See, supra, note 1.
     \7\ See, John Walsh, ``Acting Comptroller of the Currency, Remarks 
at the Exchequer Club'' (January 19, 2011).
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    As noted above, various provisions of Dodd-Frank seek to enhance 
the capital and liquidity standards of U.S. financial companies. The 
U.S. agencies are making appropriate progress in drafting the required 
studies and regulations to effectuate Congressional intent in these 
areas. A summary of these efforts is provided below:

    Under sections 115(a) and 115(b) of Dodd-Frank, in order to 
        prevent or mitigate risk to financial stability, the FSOC may 
        make recommendations to the FRB \8\ concerning the 
        establishment of prudential standards applicable to nonbank 
        financial companies supervised by the FRB and certain large 
        bank holding companies. These prudential standards, which are 
        to be more stringent than those applicable to other companies 
        that do not pose similar risk to financial stability, are 
        expected to address risk-based capital requirements, leverage 
        limits, and liquidity requirements, among other provisions. The 
        FSOC has commenced work on this project and expects to provide 
        recommendations to the FRB shortly.
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     \8\ Under section 165 of Dodd-Frank, the FRB, on its initiative or 
pursuant to recommendations by FSOC under Sections 115(a) and 115(b), 
shall establish prudential standards applicable to nonbank financial 
companies supervised by the FRB and certain large bank holding 
companies.

    Section 171(b) of Dodd-Frank requires the banking agencies 
        to establish minimum risk-based capital requirements applicable 
        to insured depository institutions, depository institution 
        holding companies, and nonbank financial companies supervised 
        by the FRB. On December 30, 2011, the banking agencies 
        published a notice of proposed rulemaking addressing the 
        requirements of section 171(b). Agencies continue to encourage 
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        public comment on this proposal through February 28, 2011.

    Section 115(c) of Dodd-Frank requires the FSOC to conduct a 
        study of the feasibility, benefits, costs, and structure of a 
        contingent capital requirement for certain nonbank financial 
        companies and bank holding companies. FSOC has commenced work 
        on this requirement earlier than initially projected in order 
        to articulate a U.S. position on this important topic in 
        advance of international deliberations at the Basel Committee, 
        Financial Stability Board, and other organizations.

    Section 616(c) of Dodd-Frank amends the International 
        Lending Supervision Act of 1983 by providing that each Federal 
        banking agency shall seek to make capital standards 
        countercyclical, so that the amount of required capital 
        increases in times of economic expansion and decreases in times 
        of economic contraction, consistent with safety and soundness. 
        Consistent with this provision, the agencies are actively 
        considering the establishment of countercyclical capital 
        requirements in proposed regulations implementing the Basel III 
        reforms.

    As noted in my testimony before this Committee on September 30 of 
last year, the Basel III reforms focus on many of the same issues and 
concerns that the Dodd-Frank Act sought to address. These reforms of 
the Basel Committee are designed to strengthen global capital and 
liquidity standards governing large, internationally active banks and 
promote a more resilient banking sector. Like Dodd-Frank, the Basel III 
reforms tighten the definition of what counts as regulatory capital by 
placing greater reliance on higher quality capital instruments; expand 
the types of risk captured within the capital framework; establish more 
stringent capital requirements; provide a more balanced consideration 
of financial stability and systemic risks in bank supervision practices 
and capital rules; and call for leverage ratio requirement and global 
minimum liquidity standards. Since the Basel III enhancements can take 
effect in the U.S. only through formal rulemaking by the banking 
agencies, U.S. agencies have the opportunity to integrate certain Basel 
III implementation efforts with the heightened prudential standards 
required by Dodd-Frank. Such coordination in rulemaking will ensure 
consistency in the establishment of capital and liquidity standards for 
similarly situated organizations, appropriately differentiate relevant 
standards for less complex organizations, and consider broader economic 
impact assessments in the development of these standards.
            Credit Ratings
    The OCC recognizes that issues surrounding credit ratings were a 
significant factor in market overconfidence that contributed to losses 
in the markets for mortgage-backed securities in 2008-2009. The Dodd-
Frank Act includes a number of important remedial measures to address 
this problem, including structural changes at the ratings agencies, 
greater SEC oversight of the ratings process, and loan-level 
disclosures to investors in asset-backed securities. In this context of 
enhanced regulation that Dodd-Frank provides, the absolute prohibition 
against any references to ratings under section 939A goes further than 
is reasonably necessary. Moreover, it has become clear, as we have 
tried to implement this requirement, that the disadvantages of the 
prohibition are substantial.
    Section 939A of Dodd-Frank requires each Federal agency to review 
its regulations that refer to, or require the use of, credit ratings in 
connection with an assessment of the creditworthiness of a security or 
money market instrument. Each agency must then remove from its 
regulations any reference to or requirement for reliance on credit 
ratings and must develop alternative standards of creditworthiness to 
serve as a substitute for reliance on credit ratings.
    In accordance with section 939A, the OCC reviewed its regulations 
and determined that credit ratings are referenced in two key areas: (1) 
regulations governing which investment securities banks may purchase 
and hold; and (2) regulations governing banking institutions' risk-
based capital requirements. Together, these regulations prevent banks 
from making excessively speculative investments and help to assess the 
relative risk of securities holdings.
    In an effort to modify its regulations pursuant to the requirements 
of section 939A, the OCC published an ANPR in August 2010 requesting 
comment on alternative creditworthiness measures for its investment 
securities regulations. Shortly thereafter, the OCC joined with the 
FDIC and FRB in publishing an ANPR requesting comment on alternatives 
for the agencies' risk-based capital regulations.
    Additionally, the FRB, FDIC, and OCC hosted a forum on alternatives 
to credit ratings that included representatives from various sectors of 
the financial industry, including community, regional, and 
internationally active banking institutions, financial analysts and 
consultants, credit rating agencies, and insurance industry regulators, 
as well as members of academia.
    The comments received in response to the ANPRs, as well as the 
discussion during the credit ratings forum, reinforced my concerns. 
Although the commenters generally concurred with the agencies' stated 
criteria for developing alternative creditworthiness standards, they 
failed to suggest practical alternatives that could be implemented 
across the banking industry.
    In response to the OCC's requests for comment on how best to 
implement section 939A, regional and community banks noted that using 
internal risk assessment systems to measure credit worthiness for 
regulatory purposes would be costly and time consuming. These 
commenters noted that while cost and burden would be a factor for all 
banks, it is likely to be more pronounced for community and regional 
banks, and may therefore place them at a disadvantage compared to 
larger institutions that have advanced analytical capabilities and 
whose in-house systems and management capabilities could be converted 
to apply new standards. A number of commenters stated that the costs 
could be so great as to shut out smaller institutions from being able 
to purchase certain types of high quality investment securities.
    These concerns could be addressed if section 939A is amended in a 
targeted manner that allows institutions to make limited use of credit 
ratings. Precluding undue or exclusive reliance on credit ratings, 
rather than imposing an absolute bar to their use, would strike a more 
appropriate balance between the need to address the problems created by 
overreliance on credit ratings with the need to enact sound regulations 
that do not adversely affect credit availability or impede economic 
recovery. With appropriate operational and due diligence requirements, 
credit ratings can be a valuable factor to consider when evaluating the 
creditworthiness of money market instruments and other securities.
    Additionally, without amendment to allow the use of ratings as one 
of the factors taken into consideration in evaluating creditworthiness, 
the provision would prevent the Federal banking agencies from 
implementing internationally agreed capital, liquidity, and other 
prudential standards--including the strong new Basel III framework that 
is now being finalized. The banking agencies already have had to 
propose a limited implementation of an internationally negotiated 
framework applicable to traded assets. Because of section 939A, the 
Federal banking agencies' proposal to amend the risk-based capital 
rules for market risk, published on January 11, 2011, did not include 
ratings-based provisions that would have significantly increased the 
amount of capital required to be held against traded assets. The 
continued inability of the banking agencies to implement important 
portions of the international standards will adversely affect our 
ability to negotiate strong new global standards designed to prevent a 
recurrence of the recent financial crisis.
            Inconsistent or Duplicative Supervisory Responsibilities
    Other implementation difficulties arise outside the rulemaking 
context. One example concerns the respective roles of the banking 
agencies and the CFPB in dealing with consumer complaints. Under the 
Dodd-Frank Act, the function of handling consumer complaints is not a 
function that transfers to the CFPB, but the CFPB has various 
responsibilities concerning consumer complaints. At the same time, 
other provisions of the Dodd-Frank Act envision that the prudential 
regulators will also have responsibilities handling consumer 
complaints, and those responsibilities are not confined to complaints 
concerning banks of $10 billion or more in asset size. Absent 
clarification of the CFPB's role, it is difficult for the prudential 
regulators to determine how to staff their consumer complaint 
operations, and if we downsize those operations to handle only 
complaints involving institutions of less than $10 billion in size, it 
is not clear how complaints involving larger institutions will be 
handled.
    Another area of concern is the confusing overlap of roles of the 
Federal banking agencies and the CFPB for supervising and enforcing 
fair lending provisions for insured depository institutions with total 
assets greater than $10 billion. The Federal banking agencies currently 
oversee depository institutions' compliance with the Fair Housing Act, 
the ECOA, and the Federal Reserve Board's Regulation B, using 
interagency examination guidelines issued by the Federal Financial 
Institutions Examination Council. Under the Dodd-Frank Act, the banking 
agencies will continue to perform this function for institutions under 
our supervision with $10 billion or less in total assets. For larger 
institutions, the legislation assigns exclusive supervisory 
responsibility for ``Federal consumer financial laws'' to the CFPB. The 
definition of ``Federal consumer financial laws'' includes the ECOA and 
Regulation B, but not the Fair Housing Act. Because conduct that 
violates the Fair Housing Act generally also violates the ECOA, the 
CFPB's examination for compliance with ECOA should suffice to address 
compliance with the Fair Housing Act.
    However, if the intent of the legislation is for the CFPB to 
supervise larger institutions for compliance with the ECOA and 
Regulation B, but for the Federal banking agencies to supervise such 
institutions' compliance with the Fair Housing Act, this result risks 
significant inefficiency and potential confusion regarding 
accountability in this area.
    Another provision presenting potential concerns are the particular 
requirements for how the prudential supervisors and the CFPB conduct 
examinations of institutions with $10 billion or more in size. We 
strongly favor efficient coordination of the activities of the 
prudential regulators and the CFPB, but the particular requirements set 
out in the Dodd-Frank Act would direct multistep activities that are 
inefficient, overbroad, and sufficiently time-consuming that safety and 
soundness based remedial actions that institutions should be required 
to take immediately could be delayed.
    While we plan to work with the CFPB to ensure appropriate oversight 
of these activities without creating duplicative and potentially 
inconsistent supervision, we also believe these areas would benefit 
from Congressional clarification.

III. Other Developments
    At the time of this Committee's Dodd-Frank implementation hearing 
in September, concerns about foreclosure processing at the largest 
mortgage servicers were just beginning to command wide attention. In 
the months since then, the OCC, together with the other Federal banking 
regulators, has taken unprecedented steps to investigate the problem. 
This section provides an overview of that work, and the related 
initiative to develop comprehensive national mortgage servicing 
standards.

A. Foreclosure Processing Irregularities
    Following reports of irregularities in the foreclosure processes of 
several major mortgage servicers in the latter part of 2010, the OCC, 
together with the FRB, the FDIC, and the OTS, undertook an 
unprecedented project of coordinated horizontal examinations of 
foreclosure processing at the 14 largest \9\ federally regulated 
mortgage servicers during fourth quarter 2010. In addition, the 
agencies conducted interagency examinations \10\ of MERSCORP and its 
wholly owned subsidiary, Mortgage Electronic Registration Systems, Inc. 
(MERS), and Lender Processing Servicers (LPS), which provide 
significant services to support mortgage servicing and foreclosure 
processing across the industry. The primary objective of the 
examinations was to evaluate the adequacy of controls and governance 
over bank foreclosure processes, including compliance with applicable 
Federal and State law. Examiners also evaluated bank self assessments 
and remedial actions as part of this process, assessed foreclosure 
operating procedures and controls, interviewed bank staff involved in 
the preparation of foreclosure documents, and reviewed approximately 
2,800 borrower foreclosure cases \11\ in various stages of foreclosure. 
Examiners focused on foreclosure policies and procedures, 
organizational structure and staffing, vendor management including use 
of third parties, including foreclosure attorneys, quality control and 
audits, accuracy and appropriateness of foreclosure filings, and loan 
document control, endorsement, and assignment. When reviewing 
individual foreclosure files, examiners checked for evidence that 
servicers were in contact with borrowers and had considered alternate 
loss mitigation efforts, including loan modifications, in addition to 
foreclosure.
---------------------------------------------------------------------------
     \9\ Agencies conducted foreclosure-processing examinations at 
Aurora Bank, Bank of America, Citibank, EverBank, GMAC/Ally Bank, HSBC, 
OneWest, JPMC, MetLife, PNC, Sovereign Bank, SunTrust, U.S. Bank, and 
Wells Fargo.
     \10\ The interagency examination of MERS was led by the OCC with 
participation by the FHFA, FRB, FDIC, and OTS. The interagency 
examination of LPS was led by the FRB with participation by FDIC, OCC, 
and OTS.
     \11\ The foreclosure file sample was selected independently by 
examination teams based on preestablished criteria. Foreclosure files 
at each bank were selected from the population of in-process and 
completed foreclosures during 2010. In addition, the foreclosure file 
sample at each bank included foreclosures from both judicial States and 
nonjudicial States.
---------------------------------------------------------------------------
    To ensure consistency in the examinations, the agencies used 
standardized work programs to guide the assessment and document 
findings of each institution's corporate governance process and the 
individual case review. Specifically, work programs were categorized 
into the following areas:

    Policies and Procedures--Examiners determined if the 
        policies and procedures in place ensured adequate controls over 
        the foreclosure process and that affidavits, assignments, and 
        other legal documents were properly executed and notarized in 
        accordance with applicable laws, regulations, and contractual 
        requirements.

    Organizational Structure and Staffing--Examiners reviewed 
        the functional unit(s) responsible for foreclosure processes, 
        including staffing levels, qualifications, and training 
        programs.

    Management of Third-Party Service Providers--Examiners 
        reviewed the financial institutions' governance of key third 
        parties used throughout the foreclosure process.

    Quality Control and Internal Audits--Examiners assessed 
        foreclosure quality control processes. Examiners also reviewed 
        internal and external audit reports, including Government-
        sponsored enterprise (GSE) and investor audits and reviews of 
        foreclosure activities, and institutions' self-assessments to 
        determine the adequacy of these compliance and risk management 
        functions.

    Compliance With Applicable Laws--Examiners checked 
        compliance with applicable State and local requirements as well 
        as internal controls intended to ensure compliance.

    Loss Mitigation--Examiners determined if servicers were in 
        direct communication with borrowers and whether loss mitigation 
        actions, including loan modifications, were considered as 
        alternatives to foreclosure.

    Critical Documents--Examiners determined whether servicers 
        had control over the critical documents in the foreclosure 
        process, including appropriately endorsed notes, assigned 
        mortgages, and safeguarding of original loan documentation.

    Risk Management--Examiners determined whether institutions 
        appropriately identified financial, reputation, and legal 
        risks, and whether these risks were communicated to the board 
        of directors and senior management.

    In general, the examinations found critical deficiencies and 
shortcomings in foreclosure governance processes, foreclosure document 
preparation processes, and oversight and monitoring of third party law 
firms and vendors. These deficiencies have resulted in violations of 
State and local foreclosure laws, regulations, or rules and have had an 
adverse affect on the functioning of the mortgage markets and the U.S. 
economy as a whole. By emphasizing timeliness and cost efficiency over 
quality and accuracy, examined institutions fostered an operational 
environment that is not consistent with conducting foreclosure 
processes in a safe and sound manner.
    Despite these deficiencies, the examination of specific cases and a 
review of servicers' custodial activities found that loans were 
seriously delinquent, and that servicers maintained documentation of 
ownership and had a perfected interest in the mortgage to support their 
legal standing to foreclose. In addition, case reviews evidenced that 
servicers were in contact with troubled borrowers and had considered 
loss mitigation alternatives, including loan modifications. A small 
number of foreclosure sales should not have proceeded because of an 
intervening event or condition, such as the borrower: (a) being covered 
by the Servicemembers Civil Relief Act; (b) filing bankruptcy shortly 
before the foreclosure action; or (c) being approved for a trial period 
modification.
    While all servicers exhibited some deficiencies, the nature of the 
deficiencies and the severity of issues varied by servicer. The OCC and 
the other Federal banking agencies with relevant jurisdiction are in 
the process of finalizing actions that will incorporate appropriate 
remedial requirements and sanctions with respect to the servicers 
within their respective jurisdictions. We also continue to assess and 
monitor servicers' self-initiated corrective actions. We expect that 
our actions will comprehensively address servicers' identified 
deficiencies and will hold servicers to standards that require 
effective and proactive risk management of servicing operations, and 
appropriate remediation for customers who have been financially harmed 
by defects in servicers' standards and procedures.
    We also intend to leverage our findings and lessons learned in this 
examination and enforcement process to contribute to the development of 
national mortgage servicing standards. This initiative is discussed in 
more detail below.

B. New National Mortgage Servicing Standards
    The interagency foreclosure processing examinations revealed 
significant weaknesses in mortgage servicing related to foreclosure 
oversight and operations. Outside the scope of the foreclosure review, 
however, we have also seen servicing-related problems arise for 
borrowers seeking mortgage relief.
    Two practices in particular are generally recognized to have 
adversely affected borrowers seeking to avoid foreclosure. For example, 
I have questioned the practice of continuing foreclosure proceedings 
even when a trial modification had been negotiated and is in force--the 
so-called ``dual track'' issue. Indeed, the OCC has directed national 
bank servicers to suspend foreclosure proceedings for borrowers in 
successfully performing trial modifications when they have the legal 
ability under the servicing contract to do so. Another significant 
issue relates to the sufficiency of staffing. Frequently, troubled 
borrowers find that there is no one individual or team who takes 
responsibility for monitoring and acting on their loan modification 
requests. This can lead to lost time, lost documents, and lost homes. 
These borrowers need to have a single point of contact that they can go 
to in these situations. And servicers need to have appropriately 
trained and dedicated staff, reporting to management, with the 
authority and responsibility to address the borrower's concerns so they 
cannot ``fall through the cracks.''
    But the problems with servicing are not limited to the practices 
affecting delinquent loans, and recent experience highlights the need 
for uniform standards for mortgage servicing that apply to all facets 
of servicing the loan, from loan closing to payoff. The OCC believes 
that mortgage servicing standards should apply uniformly to all 
mortgage servicers and provide the same safeguards for consumers, 
regardless of whether a mortgage has been securitized. To be meaningful 
and effective, these standards should be directly enforceable by 
Federal and State agencies rather than rely on the actions of private 
parties to enforce the terms of servicing contracts affecting a limited 
class of mortgage loans. A key driver of servicing practices has been 
and continues to be secondary market requirements. We will not achieve 
improvements in mortgage servicing without corresponding changes in 
requirements imposed by the GSEs.
    To further this effort and discussion, the OCC developed a 
framework for comprehensive mortgage servicing standards that we shared 
with other agencies, and we are now participating in an interagency 
effort to develop a set of comprehensive and robust, nationally 
applicable mortgage servicing standards. Our objective is to develop 
uniform standards that govern processes for:

    Handling borrower payments, including applying payments to 
        principal and interest and taxes and insurance before they are 
        applied to fees, and avoiding payment allocation processes 
        designed primarily to increase fee income;

    Providing adequate borrower notices about their accounts 
        and payment records, including a schedule of fees, periodic and 
        annual statements, and notices of payment history, payoff 
        amount, late payment, delinquency, and loss mitigation;

    Responding promptly to borrower inquiries and complaints, 
        and promptly resolving disputes;

    Providing an avenue for escalation and appeal of unresolved 
        disputes;

    Effective incentives to work with troubled borrowers, 
        including early outreach and counseling;

    Making good faith efforts to engage in loss mitigation and 
        foreclosure prevention for delinquent loans, including 
        modifying loans to provide affordable and sustainable payments 
        for eligible troubled borrowers;

    Implementing procedures to ensure that documents provided 
        by borrowers and third parties are maintained and tracked so 
        that borrowers generally will not be required to resubmit the 
        same documented information;

    Providing an easily accessible single point of contact for 
        borrower inquiries about loss mitigation and loan 
        modifications;

    Notifying borrowers of the reasons for denial of a loan 
        modification, including information on the NPV calculation;

    Implementing strong foreclosure governance processes that 
        ensure compliance with all applicable legal standards and 
        documentation requirements, and oversight and audit of third 
        party vendors;

    Not taking steps to foreclose on a property or conduct a 
        foreclosure sale when the borrower is in a trial or permanent 
        modification and is not in default on the modification 
        agreement; and

    Ensuring appropriate levels of trained staff to meet 
        current and projected workloads.

    We are still at a relatively early stage in this process, but the 
fact that we share these common objectives will help ensure that the 
agencies can achieve significant reforms in mortgage servicing 
practices across the board for all types of mortgage servicing firms.

IV. Conclusion
    Let me close by assuring the Committee that, as we work to 
implement the initiatives required by the Dodd-Frank Act, the OCC 
remains fully engaged in its primary mission of ensuring the safety and 
soundness as well as the vibrancy of the national banking system.
    We continue to closely monitor and evaluate developments in the 
system. The system is beginning to return to profitability--though 
revenue generation and margins are low compared to historical 
experience. In the large banks, we see a return to balance sheet 
strength as capital, reserve, and liquidity levels have been rebuilt 
over the past 3 years. Although credit risk remains elevated, we see 
steady improvements contributing to an overall lower risk profile in 
the largest banks. Conditions are also stabilizing for community banks. 
While embedded losses continue to produce bank failures among community 
banks, the vast majority of community banks continue to play a vibrant 
role in the Nation's financial system. But, going forward, banks of all 
sizes will face a business landscape that is significantly changed by 
postcrisis market developments and by new rules implementing Dodd-
Frank. These developments affect both the ability of banks to generate 
revenue and the costs and viability of particular activities or lines 
of business. Their efficiency may be affected in the shorter term and 
their business models in the long run. The OCC is committed to 
supervising the effects of these changes to ensure the continuing 
safety and soundness of the national banks we supervise.
    I appreciate this opportunity to update the Committee on the work 
we are doing to implement Dodd-Frank and I am happy to answer your 
questions.
       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                      FROM BEN S. BERNANKE

Q.1. Recently, some have voiced concerns that the timeframe for 
the rulemakings required by the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank) is too short to allow 
for adequate consideration of the various comments submitted or 
to review how the new rules may impact our financial markets. 
Does the current timeframe established by Dodd-Frank allow each 
rulemaking to be completed in a thoughtful and deliberative 
manner?

A.1. Response not provided.

Q.2. Please identify the key trends in the derivatives market 
that your agencies are currently monitoring to ensure systemic 
stability.

A.2. Response not provided.

Q.3. In defining the exemption for ``qualified residential 
mortgages,'' are the regulators considering various measures of 
a lower risk of default, so that there will not just be one 
``bright line'' factor to qualify a loan as a Q.R.M.?

A.3. Response not provided.

Q.4. What data are you using to help determine the definition 
of a Qualified Residential Mortgage?

A.4. Response not provided.

Q.5. Dodd-Frank (Sec 939A) required the regulators to remove 
any reference or requirement of reliance on credit ratings from 
its regulations. In his testimony, Acting Comptroller of the 
Currency John Walsh wrote: ``[R]egional and community banks 
noted [in their comments] that using internal risk assessment 
systems to measure credit worthiness for regulatory purposes 
would be costly and time consuming . . . . These concerns could 
be addressed if section 939A is amended in a targeted manner 
that allows institutions to make limited use of credit ratings. 
Precluding undue or exclusive reliance on credit ratings, 
rather than imposing an absolute bar to their use, would strike 
a more appropriate balance between the need to address the 
problems created by overreliance on credit ratings with the 
need to enact sound regulations that do not adversely affect 
credit availability or impede economic recovery.''
    What is the status of this effort and what types of 
alternative measures are being considered? Do you share the 
concerns raised by community banks, and what is your reaction 
to Acting Comptroller Walsh's comments on this issue?

A.5. Response not provided.

Q.6. Please discuss the status of your efforts to implement the 
stress test provisions under Dodd-Frank? To what extent have 
you collaborated with the other banking regulators and how do 
you plan to leverage the Office of Financial Research?

A.6. Response not provided.

Q.7. Please discuss the current status and timeframe of 
implementing the Financial Stability Oversight Council's (FSOC) 
rulemaking on designating nonbank financial companies as being 
systemically important. As a voting member of FSOC, to what 
extent is the Council providing clarity and details to the 
financial marketplace regarding the criteria and metrics that 
will be used by FSOC to ensure such designations are 
administered fairly? Is the intent behind designation decisions 
to deter and curtail systemically risky activity in the 
financial marketplace? Are diverse business models, such as the 
business of insurance, being fully and fairly considered as 
compared with other financial business models in this 
rulemaking?

A.7. Response not provided.

Q.8. On February 1, the Fed decided to not move forward with 
three Regulation Z rulemakings, instead deferring to the CFPB 
to complete these rules. There are three additional Regulation 
Z rulemakings pending. Does the Fed intend to complete these 
rulemakings?

A.8. Response not provided.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                      FROM BEN S. BERNANKE

Q.1. The Dodd-Frank Act requires an unprecedented number of 
rulemakings over a short period of time. As a result, some 
deadlines have already been missed and some agencies expect to 
miss additional deadlines. It appears that many of the 
deadlines in Dodd-Frank are not realistic. Which Dodd-Frank 
deadlines do you anticipate not being able to meet? If Congress 
extended the deadlines, would you object? If your answer is 
yes, will you commit to meeting all of the statutory deadlines? 
If Congress affords additional time for rulemaking under the 
Dodd-Frank Act, will you be able to produce higher-quality, 
better coordinated rules?

A.1. The Board has made considerable progress in carrying out 
its assigned responsibilities for issuing final rules under the 
Dodd-Frank Act. In October, for example, the Board issued an 
interim final rule to ensure that real estate appraisers are 
free to use their independent professional judgment in 
assigning home values without influence or pressure from those 
with interests in the transactions. The rule also seeks to 
ensure that appraisers receive customary and reasonable 
payments for their services. In February, the Board announced 
its approval of a final rule to implement the provisions of the 
Act that give banking firms a period of time to conform their 
activities and investments to the prohibitions and restrictions 
of the so-called Volcker Rule. The Board recognizes the concern 
expressed by the Congress regarding agency delay in the 
rulemaking process and will work to ensure that the law is 
implemented in a manner that is timely, best protects the 
stability of our financial system, and strengthens the U.S. 
economy.
    The Board maintains a projected schedule of rulemakings on 
its public Web site. While the Board generally has met the 
congressionally mandated schedule in the Dodd-Frank Act, the 
Board recently announced that final action on the 
implementation of the debit interchange fee standards and 
related rules under section 1075 of the Act will be delayed 
beyond the April 21, 2011, action date in the Act. The Board 
has devoted significant resources to timely completion of the 
rulemaking and expects that due to the complexity of this 
rulemaking, importance of the issues it raises, and the 
significant amount of public comment received, the Board will 
act on the final rule before the July 21, 2011, effective date 
of the statutory requirement.
    The provisions of the Dodd-Frank Act are important and grew 
out of the exigencies and difficulties experienced during the 
recent financial crisis. It is important that the steps taken 
by Dodd-Frank Act be implemented well and in a timely fashion. 
We will continue to work diligently to meet whatever schedule 
Congress determines is appropriate for effectively implementing 
and executing the policy objectives of the Act.

Q.2. Secretary Geithner recently talked about the difficulty of 
designating nonbank financial institutions as systemic. He 
said, ``it depends too much on the state of the world at the 
time. You won't be able to make a judgment about what's 
systemic and what's not until you know the nature of the 
shock.'' \1\ If it is impossible to know which firms are 
systemic until a crisis occurs, the Financial Stability 
Oversight Council will have a very difficult time objectively 
selecting systemic banks and nonbanks for heightened 
regulation. As a member of the Council, do you believe that 
firms can be designated ex ante as systemic in a manner that is 
not arbitrary? If your answer is yes, please explain how.
---------------------------------------------------------------------------
     \1\ See, Special Inspector General for the Troubled Asset Relief 
Program, ``Extraordinary Assistance Provided to Citigroup, Inc.'' 
(SIGTARP 11-002) (Jan. 13, 2011) (available at: http://www.sigtarp.gov/
reports/audit/2011/
Extraordinary%20Financial%20Assistance%20Provided%20to%20Citigroup,%20In
c.pdf), at 43.

A.2. The Dodd-Frank Act requires the Council to designate 
nonbank financial firms for Federal Reserve supervision and 
regulation if material financial distress at the firm could 
pose a threat to U.S. financial stability. Making designation 
decisions will be challenging, but we are committed to 
assisting the Council in devising standards and processes for 
designations that are as consistent across firms as reasonably 
possible. Certain characteristics--such as a firm's size, its 
interconnectedness with other firms or markets, and the 
availability of substitutes for the financial services it 
provides--will affect the likelihood and the magnitude of 
spillovers from a firm's distress to the broader financial 
system and real economy in a variety of stress scenarios. The 
Council is also considering factors that are intended to 
account for different types of economic conditions in 
determining designations.
    The Council has issued a notice of proposed rulemaking on 
the nonbank financial firm designation process that indicates 
the Council's intent to incorporate information on these 
characteristics into its designation process. The Council's 
decisions about the designation of nonbank financial firms will 
be based on substantial information and analysis about the 
characteristics of financial firms and markets and will provide 
significant due process to affected companies.

Q.3. Section 112 of the Dodd-Frank Act requires the Financial 
Stability Oversight Council to annually report to Congress on 
the Council's activities and determinations, significant 
financial market and regulatory developments, and emerging 
threats to the financial stability of the United States. Each 
voting member of the Council must submit a signed statement to 
the Congress affirming that such member believes the Council, 
the Government, and the private sector are taking all 
reasonable steps to ensure financial stability and mitigate 
systemic risk. Alternatively, the voting member shall submit a 
dissenting statement. When does the Council expect to supply 
the initial report to Congress?

A.3. Section 112 requires the Council to make an annual report 
to Congress. The Council has been working diligently to 
implement its statutory authorities and responsibilities 
outlined under section 112 of the Dodd-Frank Act. For example, 
the Council has begun to develop a framework and infrastructure 
to evaluate potential systemic risks to the financial stability 
of the United States and to monitor financial market and 
regulatory developments. As a member agency of the Council, the 
Board is providing assistance to the Council in these efforts. 
The Board is committed to continuing to work with the Council 
and the other member agencies to assist the Council in 
implementing all of its responsibilities and duties under 
section 112 within the timeframe provided under the Act. The 
Board expects the Council will submit its report to Congress by 
July 21, 2011.

Q.4. Which provisions of Dodd-Frank create the most incentives 
for market participants to conduct business activities outside 
the United States? Have you done any empirical analysis on 
whether Dodd-Frank will impact the competitiveness of U.S. 
financial markets? If so, please provide that analysis.

A.4. The extent to which the Dodd-Frank Act creates incentives 
for market participants to conduct business activities outside 
the United States will depend importantly on (i) the extent to 
which other major jurisdictions adopt similar regulatory 
frameworks and (ii) the manner in which the Federal financial 
regulatory agencies implement the provisions of the Act. The 
outcomes of both of these processes are far from over. As a 
result, assessing the extent to which the Dodd-Frank Act might 
provide incentives for financial firms to move businesses 
overseas is difficult at this time.
    International coordination of financial reform is essential 
for achieving global financial stability. Fortunately, from the 
U.S. perspective, the international agenda to date has been 
well aligned with the Dodd-Frank Act and the complementary 
endeavors of the U.S. financial regulatory agencies. We have 
worked hard in the Basel Committee and Financial Stability 
Board over the past few years to achieve international 
regulatory outcomes that are consistent with U.S. reform goals, 
and there are a few areas where we in the United States are 
continuing to work particularly hard to keep our reforms well 
aligned with international efforts. These areas include, among 
others, our efforts as part of the Financial Stability 
Oversight Council to establish criteria for measuring the 
systemic importance of nonbank financial firms, our ongoing 
work to determine how to apply the stricter prudential 
standards for systemically important financial firms under the 
Dodd-Frank Act to foreign banks, and the implementation of 
Dodd-Frank reforms for over-the-counter derivatives and 
incentive compensation. We hope that all countries will 
similarly strive to harmonize domestic rules with international 
standards.
    Of course, some parts of the Dodd-Frank Act are unlikely to 
become part of the international financial regulatory 
framework. For example, the Volcker Rule in section 619 limits 
the authority of banks to engage in proprietary trading of 
securities and derivatives and to sponsor and invest in private 
funds. The derivatives push-out rule in section 716 forces U.S. 
banks to push certain derivatives activities into affiliates. 
Section 622 of the Act also contains a financial sector 
concentration limit. We understand that other countries are 
unlikely to adopt these sorts of restrictions.
    Although not all aspects of financial reform will be 
perfectly consistent across countries, our challenge is 
nevertheless to achieve global consistency on the core reforms 
necessary to protect financial stability while providing a 
playing field that is as level as possible. Achieving these 
objectives will require a continued commitment to international 
collaboration and a resolve to continue to push reforms 
forward, even as the pressures for reform generated by the 
financial crisis begin to ease.
    To the extent consistent with its statutory obligations, 
the Board will consider competitive considerations as we work 
to implement the provisions of the Act and will monitor the 
competitive and other effects of the Act as part of our ongoing 
efforts to protect U.S. financial stability and the safety and 
soundness of U.S. financial institutions.

Q.5. More than 6 months have passed since the passage of the 
Dodd-Frank Act, and you are deeply involved in implementing the 
Act's approximately 2,400 pages. Which provisions of the Dodd-
Frank Act are proving particularly difficult to implement? Have 
you discovered any technical or substantive errors in the Dodd-
Frank legislation? If so, please describe them.

A.5. The Board has made considerable progress in completing its 
assigned responsibilities under the Act. As we continue to work 
through our rulemaking and other implementation projects, we 
will communicate challenges, including technical or substantive 
errors we encounter in the legislation, to you in response to 
this inquiry.

Q.6. What steps are you taking to understand the impact that 
your agency's rules under Dodd-Frank will have on the U.S. 
economy and its competitiveness? What are the key ways in which 
you anticipate that requirements under the Dodd-Frank Act will 
affect the U.S. economy and its competitiveness? What are your 
estimates of the effect that the Dodd-Frank Act requirements 
will have on the jobless rate in the United States?

A.6. Since the Dodd-Frank Act was enacted, the Federal Reserve, 
both independently and in conjunction with other agencies, has 
made considerable progress towards adopting regulations 
designed to promote financial market stability, strengthen 
financial institutions, and reduce systemic risk to the 
financial system and the economy. Measuring the impact of these 
regulations on the overall economy, however, is exceptionally 
challenging, especially given that many significant Government 
regulations aimed at strengthening the financial system and 
financial institutions are still in development. And even after 
the various provisions of the act are implemented, any estimate 
of their economic effects would be inherently quite uncertain. 
Nevertheless, the effects of the act are likely to be much less 
important than those of other factors now influencing 
unemployment and economic growth. In particular, the current 
slow pace of the recovery appears to be primarily driven by 
ongoing problems in the housing market and the commercial 
construction sector, the extremely tight budget conditions 
facing State and local governments, and a general need for many 
households and firms to repair their balance sheets in the wake 
of falling real estate values and a deep recession.
    As noted in the study issued by the Secretary of the 
Treasury pursuant to section 123 of the Dodd-Frank Act, 
financial regulation can affect the economy through two main 
channels. First, financial regulation can affect the supply and 
cost of credit by promoting or inhibiting allocative 
efficiency, which in turn can have implications for the overall 
economy. Financial regulation also can affect the riskiness of 
individual financial institutions and the financial system as a 
whole. For example, financial regulations that reduce default 
risk will help lower the expected cost of resolutions, thereby 
benefiting the economy by making systemic financial crises less 
likely. Thus, regulations that increase efficiency and reduce 
excessive risk-taking can bring substantial long-run benefits 
to American households and firms. As the experience of the last 
few years amply demonstrates, financial instability can be 
extremely costly in terms of unemployment and overall economic 
well-being.
    The Federal Reserve is cognizant of the fact that poorly 
designed rules can adversely affect the supply and cost of 
credit, or unintentionally increase risk. Accordingly, 
examining proposed rules for their possible unintended 
consequences is a key part of Federal Reserve rulemaking. In 
exercising its rulemaking authority under the act, the Federal 
Reserve strives to avoid any disruption to the functioning of 
the financial system and the broader economy that might be 
caused by its rules.
    With respect to global competitiveness, the Federal Reserve 
(together with other U.S. Government regulatory agencies) seeks 
to preserve a level playing field that will continue to allow 
U.S. companies to compete effectively and fairly in the global 
economy through ongoing discussions with foreign supervisory 
authorities on possible changes to bank capital standards and 
other international rules affecting financial markets and 
firms.

Q.7. What steps are you taking to assess the aggregate costs of 
compliance with each Dodd-Frank rulemaking? What steps are you 
taking to assess the aggregate costs of compliance with all 
Dodd-Frank rulemakings, which may be greater than the sum of 
all of the individual rules' compliance costs? Please describe 
all relevant reports or studies you have undertaken to quantify 
compliance costs for each rule you have proposed or adopted. 
Please provide an aggregate estimate of the compliance costs of 
the Dodd-Frank rules that you have proposed or adopted to date.

A.7. The Board complies with its obligation under the Paperwork 
Reduction Act (PRA) (44 U.S.C. 3501, et seq.) to estimate the 
paperwork burden (specifically record keeping, reporting, and 
disclosure requirements) imposed by the Board's rules and to 
keep this burden as low as possible. As required under the PRA, 
the Board seeks public comment on the paperwork burden imposed 
by its rules by providing notice in the Federal Register. The 
level of burden estimated under the PRA is then described, in 
detail, in the Federal Register notice for each final rule 
adopted by the Board, after taking account of the comments 
received during the public comment process. These Federal 
Register notices and final burden estimates are best evaluated 
in the context of each statutorily required rule and can be 
found on the Board's public Web site.

Q.8. The Fed, the SEC, the FDIC, and the CFTC are all 
structured as boards or commissions. This means that before 
they can implement a rule they must obtain the support of a 
majority of their board members. How has your board or 
commission functioned as you have been tackling the difficult 
job of implementing Dodd-Frank? Have you found that the other 
members of your board or commission have made positive 
contributions to the process?

A.8. The members of the Board of Governors are working 
cooperatively and constructively to implement the provision of 
the Dodd-Frank Act. The Board has established a series of 
committees that allow for direct input by Board members into, 
and supervision of staff working on, each Dodd-Frank 
rulemaking. This approach has allowed the Board to draw on the 
expertise of its members and, at the same time, work in an 
efficient and collaborative way. All rules are then reviewed by 
the full Board before being published for comment and then 
again before final adoption.
    To aid the Board in these efforts, since the enactment of 
the Dodd-Frank Act, the Board has approved a number of staffing 
and organizational changes, drawing on resources from across 
the Federal Reserve System in areas such as banking 
supervision, economic research, financial markets, consumer 
protection, payments, and legal analysis. In all, more than 300 
staff are working to assist in completing the Dodd-Frank Act 
rulemakings and related provisions. The Board also has created 
a senior staff position to coordinate our efforts and developed 
project reporting and tracking tools to facilitate management 
and oversight of all of our implementation responsibilities. 
The Board's Senior Advisor for Regulatory Reform Implementation 
provides updates to the Board on progress and ensures that 
important issues are put before the Board and other system 
leaders for resolution.

Q.9. Numerous calls have arisen for a mandatory ``pause'' in 
foreclosure proceedings during the consideration of a mortgage 
modification. Currently, what is the average number of days 
that customers of the institutions that you regulate are 
delinquent at the time of the completed foreclosure? If 
servicers were required to stop foreclosure proceedings while 
they evaluated a customer for mortgage modification, what would 
be the effect on the foreclosure process in terms of time and 
cost. What effect would these costs have on the safety and 
soundness of institutions within your regulatory jurisdiction. 
Please differentiate between judicial and nonjudicial States in 
your answers and describe the data that you used to make these 
estimates.

A.9. As of year-end 2010, the average number of days between a 
delinquency start and foreclosure completion had grown to 474 
days from 378 days at year-end 2009. For the period from 1998 
through 2010, the number of days from delinquency to 
foreclosure was, on average, 404 days. The number of days 
required to complete a foreclosure is higher in judicial States 
as the first table below demonstrates.


    The second table shows the average amount of lost expense 
as a percent of a foreclosure balance. \1\ The data indicate 
that lengthening the number of days required to complete a 
foreclosure adds to the relative cost of the overall process, 
and the cost is higher in judicial States. Although it is 
difficult to quantify the incremental effect of further 
procedural delays in foreclosures, delays and uncertainty 
resulting from flaws in the foreclosure process have the 
potential to delay recovery in housing markets and to undermine 
confidence in our financial and legal systems. For this reason, 
the Federal Reserve has emphasized the importance of using loan 
modifications as a means to prevent avoidable foreclosures and 
continues to encourage effective loan modifications as the most 
beneficial outcome from both consumers and the banking 
industry.
---------------------------------------------------------------------------
     \1\ Lost interest expense is computed by first multiplying one-
twelfth of the annual interest rate on the loan by the number of months 
between the start of delinquency and the foreclosure. This product is 
then divided by the loan balance at foreclosure end to get costs as a 
percent of loan balance.




Q.10. The burden of complying with Dodd-Frank will not affect 
all banks equally. Which new Dodd-Frank Act rules will have the 
most significant adverse impact on small and community banks? 
Which provisions of Dodd-Frank will have a disparate impact on 
small banks as compared to large banks? Do you expect that the 
number of small banks will continue to decline over the next 
decade? If so, is the reason for this decline the Dodd-Frank 
Act? Have you conducted any studies on the costs Dodd-Frank 
will impose on small and community banks? If so, please 
---------------------------------------------------------------------------
describe the results and provide copies of the studies.

A.10. The reforms contained within the Dodd-Frank Act are 
principally directed at constraining the activities and risks 
of the largest, most interconnected financial institutions, not 
at small or community banks. Moreover, small and community 
banks are exempted from many of the Act's restrictions. 
Accordingly, the Act as a whole should help level the 
competitive playing field between large and small banks. 
However, many community banks are concerned about an expected 
increase in overall regulatory burden as a result of the Act's 
implementation.
    For example, many community banks are concerned about 
potential future regulatory burden from new consumer protection 
rules they expect to be promulgated by the Consumer Financial 
Protection Bureau (CFPB) established under Dodd-Frank. Many 
community banks are also concerned about Dodd-Frank's 
regulation of debit card interchange fees, noting that proposed 
requirements will raise their operating costs and that caps 
imposed on the amount that large banks may charge for 
interchange could result in a significant decline in revenues 
for smaller banks, a substantial concern given the relatively 
limited options small banks have for earning noninterest 
income. Other provisions of the Act that raise concerns for 
community banks include the provision that prohibits Federal 
agencies from using credit ratings in their regulations, and 
provisions that could apply central clearing and trading 
requirements or swap dealer regulation to the OTC derivatives 
activities of small banks.
    The number of small banks has been declining steadily for a 
number of decades. This trend reflects a highly competitive 
market for financial products and services, as well as 
significant demographic and technological changes. Legislation 
has also affected the number of small banks in the United 
States by, for example, allowing interstate banking and 
eliminating the requirement for a bank holding company to own a 
separate bank in each of the states in which it was operating. 
While many community banks have argued that the costs of 
complying with new regulatory burdens arising from the Dodd-
Frank Act will accelerate the decline in the number of small 
banks, relatively few of the major provisions of Dodd-Frank 
apply in a meaningful way to small banks. As a result, it is 
not clear that Dodd-Frank will be a material driver of future 
declines in the numbers of small banks in the United States. To 
date, we have not conducted a study on the costs Dodd-Frank 
will impose on small and community banks.
    The Federal Reserve is committed to working with the other 
U.S. financial regulatory agencies to implement the Dodd-Frank 
Act and related reforms in a manner that both achieves the 
law's key financial stability objectives and appropriately 
takes into account the risk profiles and business models of 
small and community banks.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                      FROM BEN S. BERNANKE

Q.1. It is my understanding that the Federal Reserve has a 
1,887 page supervision manual for Bank Holding Companies, a 
1,767 page supervision manual for commercial banks, and a 675 
page manual for trading and capital markets activities, and 
several other supervision manuals that apply to your covered 
institutions. I appreciate that there is a lot of ground for 
the Federal Reserve staff examiners to cover. For the largest 
financial institutions, what is the process for ensuring that 
your examiners cover all of the applicable materials from these 
manuals on a regular basis at each institution?

A.1. The Federal Reserve's risk-focused program for supervising 
the largest banking organizations on a consolidated basis 
entails developing a comprehensive understanding of each 
organization and assessing the risks to which each organization 
is exposed. A supervisory plan is tailored to each organization 
based on this institutional understanding and risk assessment 
and typically includes a combination of continuous onsite and 
offsite monitoring, targeted examination/inspection activities, 
and detailed reviews of operations and internal controls. In 
addition to extensive supervision at the individual firm level, 
these organizations are grouped into a portfolio of firms which 
facilitates cross-portfolio peer perspectives. The findings 
from the supervisory activities conducted throughout the year 
are combined into a comprehensive assessment that leads to the 
assignment of supervisory ratings.
    In conducting these activities, examiners are expected to 
utilize sufficient examination procedures to reach informed 
judgments on the factors included in the rating systems for 
State member banks and bank holding companies, as appropriate. 
The Federal Reserve ensures the integrity of this process 
through oversight by senior Board and System officials and 
through a quality assurance process that includes horizontal 
reviews of activities across organizations and reviews of 
Reserve Bank operations. The Federal Reserve's supervisory 
manuals are intended to serve as reference documents for staff 
as they engage in supervisory activities. Staff is not expected 
to review each element contained in these manuals because the 
supervision of the largest institutions is tailored to an 
institution's unique business activities and risk profile.

Q.2. Do you believe that the Federal Reserve needs to conduct 
routine, full-scale examinations of the largest firms in order 
to identify risks and concerns that may not be identified by 
the firms themselves?

A.2. As noted above, Federal Reserve staff develops and 
executes a comprehensive supervisory plan tailored to the areas 
of primary risk for each banking organization, with the depth 
and breadth of the plan typically being greater for the largest 
and most complex organizations, as well as those with the most 
dynamic risk profiles. A primary objective of these supervisory 
activities is to understand and assess an organization's 
ability to identify, measure, monitor, and control primary 
risks to the consolidated organization, and examination and 
other activities are undertaken to maintain this understanding 
and assessment across risk management and control functions 
(credit, legal, and compliance, liquidity, market, operational, 
and reputational risks) for the consolidated organization. 
These activities result in supervisory assessments that are 
comparable to those generated under a routine, full scope 
examination.
    For each banking organization there are selected portfolios 
and business lines that are primary drivers of risk or revenue, 
or that otherwise materially contribute to understanding 
inherent risk or assessing controls for a broader corporate 
function. Independent from each firm's internal efforts to 
identify risks and concerns, Federal Reserve staff analyze 
external factors and internal trends in the firm's strategic 
initiatives--as evidenced by budget and internal capital 
allocations and other factors--to identity significant 
activities and areas vulnerable to volatility in revenue, 
earnings, capital, or liquidity that represent material risks 
for the organization. This determination of material portfolios 
and business lines considers all associated risk elements, 
including legal and compliance risks.
    A wide variety of examination and other supervisory 
activities are utilized by Federal Reserve staff to identify, 
understand, and assess primary firmwide risk management or 
control mechanisms, and the underlying material portfolios and 
business lines. These activities may identify certain functions 
that require more intensive supervisory focus due to 
significant change in inherent risk, control processes, or key 
personnel; potential concerns regarding the adequacy of 
controls; or the absence of sufficiently recent examination 
activities for a primary firmwide risk management or control 
function, either by the Federal Reserve or another primary 
supervisor or functional regulator.
    It is important to add that with passage of the Dodd-Frank 
Act, the Federal Reserve and other agencies are expected to 
supervise financial institutions and critical infrastructures 
with an eye toward not only the safety and soundness of each 
individual firm, but also taking into account risks to overall 
financial stability. In response, the Federal Reserve is 
developing a macroprudential approach to supervision with 
explicit focus on identifying risks and concerns, strengthening 
systemic oversight and addressing stability concerns.

Q.3. Can you provide your view on the Basel III framework and 
also the extent, if any, that Basel III may conflict with the 
requirements of the Dodd-Frank Act and how are you responding 
to these conflicts?

A.3. The Board of Governors of the Federal Reserve System 
(Board) actively participates on and contributes to the work of 
the Basel Committee on Banking Supervision (BCBS) to advance 
sound supervisory policies for internationally active banking 
organizations and improve the stability of the international 
banking system. On December 16, 2010, the BCBS published, 
``Basel III: A global regulatory framework for more resilient 
banks and banking systems.'' The Basel III framework, as part 
of the BCBS's ongoing efforts to improve the resilience of the 
banking sector, increases the quality, quantity, consistency, 
and transparency of capital, introduces new global liquidity 
standards, and strengthens capital requirements for certain 
risk exposures. The Board generally supports the Basel III 
framework and will continue working collaboratively with the 
BCBS and the Financial Stability Board in the ongoing efforts 
to develop an appropriate approach to ensure that systemically 
important financial institutions have a sufficient degree of 
loss-absorbing capacity.
    The Board has identified key areas where the requirements 
of the Basel III framework and Dodd-Frank Act conflict. For 
instance, the Dodd-Frank Act's requirement under Section 939A 
to remove-any reference to or requirement of reliance on 
ratings in Federal regulations conflicts with, or significantly 
complicates, the implementation of the Basel III framework, 
which requires the use of credit ratings for determining the 
risk-based capital requirements of certain exposures. To 
address the requirements of Section 939A, the U.S. Federal 
banking agencies issued an advanced notice of proposed 
rulemaking August 25, 2010, seeking comments on alternatives to 
the use of credit ratings in risk-based capital rules and are 
in the process of developing alternative approaches.
    In addition, Section 171 of the Dodd-Frank Act (commonly 
referred to as the ``Collins Amendment'') establishes certain 
requirements for U.S. leverage and risk-based capital 
requirements that are not included in the Basel III framework. 
To address certain requirements of Section 171, the agencies 
requested comment on December 15, 2010, on a proposed 
rulemaking that would require a banking organization operating 
under the advanced approaches. (Basel II-based) capital 
standards to meet, on an ongoing basis, the higher of the 
generally applicable (Basel I-based) and the advanced 
approaches minimum risk-based capital requirements. Also, under 
the Basel III framework, certain capital instruments that will 
no longer qualify for inclusion in regulatory capital will be 
phased out over a period of 10 years. Under Section 171, 
however, such instruments would be subject to a more rapid 
phase out period of 3 years. The agencies will address this and 
other provisions of Section 171 in subsequent rulemakings.
    The Board is analyzing several other sections of Dodd-Frank 
Act that pose potential conflicts with the Basel III framework. 
We expect to have a more comprehensive list of such conflicts 
in the next few months as we work through the elements of the 
domestic rulemaking related to the Basel III framework.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ
                      FROM BEN S. BERNANKE

Q.1. One of the most important reforms in Dodd-Frank was 
requiring systemically significant firms to hold more capital 
and have better liquidity to prevent another crisis. The crisis 
would not have happened had we not allowed big banks and some 
nonbanks to acquire so much debt and leverage. What steps are 
being taken to ensure that these capital, leverage, and 
liquidity requirements are implemented robustly?

A.1. The Federal Reserve Board is in the process of 
strengthening capital, leverage and liquidity requirements for 
systemically important institutions through a number of 
international and domestic initiatives. As part of its response 
to the financial crisis, the Basel Committee approved the final 
Basel 3 Accord in December 2010. The Accord will make the 
global financial system more stable and reduce the likelihood 
of future devastating financial crises by requiring 
internationally active banks to hold more and better quality 
capital and more robust liquidity buffers against the risks 
they run. The Accord will increase the capacity of banks to 
absorb losses and withstand funding pressures without relying 
on public support, and reduce the likelihood that stresses in 
the financial system would result in damaging spillovers to the 
real economy. The Accord will also reduce the incentives for 
banks to take excessive risks in the first place. National 
jurisdictions are required to issue legislation or regulations 
to implement the Accord by the end of 2013. The Board, in 
conjunction with the other U.S. banking agencies, is currently 
working on proposed rules to implement the Accord in the United 
States consistent with that timetable. The Federal Reserve 
System is also engaged in a capital planning review exercise 
that, by design, assesses the firms' capital planning 
processes, including the outcome of their internal stress 
tests. Part of the capital planning review includes an 
assessment of the largest BHCs' plans to meet the increased 
capital requirements associated with the Basel 3 Accord.
    While the Basel Accord is directed at banks and bank 
holding companies, additional efforts are underway to increase 
the regulation and supervision of systemically important 
nonbank financial institutions. As you are aware, some of the 
most destabilizing events of the recent financial crisis 
involved the collapses of large, nonbank financial firms. The 
Dodd-Frank Act usefully includes provisions that enable the 
Federal Government to expand the perimeter of regulation and 
help ensure that any nonbank financial firm with an outsized 
systemic footprint is subject to strong Federal oversight on a 
consolidated basis. The Financial Stability Oversight Council 
(FSOC) recently issued a notice of proposed rulemaking on the 
designation process for systemically important nonbank 
financial institutions (nonbank SIFIs) and is expected to 
finalize those rules later this year, paving the way for 
possible future designations. Nonbank firms designated by the 
FSOC will be subject to consolidated supervision by the Federal 
Reserve Board, including consolidated capital, leverage, and 
liquidity requirements.
    The Board is also in the process of developing the enhanced 
prudential standards contained in sections 165 and 166 of the 
Dodd-Frank Act for both bank holding companies with 
consolidated assets greater than $50 billion as well as nonbank 
SIFIs designated by the FSOC. The enhanced prudential standards 
include risk-based capital, leverage and liquidity 
requirements, as well as single-counterparty credit exposure 
limits and requirements to produce resolution plans, run stress 
tests, and comply with enhanced risk management standards. The 
enhanced prudential standards generally must increase in 
stringency as the firm's systemic footprint increases and not 
result in sharp, discontinuous changes for firms with a similar 
systemic footprint. Final rules implementing sections 165 and 
166 are due in January 2012, and the Board expects to issue 
proposed rules in the coming months. Our goal is to produce a 
well-integrated set of rules that meaningfully reduces the 
probability of failure of our largest, most complex financial 
firms and the losses to the financial system in the event of 
their failure.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                      FROM BEN S. BERNANKE

Q.1. Banks, Capital, and Losses. The ongoing foreclosure crisis 
and the foreclosure fraud scandal are issues of great national 
importance, and of particular importance in my home State.
    And right now the four largest banks are the most exposed 
to the shaky real estate market--they have over 40 percent of 
the mortgage servicing contracts and second lien mortgages.
    Despite this exposure to potential housing-related losses, 
as well as looming new capital rules from Dodd-Frank and the 
Basel Committee, the Federal Reserve is conducting stress tests 
that will pave the way for 19 of the largest banks to once 
again buy back their stock and issue dividends.
    The three largest banks also have about $121 billion in 
debt guaranteed by the FDIC which costs taxpayers, gives this 
debt a funding advantage, and is not being counted by the 
stress tests.

    By easing dividend and stock restrictions on big 
        banks, are we adding to the advantage that they have 
        over their smaller competitors?

    Everyone agrees that lending has contracted but 
        bonuses are booming. Won't paving the way for dividend 
        payments to investors--including their own executives--
        limit the banks' ability to deploy their capital to 
        support the recovery?

    There is a lot of uncertainty about the future of 
        the housing market and new capital requirements, and 
        each dollar paid out to shareholders is a dollar less 
        in equity for the bank. How can we ensure that allowing 
        big banks to issue dividends now won't damage their 
        capital levels and future stability?

    Should one of these 19 companies encounter issues 
        with their capital base, are the Fed and FDIC ready to 
        use their new authorities under Dodd-Frank right now--
        the ``Grave Threat Divestiture'' and ``Orderly 
        Liquidation Authority,'' respectively?

    If not now, when will those authorities be ready?

A.1. Response not provided.

Q.2. Capital Rules and Foreign Banks. A recent report in the 
Wall Street Journal raised concerns about foreign banks 
shedding their Bank Holding Company designations in an effort 
to evade new capital requirements imposed by the Dodd-Frank 
Act. There appear to be concerns about the level of capital at 
some of these institutions. And though Dodd-Frank contains 
several anti-evasion provisions, including Section 113 and 
Section 117, those provisions apply, respectively, to Nonbank 
Financial Companies and Bank Holding Companies that received 
TARP funding.

    Is it your interpretation that Dodd-Frank does not 
        contain anti-evasion authority that would apply to this 
        situation? Please explain any authority that the Board 
        does have.

    Would such anti-evasion authority be useful for the 
        Board to carry out its mission of Bank Holding Company 
        supervision and systemic risk mitigation?

A.2. Response not provided.

Q.3. Mortgage Servicing and Examinations. In November, the GAO 
released a study on abandoned foreclosures, also known as 
``bank walkaways.'' With respect to mortgage servicing, the 
report found:

        According to our interviews with Federal banking 
        regulators, mortgage servicers' practices . . . have 
        not been a major focus covered in their supervisory 
        guidance in the past. The primary focus in these 
        regulators' guidance is on activities undertaken by the 
        institutions they oversee that create the significant 
        risk of financial loss for the institutions. Because a 
        mortgage servicer is generally managing loans that are 
        actually owned or held by other entities, the servicer 
        is not exposed to losses if the loans become delinquent 
        or if no foreclosure is completed. As a result, the 
        extent to which servicers' management of the 
        foreclosure process is addressed in regulatory guidance 
        and consumer protection laws has been limited and 
        uneven. For example, guidance in the mortgage banking 
        examination handbook that OCC examiners follow when 
        conducting examinations of banks' servicing activities 
        notes that examiners should review the banks' handling 
        of investor-owned loans in foreclosure, including 
        whether servicers have a sound rationale for not 
        completing foreclosures in time or meeting investor 
        guidelines. In contrast, the guidance included in the 
        manual Federal Reserve examiners use to oversee bank 
        holding companies only contained a few pages related to 
        mortgage servicing activities, including directing 
        examiners to review the income earned from the 
        servicing fee for such operations, but did not 
        otherwise address in detail foreclosure practices.

        In addition, until recently, the extent to which these 
        regulators included mortgage servicing activities in 
        their examinations of institutions was also limited. 
        According to OCC and Federal Reserve staff, they 
        conduct risk-based examinations that focus on areas of 
        greatest risk to their institutions' financial 
        positions as well as some other areas of potential 
        concern, such as consumer complaints. Because the risks 
        from mortgage servicing generally did not indicate the 
        need to conduct more detailed reviews of these 
        operations, federal banking regulators had not 
        regularly examined servicers' foreclosure practices on 
        a loan-level basis, including whether foreclosures are 
        completed. For example, OCC officials told us their 
        examinations of servicing activities were generally 
        limited to reviews of income that banks earn from 
        servicing loans for others and did not generally 
        include reviewing foreclosure practices.

    Please describe your agencies' views of the risks related 
the banks' servicing divisions, including:

    The losses stemming from the servicing divisions of 
        the banks that you regulate.

    What further losses, if any, you expect.

    How your agencies have changed your examination 
        procedures relating to banks' servicing divisions.

    Whether there will be uniform standards for 
        servicing examination across all Federal banking 
        agencies.

A.3. Response not provided.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                      FROM BEN S. BERNANKE

Q.1. The ``routing'' provisions included in the Fed's proposed 
debit interchange rules would seem to provide merchants with an 
opportunity to discriminate against purchases made with cards 
from ``exempt'' small issuers which would hear larger 
interchange rates. What responsibility and authority does the 
Fed have to ensure that small issuers aren't discriminated 
against through subtle ``steering'' by merchants or more 
explicit discrimination against transactions made with cards 
from small issuers?

A.1. Response not provided.

Q.2. In drafting your proposed debit interchange rules, to what 
extent did the Fed evaluate the impact of those proposed rules 
on consumers?

A.2. Response not provided.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                      FROM BEN S. BERNANKE

Q.1. For each of the witnesses, though the Office of Financial 
Research does not have a Director, what are each of you doing 
to assist OFR in harmonizing data collection, compatibility, 
and analysis?

A.1. Response not provided.

Q.2. Chairman Bernanke, I understand the FSOC has organized and 
released proposed rules on how it will designate systemically 
significant nonbank financial companies for regulation.

A.2. Response not provided.

Q.3. As you know, I worked quite extensively on Title 1 and 
Title 2, and I worked very hard to include this authority and 
specifically, to make sure that this authority was not 
restricted by exempting any class of institution. But the bill 
did specifically include a list of 10 factors that together, 
were intended to paint a thorough picture of the systemic risks 
that threatened our economy during the last few years. One of 
the things financial institutions asked for, and I thought was 
reasonable and the Congress thought reasonable, was that the 
Council provide some specificity around those factors so that 
if a company wanted to manage the risks it posed and avoid 
designation, it could.
    I am concerned that your draft rule merely restates the 
criteria without providing any quantitative guidance for 
companies. This is not about evasion--the Council has authority 
to react to attempts at evasion. And this is not about rigid 
rules that must be triggered before the council can act, 
because the Council can also look at qualitative issues and the 
whole picture.
    I also feel that there is a benefit to including specifics 
that companies can manage to as long as the specifics really 
get at systemic risk, companies managing within the parameters 
you set will by definition reduce the systemic risk present in 
the financial system. There is nothing wrong with teaching to 
the test if the test is well designed and there shouldn't be 
anything wrong with companies managing to the Council's 
parameters if they are well designed.
    Why did the draft rule fail to provide any specifics, 
unlike, banking regulators do when it comes to Tier 1 capital, 
or leverage ratios, or core deposits? Will you reconsider the 
rule to give companies more specific measures so that they can 
manage the risk they pose?

A.3. Response not provided.

Q.4. Chairman Bernanke, your agency was charged with working 
together to develop orderly liquidation plans for systemically 
significant financial institutions so that they can avoid 
needing resolution under Title 2 if they fail. Where are we in 
that process and when can we expect companies to start 
submitting plans to you for review and approval?

A.4. Response not provided.

Q.5. Chairman Bernanke, most of the companies subject to the 
requirement for an orderly liquidation plan are multinational 
in at least some respect. What cross border issues have you 
uncovered and how are you working to address those issues? Are 
there any legal barriers to resolving those issues in a way 
that ensures the plans work?

A.5. Response not provided.

Q.6. Chairman Bernanke, many of my colleagues have brought up 
concerns about how the proposed interchange rule will affect 
small financial institutions and, ultimately, consumers. 
Specifically the rule does not address how merchants make 
routing choices, which could significantly affect volume for 
small institutions. So I want to ask you, how do you anticipate 
that this proposed cap will affect consumers and their access 
to banking services?
    If banks raise account fees, limit access to certain 
services, and banking generally becomes more expensive for 
consumers, will that push people out of the regulated banking 
space that many people have worked hard to bring them into?

A.6. Response not provided.

Q.7. Chairman Bernanke, I believe that the Qualified 
Residential Mortgage is a significant effort towards repairing 
our underwriting problems and lack of private sector investment 
in the housing market right now. I understand there is concern 
that because these qualified mortgages will be exempted from 
risk retention standards, we want this type of mortgage to be 
affordable and available. Can you tell us how you are weighing 
the construct of a QRM--including down payment, income, LTV, 
and the use of private insurance?

A.7. Response not provided.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                      FROM BEN S. BERNANKE

Q.1. Federal Reserve Supervision of Largest Financial Firms. 
The rulemaking for Dodd-Frank is a critical part of ensuring 
financial reform and protecting the economy and taxpayers. 
Equally important, though, is the manner in which the Federal 
Reserve, as the supervisor of the largest financial firms, 
conducts its supervisory responsibilities. Could you please 
update the Committee on improvements to the supervisory process 
put in place over the past 2 years. In addition, can you please 
describe improvements to the examination process, including 
what types of full-scope examinations (including but not 
limited to stress tests) that the largest bank holding 
companies are subjected to on an annual basis. In addition, 
what processes does the Federal Reserve use to ensure that its 
staff conducting examinations identify risks or compliance 
problems that are not identified by the bank holding companies 
themselves.

A.1. Response not provided.

Q.2. Financial Crisis and Economic Growth. Please provide your 
best estimate of (1) how much U.S. gross domestic product was 
lost during the period of 2009 through the present as a result 
of the 2007-08 financial crisis and (2) how much of the U.S. 
debt added during the period of 2009 through the present was as 
a result of the 2007-08 financial crisis (for example, lost tax 
revenue and increased mandatory payments)?
    Do you agree that failure to speedily implement necessary 
financial reforms represents a very serious fiscal risk to the 
United States?

A.2. Response not provided.

Q.3. Community Banks and Economic Growth. I have heard from 
some of my local community banks that certain capital, 
accounting, and examination rules may be working at cross 
purposes with the ability of community banks to serve the 
economic growth needs of the families and small businesses they 
serve in their communities, especially when compared to 
standards applied to the largest national banks. I wish to 
bring several to your attention and ask that you comment:

    The Financial Accounting Standards Board's proposed 
        exposure draft on ``Troubled Debt Restructurings'' 
        (TDRs) has been pointed out as possibly creating a 
        capital disincentive for banks to engage in work-outs 
        and modifications with their business borrowers because 
        of the effect of immediately having to declare those 
        loans ``impaired.'' In addition, for banks over $10 
        billion in asset size, there may be additional direct 
        costs for FDIC premiums based on a formula that 
        considers TDR activity.

    The disallowance to Risk-Based Capital of the 
        amount of Allowance for Loan Losses (ALLL) in excess of 
        1.25 percent of Risk Weighted Assets has been flagged 
        as a challenge in this environment, where some firms 
        have ALLL that significantly exceeds that threshold. 
        This may serve to understate the risk-based capital 
        strength of the bank, adding to costs and negatively 
        impacting customer and investor perceptions of the 
        bank's strength.

    It has been reported that examiners have rejected 
        appraisals that are less than 9 months old when 
        regulatory guidance calls for accepting appraisals of 
        up to 12 months.

    Community banks are subject to examination in some 
        cases as frequently as every 3 months. In contrast, 
        some suggest that our largest national banks may not 
        ever undergo an examination as thorough, with the 
        challenges surrounding loan documentation, foreclosure, 
        and MERS as a glaring example of the results.

    Are there regulatory or supervisory adjustments in these or 
related areas that need to be made to facilitate community 
banks' abilities to serve their communities?
    In addition, have you considered ways in which capital 
charges, accounting rules, and examination rules for community 
banks in particular can be adapted to be less procyclical, such 
that they do not become stricter into an economic downturn and 
lighter at the top of an upturn?
    Finally, what procedures do you have in place to ensure 
that our community banks and our largest national banks are not 
subject to differing examination standards, even when they are 
examined by different regulators?

A.3. Response not provided.

Q.4. International Coordination Regarding Resolution. Our 
largest financial firms today operate across many national 
boundaries. Some firms are aiming to conduct 50 percent or more 
of their business internationally. Can you update the Committee 
on the status and any challenges regarding the establishment of 
mechanisms, plans, and other aspects of coordination between 
international regulatory bodies to ensure that financial firms 
operating internationally can be effectively placed into the 
Dodd-Frank resolution regime and are not otherwise able to 
attain ``too big to fail'' status through international 
regulatory arbitrage?
    Please also update the Committee on the status of the 
regulation of international payments systems and other internal 
systemic financial market utilities so that the entities that 
manage or participate in them are not able to avoid the 
resolution regime through international regulatory arbitrage.

A.4. Response not provided.

Q.5. Repo and Prime Brokerage. During the financial crisis, the 
instability of the triparty repurchase agreement (repo) markets 
and prime brokerage relationships played critical roles in the 
collapse of several major financial firms. As the quality of 
the repo collateral began to decline and as both repo and prime 
brokerage ``depositors'' began to doubt the stability of their 
counterparties (because of the toxic positions in the trading 
accounts of the counterparties), a classic bank run emerged, 
only this time it was at the wholesale level. Please provide an 
update on rulemaking and other policy changes designed to 
reduce risks to our financial system in the repo markets and in 
prime brokerage.

A.5. Response not provided.

Q.6. Derivatives Oversight. Counterparty risk and other risks 
associated with derivatives played a central role in the 
financial crisis, especially in fueling the argument that firms 
such as AIG were too big or too interconnected to fail. What 
oversight systems do you plan to have in place to ensure that 
any accommodations made in the course of rulemaking for 
nonfinancial commercial parties do not create holes in the 
regulatory structure that permit the accumulation of hidden or 
outsized risk to the U.S. financial system and economy.

A.6. Response not provided.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM BEN S. BERNANKE

Q.1. Regarding the FSOC's recently proposed Notice of Proposed 
Rulemaking on the authority to require Federal Reserve 
supervision and regulation of certain nonbank financial 
companies, will the Council propose metrics adapted for the 
risks presented by particular industry sectors for notice and 
comment, and does the Council intend to designate nonbank 
financial companies before those industry-specific metrics are 
published?

A.1. Response not provided.

Q.2. Dodd-Frank requires that risk retention be jointly 
considered by the regulators for each different type of asset 
and includes a specific statutory mandate related to any 
potential reforms of the commercial mortgage-backed securities 
to limit disruptions. Given the importance of rigorous cost-
benefit and economic impact analyses and the need for due 
consideration of public comments, do your agencies need more 
time than is provided by the looming April deadline?

A.2. Response not provided.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                      FROM BEN S. BERNANKE

Q.1. Chairman Bernanke, the Federal Reserve has issued proposed 
changes to disclosures under Regulation Z and the Truth in 
Lending Act with the comment period having ended in December 
2010. It has been brought to my attention that the model 
disclosure forms included in the proposed rule related to 
certain credit insurance products steer customers away from 
those products with claims that may not be relevant to a 
particular customer's situation--i.e., ``This product will cost 
up to $118.00 per month.'' (Model Form H-17(B)). While I am 
aware of the risks associated with certain credit insurance 
products, the experience in Tennessee has been that many 
consumers have benefited from this type of insurance coverage. 
Model disclosures containing strong warnings against purchasing 
this type of protection may leave consumers unprotected and in 
a worse financial situation than currently today with credit 
protection in place. Can you discuss the Federal Reserve model 
disclosure testing methodologies to determine the impact of 
certain terms and phrases used in model disclosures and 
customer responses to those terms and phrases?

A.1. The Federal Reserve Board has recently issued proposals to 
revise Regulation Z, which implements the Truth in Lending Act 
(TILA). Among other things, the proposals published in August 
2009 and September 2010 would revise the disclosures provided 
to consumers in connection with the purchase of credit 
insurance and similar products, such as debt cancellation 
coverage or debt suspension coverage (credit protection 
products). These new disclosure requirements would apply to 
credit protection products purchased in connection with any 
consumer credit transaction. The Board used consumer testing to 
develop the model disclosures in both the August 2009 and 
September 2010 proposed rules for credit protection products.
    On February 1, 2011, the Board announced that it does not 
expect to finalize three pending Regulation Z proposals prior 
to the transfer of authority for such rulemakings to the 
Consumer Financial Protection Bureau (CFPB). Those rulemakings 
include the proposed disclosures for ``credit protection'' 
products. The Board will transfer the record of these 
rulemakings to the CFPB for its consideration before any final 
rules are issued. Thus, the CFPB also would be the agency to 
determine whether further study is needed, including whether 
additional consumer testing would be appropriate.
    You express concern about the Board's proposed model 
disclosures for these products. You state that the proposed 
disclosures would steer consumers away from credit protection 
products with claims that might not be relevant to a particular 
customer's situation. The Board believes that in order for 
consumers to benefit from the disclosures, the disclosures must 
be clear and meaningful. Accordingly, the proposed disclosures 
that were published for comment were based, in part, on 
consumer testing to ensure that consumers understand the 
product. The model disclosures seek to provide consumers with 
timely information regarding the costs and risks of credit 
protection products in addition to the benefits promoted by 
creditors or other vendors. Even if a particular risk may not 
affect every consumer, there can be benefit in alerting all 
consumers who potentially may be affected. However, in weighing 
whether the benefits of the added disclosure outweigh its 
costs, it would be appropriate also to consider the likelihood 
that the risk will occur.
    You also ask about the consumer testing methodologies used 
by the Board to determine the impact of the language used in 
the proposed model disclosures, and about consumers' responses 
to this language. The Board conducted consumer testing for the 
proposed model forms with the assistance of a consulting firm, 
ICF Macro (Macro) that specializes in designing and testing 
such documents. Consumer testing was conducted in connection 
with both the August 2009 and September 2010 proposals. Macro 
conducted six rounds of testing in various locations around the 
country, with a total of 60 individual interviews with 
consumers of varying demographic backgrounds. Four rounds of 
testing were conducted before the Board issued the August 2009 
proposals; two rounds were conducted in connection with the 
September 2010 proposal.
    In connection with the September 2010 proposed rules, 
testing of the disclosures and notices related to credit 
insurance was carried out through two rounds of interviews. 
Before each round of interviews, Macro developed model 
disclosures. In some cases, multiple versions of each type of 
disclosure were developed so that the impact of varying 
language or format could be studied. Board staff attended all 
rounds of testing. After each round, Macro briefed Board staff 
on key findings, as well as their implications for disclosure 
design and layout.
    Individual interviews with consumers were approximately 75 
minutes long. While the interview guide varied between rounds, 
the general structure of these interviews was very similar. 
Participants were given a disclosure and asked to ``think 
aloud'' while they reviewed the document, indicating whenever 
they found something surprising, interesting, or confusing. 
Following this ``think aloud'' process, participants were asked 
specific questions about the information on the disclosure to 
determine how well they could find and interpret the content. 
The participants were then given a new disclosure to review and 
the interviewer took them through the same process.
    The consumer testing results generally demonstrated that 
that the proposed model forms communicate important information 
in a clear and effective way, which should enable consumers to 
comprehend complex information and make informed financial 
decisions. In addition, findings from the last round of testing 
showed that comprehension of the disclosure was high when the 
information was presented in tabular question-and-answer 
format. As a result, the proposed model forms use this format. 
Comprehension of the content of this disclosure was also high. 
However, because of concerns about ``information overload,'' 
some of the information on the tested disclosure form was not 
included in the proposed model forms published for comment. The 
following three reports prepared by Macro describe the results 
of the 2009 and 2010 testing, and are available on the Board's 
public Web site at: http://www.federalreserve.gov/boarddocs/
meetings/2009/20090723/Full%20HELOC_Macro%20Report.pdf (August 
2009 Proposed Rules for Home-Equity Lines of Credit); http://
www.federalreserve.gov/boarddocs/meetings/2009/20090723/
Full%20Macro%20CE%20Report.pdf (August 2009 Proposed Rules for 
Closed-end Mortgage Loans); http://www.federalreserve.gov/
newsevents/press/bcreg/
bcreg20100816_MacroBOGReportOtherDisclosures(7-10)(FINAL).pdf 
(September 2010 Proposal).
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                      FROM BEN S. BERNANKE

Q.1. A Bloomberg news story, citing a Financial Stability 
Oversight Council (FSOC) staff report marked ``confidential,'' 
indicates that there is a parallel regulatory track with 
respect to the designation of systemically significant nonbank 
financial companies. The Bloomberg story mentions FSOC staff 
are moving forward with ``confidential'' criteria that will be 
used to designate systemically important nonbank financial 
institutions. However, unlike the proposed rule, which merely 
restates the statutory language, these confidential criteria 
are not subject to public comment and has yet to be reviewed by 
anyone outside of the council aside from this news report. This 
raises serious questions about the transparency of FSOC's 
rulemaking process.
    From what has been reported, portions of the leaked report 
conclude that an insurer failure could create adverse 
macroeconomic impact. This conclusion appears to have been 
reached without the required insurance expertise, which has yet 
to be appointed. A similar conclusion was made with respect to 
hedge funds.
    Unfortunately, there has been no public disclosure of the 
criteria or metrics that were used to arrive at this 
conclusion. As such, could you explain what metrics were 
applied and by whom in reaching this conclusion? What basis did 
the FSOC staff use to select these criteria?
    Chairwoman Bair's written testimony to this Committee 
states: ``The nonbank financial sector encompasses a multitude 
of financial activities and business models, and potential 
systemic risks vary significantly across the sector. A staff 
committee working under the FSOC has segmented the nonbank 
sector into four broad categories: (1) the hedge fund, private 
equity firm, and asset management industries; (2) the insurance 
industry; (3) specialty lenders, and (4) broker-dealers and 
futures commission merchants. The council has begun developing 
measures of potential risks posted by these firms.''
    ``The FSOC is committed to adopting a final rule on this 
issue later this year, with the first designations to occur 
shortly thereafter.'' Since the rulemaking process is already 
underway, do you know if the administration is planning to make 
this report public?
    Will there be an opportunity for public comment on it 
before any final rules are promulgated?
    What is your logic behind identifying these four 
categories?
    Will you publish and seek comment on the industry-specific 
metrics that will applied, before such assessments begin, so 
that Congress can have confidence that FSOC is exercising its 
authority appropriately and impacted financial companies can be 
assured that they are not being treated arbitrarily?

A.1. The Council is working to develop a framework to help it 
identify systemically important nonbank firms. On January 26, 
2011, the Council issued a notice of proposed rulemaking (NPR) 
\1\ seeking public comment on a proposed framework that the 
Council could use to determine whether a nonbank financial 
company may pose a threat to the financial stability of the 
United States. In developing the proposed framework set forth 
in the NPR, the Council considered the comments received on its 
earlier advance notice of proposed rulemaking (ANPR). \2\ 
Issuing the NPR continued the Council's commitment to solicit 
input from the public as the Council works to develop a robust 
and disciplined framework to support any designation decisions 
that it makes.
---------------------------------------------------------------------------
     \1\ 76 FR 4555 (2011).
     \2\ 75 FR 61653 (2010).
---------------------------------------------------------------------------
    The preamble to the NPR sets forth a framework for 
assessing the threat a nonbank financial company may pose to 
the financial stability of the United States. The proposed 
framework groups the statutory factors that the Council must 
consider into the following six categories: size, lack of 
substitutes, interconnectedness, leverage, liquidity risk and 
maturity mismatch, and existing regulatory scrutiny. The 
Council has begun to gather and analyze data to develop metrics 
to evaluate each of the six categories. The Council also 
intends to tailor the metrics to the principal business lines 
and business models of a nonbank financial company as 
appropriate.
    The Council has received many comments on the NPR and is in 
the process of reviewing these comments. Many commenters 
suggested that the Council provide more detail regarding the 
framework and criteria it will use as it considers possible 
designations. As it moves forward with developing its framework 
to support designation, the Council is considering how best to 
reflect these comments in its final rule. The Council also is 
considering how to continue to allow for transparency and 
public input in its process.
    As a member agency of the Council, the Board is providing 
assistance to the Council as it works to establish its 
framework.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                      FROM SHEILA C. BAIR

Q.1. Recently, some have voiced concerns that the timeframe for 
the rulemakings required by the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank) is too short to allow 
for adequate consideration of the various comments submitted or 
to review how the new rules may impact our financial markets. 
Does the current timeframe established by Dodd-Frank allow each 
rulemaking to be completed in a thoughtful and deliberative 
manner?

A.1. The FDIC recognizes the importance of providing sufficient 
time for interested parties to comment on all proposed rules 
and studies required by the Dodd-Frank Act. We are committed to 
providing adequate time for that process. It is critical, 
therefore, that we try to strike an appropriate balance in our 
efforts to implement the Dodd-Frank Act between timely and 
efficient rulemaking and careful review and consideration of 
public comment. As stated in my testimony, ``regulators must 
maintain a clear view of the costs of regulation--particularly 
to the vital community banking sector--while also never 
forgetting the enormous economic costs of the inadequate 
regulatory framework that allowed the crisis to occur in the 
first place.'' Moreover, ``it is essential that this 
implementation process move forward both promptly and 
deliberately, in a manner that resolves uncertainty as to what 
the new framework will be and that promotes long-term 
confidence in the transparency and stability of our financial 
system,'' On the other hand, we do recognize that the industry 
is adjusting to significant changes in banking laws and 
regulation, and there is cost associated with that.
    The FDIC establishes comment periods consistent with the 
timeframes dictated by the statute. As a general matter, the 
FDIC tries to provide a 60-day comment period for each 
significant proposed rule, and for some rules we have provided 
comment periods as long as 90 days. As a matter of practice, 
the FDIC often accepts and considers comments filed after the 
established deadlines but before the rulemakings are finalized.

Q.2. In defining the exemption for ``qualified residential 
mortgages,'' are the regulators considering various measures of 
a lower risk of default, so that there will not just be one 
``bright line'' factor to qualify a loan as a Q.R.M.?

A.2. Section 941 of the Dodd-Frank Act, titled, Regulation of 
Credit Risk Retention, requires the FDIC (together with the 
Federal Reserve Board, Offce of the Comptroller of the 
Currency, Securities and Exchange Commission, Department of 
Housing and Urban Development, and the Federal Housing Finance 
Agency--collectively, the ``agencies'') to require securitizers 
to retain no less than 5 percent of the credit of any assets 
transferred to investors through the issuance of an asset-
backed security (ABS). Section 941 exempts certain ABS 
issuances from the general risk retention requirement, 
including ABS issuances collateralized exclusively by 
``qualified residential mortgages'' (QRM), as jointly defined 
by the agencies.
    An interagency working group is near completion of a notice 
of proposed rulemaking to implement section 941. I anticipate 
the proposed rule will solicit public comment on various 
options for satisfying the credit risk retention requirements 
of section 941, as well as the appropriateness of certain 
exemptions. I believe that, based on the data and other 
information described in the response to Question 3 (below), 
the underwriting and product features for QRM loans should 
include standards related to the borrower's ability and 
willingness to repay the mortgage (as measured by the 
borrower's debt-to-income (DTI) ratio); the borrower's credit 
history; the borrower's down payment amount and sources; the 
loan-to-value (LTV) ratio for the loan; the form of valuation 
used in underwriting the loan; the type of mortgage involved; 
and the owner-occupancy status of the property securing the 
mortgage.

Q.3. What data are you using to help determine the definition 
of a Qualified Residential Mortgage?

A.3. In considering how to determine whether a mortgage is a 
QRM, the agencies are examining data from multiple sources. For 
example, the agencies are reviewing data on mortgage 
performance supplied by the Applied Analytics division 
(formerly McDash Analytics) of Lender Processing Services 
(LPS). To minimize performance differences arising from 
unobservable changes across products, and to focus on loan 
performance through stressful environments, for the most part, 
the agencies are considering data for prime fixed-rate loans 
originated from 2005 to 2008. This data set includes 
underwriting and performance information on approximately 8.9 
million mortgages.
    As is typical among data provided by mortgage servicers, 
the LPS data do not include detailed information on borrower 
income and on other debts the borrower may have in addition to 
the mortgage. For this reason, the agencies are also examining 
data from the 1992 to 2007 waves of the triennial Survey of 
Consumer Finances (SCF). Because families' financial conditions 
will change following the origination of a mortgage, the 
analysis of SCF data focused on respondents who had purchased 
their homes in either the survey year or the previous year. 
This data set included information on approximately 1,500 
families. In addition, it is my understanding that the agencies 
are examining a combined data set of loans purchased or 
securitized by a Government-sponsored enterprise from 1997 to 
2009. This data set consists of more than 78 million mortgages, 
and includes data on loan products and terms, borrower 
characteristics (for example, income and credit score), and 
performance data through the third quarter of 2010.

Q.4. Dodd-Frank (Sec 939A) required the regulators to remove 
any reference or requirement of reliance on credit ratings from 
its regulations. In his testimony, Acting Comptroller of the 
Currency John Walsh wrote: ``(R)egional and community banks 
noted (in their comments) that using internal risk assessment 
systems to measure credit worthiness for regulatory purposes 
would be costly and time consuming . . . . These concerns could 
be addressed if section 939A is amended in a targeted manner 
that allows institutions to make limited use of credit ratings. 
Precluding undue or exclusive reliance on credit ratings, 
rather than imposing an absolute bar to their use, would strike 
a more appropriate balance between the need to address the 
problems created by overreliance on credit ratings with the 
need to enact sound regulations that do not adversely affect 
credit availability or impede economic recovery.''
    What is the status of this effort and what types of 
alternative measures are being considered? Do you share the 
concerns raised by community banks, and what is your reaction 
to Acting Comptroller Walsh's comments on this issue?

A.4. The Federal banking agencies continue to work toward 
developing alternatives to credit ratings. On August 25, 2010, 
the banking agencies issued an Advance Notice of Proposed 
Rulemaking (ANPR) seeking industry comment on how we might 
design an alternative standard of creditworthiness, For the 
most part, the comments we received lacked substantive 
suggestions on how to answer this question, Although we have 
removed any reliance on credit ratings in our assessment 
regulation, developing an alternative standard of 
creditworthiness for regulatory capital purposes is proving 
more challenging, The use of credit ratings for regulatory 
capital covers a much wider range of exposures; we cannot rely 
on nonpublic information, and the alternative standard should 
be usable by banks of all sizes. We are actively exploring a 
number of alternatives for dealing with this problem.
    We agree with the concerns raised by Acting Comptroller 
Walsh, which stem from the difficult nature of designing 
alternative standards of creditworthiness that are 
appropriately risk sensitive and can be consistently applied 
across banking organizations of all sizes. We also agree with 
the concerns of community banks that internal risk assessments 
would place a significant burden on smaller banks, as would 
some of the other alternatives discussed in the NPR. 
Notwithstanding these concerns, the agencies will continue to 
work toward the development of a pragmatic solution for all 
banks.

Q.5. You have said that the resolution plans are a critical 
component of ending ``too big to fail.'' What is the status of 
that rulemaking?

A.5. Section 165 of the Dodd-Frank Act requires the FDIC to 
promulgate joint rules with the Federal Reserve setting forth 
the regulatory standards and filing requirements for resolution 
plans. The plans are to be jointly reviewed and enforced by the 
FDIC and Federal Reserve. The FDIC is working closely with the 
Federal Reserve to jointly promulgate rules under Section 165 
of Title I. It is the FDIC's publicly expressed desire to issue 
a proposed rulemaking in the very near term. The standards 
would establish a time line and process for firms to submit 
resolution plans.

Q.6. Please discuss the current status and timeframe of 
implementing the Financial Stabilty Oversight Council's (FSOC) 
rulemaking on designating nonbank financial companies as being 
systemically important. As a voting member of FSOC, to what 
extent is the Council providing clarity and details to the 
financial marketplace regarding the criteria and metrics that 
will be used by FSOC to ensure such designations are 
administered fairly? Is the intent behind designation decisions 
to deter and curtail systemically risky activity in the 
financial marketplace? Are diverse business models, such as the 
business of insurance, being fully and fairly considered as 
compared with other financial business models in this 
rulemaking?

A.6. The FSOC has issued a notice of proposed rulemaking 
regarding the designation of nonbank financial firms under 
Title I of the Dodd-Frank Act. The notice of proposed 
rulemaking seeks public comment on the best methods to approach 
the designation of firms, and the application of systemic 
determination criteria on an institution-specific basis. The 
proposal suggests using a framework to analyze the firms, and 
applying metrics that would be tailored to that firm's business 
model and industry sector. As provided in the proposed rule: 
``The Council would evaluate nonbank financial companies in 
each of the (six categories of the framework as proposed under 
the rule) using quantitative metrics where possible. The 
Council expects to use its judgment, informed by data on the 
six categories, to determine whether a firm should be 
designated as systemically important and supervised by the 
Board of Governors. This approach incorporates both 
quantitative measures and qualitative judgments.'' The six 
broad categories are size, suitability, interconnectedness, 
leverage, liquidity risk, and existing regulatory scrutiny. 
Designated firms will be subjected to heightened prudential 
standards developed to reduce the risk the firms may pose to 
U.S. financial stability. As an important element of the 
analysis, diverse business models and industry specific 
considerations are being taken into account.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                      FROM SHEILA C. BAIR

Q.1. The Dodd-Frank Act requires an unprecedented number of 
rulemakings over a short period of time. As a result, some 
deadlines have already been missed and some agencies expect to 
miss additional deadlines. It appears that many of the 
deadlines in Dodd-Frank are not realistic. Which Dodd-Frank 
deadlines do you anticipate not being able to meet? If Congress 
extended the deadlines, would you object? If your answer is 
yes, will you commit to meeting all of the statutory deadlines? 
If Congress affords additional time for rulemaking under the 
Dodd-Frank Act, will you be able to produce higher-quality, 
better coordinated rules?

A.1. The FDIC is committed to meeting any statutory deadlines 
on rulemakings for which it has sole rule writing authority. 
Joint rules and rules written in consultation with other 
agencies generally take more time, but to date these deadlines 
have been met as well.
    While the FDIC might not object to an extension of the 
Dodd-Frank Act deadlines, we believe the statutory timeframes 
are appropriate and serve a useful purpose. On the one hand, as 
I stated in my recent written testimony before the Committee, 
``in implementing the Dodd-Frank Act, it is important that we 
continue to move forward with dispatch to remove unnecessary 
regulatory uncertainties faced by the market and the 
industry.'' Moreover, ``it is essential that this 
implementation process move forward both promptly and 
deliberately, in a manner that resolves uncertainty as to what 
the new framework will be and that promotes long-term 
confidence in the transparency and stability of our financial 
system.'' On the other hand, we do recognize that the industry 
is adjusting to significant changes in banking laws and 
regulation, and there is cost associated with that.
    In addition, the FDIC recognizes the importance of 
providing sufficient time for interested parties to comment on 
all proposed rules and studies required by the Dodd-Frank Act. 
We are committed to providing adequate time for that process. 
It is critical, therefore, that we try to strike an appropriate 
balance in our efforts to implement the Dodd-Frank Act between 
timely and efficient rulemaking and careful review and 
consideration of public comment. As stated in my testimony, 
``regulators must maintain a clear view of the costs of 
regulation--particularly to the vital community banking 
sector--while also never forgetting the enormous economic costs 
of the inadequate regulatory framework that allowed the crisis 
to occur in the first place.''

Q.2. Secretary Geithner recently talked about the difficulty of 
designating nonbank financial institutions as systemic. He 
said, ``it depends too much on the state of the world at the 
time. You won't be able to make a judgment about what's 
systemic and what's not until you know the nature of the 
shock.'' \1\ If it is impossible to know which firms are 
systemic until a crisis occurs, the Financial Stabilty 
Oversight Council will have a very difficult time objectively 
selecting systemic banks and nonbanks for heightened 
regulation. As a member of the Council, do you believe that 
firms can be designated ex ante as systemic in a manner that is 
not arbitrary? If your answer is yes, please explain how.
---------------------------------------------------------------------------
     \1\ See, ``Special Inspector General for the Troubled Asset Relief 
Program, Extraordinary Assistance Provided to Citigroup, Inc.'' 
(SIGTARP 11-002) (Jan. 13, 2011) (available at: http://www.sigtarp.gov/
reports/auditl2011/
Extraordinary%20Financia1%20Assistance%20Provided%20to%20Citigroup,%20In
c.pdf), at 43.

A.2. Yes, we believe it is possible and necessary to designate 
firms as systemically significant prior to an actual crisis. 
The designation process can be established using a defined 
framework and criteria, together with clear and understandable 
procedures.
    There is an important distinction to be made between a 
systemic risk determination that is made under Title II to 
authorize appointment of the FDIC as receiver for a financial 
company, and the designation of firms as systemically important 
under Title I of the Dodd-Frank Act. The systemic risk 
determination under Title II is made at the time of financial 
distress, and requires a finding that the firm is in default or 
in danger of default and that its insolvency would pose a 
threat to the financial stability of the U.S., among other 
findings. That determination will depend upon the circumstances 
at the moment. On the other hand, the determination of systemic 
significance under Title I, while addressing similar analysis 
regarding potential threat to U.S. financial stability, is 
focused on the need to develop and apply--prior to crisis--
heightened supervisory standards applicable to such firms, 
including a requirement that the firm develop resolution plans. 
It is vital that those firms which may possibly threaten U.S. 
financial stability be identified and subject to these 
heightened standards, and submit resolution plans as mandated 
by Congress prior to the actual occurrence of financial 
distress.
    To provide a defined framework and explain the process, the 
FSOC has issued a notice of proposed rulemaking regarding the 
designation of nonbank financial firms under Title I of the 
Dodd-Frank Act. The notice of proposed rulemaking seeks public 
comment on the best methods to approach the designation of 
firms, and the application of systemic determination criteria 
on an institution-specific basis, The proposal suggests using a 
framework to analyze the firms and applying metrics that would 
be tailored to that firm's business model and industry sector. 
As provided in the proposed rule: ``The Council would evaluate 
nonbank financial companies in each of the [six categories of 
the framework as proposed under the rule] using quantitative 
metrics where possible. The Council expects to use its 
judgment, informed by data on the six categories, to determine 
whether a firm should be designated as systemically important 
and supervised by the Board of Governors. This approach 
incorporates both quantitative measures and qualitative 
judgments.''

Q.3. Section 112 of the Dodd-Frank Act requires the Financial 
Stabilty Oversight Council to annually report to Congress on 
the Council's activities and determinations, significant 
financial market and regulatory developments, and emerging 
threats to the financial stability of the United States. Each 
voting member of the Council must submit a signed statement to 
the Congress affirming that such member believes the Council, 
the Government, and the private sector are taking all 
reasonable steps to ensure financial stability and mitigate 
systemic risk. Alternatively, the voting member shall submit a 
dissenting statement. When does the Council expect to supply 
the initial report to Congress?

A.3. The report is required on an annual basis, and we expect 
that the report will be submitted in a timely fashion this 
July.

Q.4. Which provisions of Dodd-Frank create the most incentives 
for market participants to conduct business activities outside 
the United States? Have you done any empirical analysis on 
whether Dodd-Frank will impact the competitiveness of U.S. 
financial markets? If so, please provide that analysis.

A.4. The Dodd-Frank Act contains no provisions that 
specifically encourage the conduct of business outside of the 
U.S. The FDIC has not conducted an empirical analysis of the 
potential impact of the Act on the decision making of financial 
firms in locating their operations internationally. However, 
these decisions will likely continue to be based on a large 
number of considerations. Foremost among them will continue to 
be the location of their customers. The U.S. economy is the 
world's largest, encompassing about a quarter of global 
economic activity. Its capital markets also remain the world's 
largest and most sophisticated. This leading global position 
not only makes the U.S. a preferred venue for conducting 
banking and other financial activities, but it also 
necessitates a strong regulatory framework for ensuring 
financial stability and safe and sound banking practices.
    It is true that short-term international competitive 
imbalances could arise if there were a failure to coordinate 
capital requirements, resolution procedures, and other 
regulatory practices designed to promote financial stability. 
However, as we have seen in the aftermath of the recent global 
financial crisis, some of the countries where financial 
practices were allowed to weaken the most saw their financial 
institutions experience large losses that ultimately undermined 
their sovereign balance sheets and macroeconomic stability. 
Clearly, winning such a race to the bottom is no recipe for 
long-term competitive advantage in finance or in overall 
economic performance.
    The Dodd-Frank Act mandates more than 70 studies, many of 
which relate to the effects of the Act's provisions on the 
economy and the functioning of financial markets. As described 
in our testimony, the FDIC is working on a number of fronts, 
both on our own and in concert with our regulatory 
counterparts, to complete these assigned studies and carry out 
rulemakings as mandated by the Act as expeditiously, as 
carefully, and as transparently as possible.

Q.5. More than 6 months have passed since the passage of the 
Dodd-Frank Act, and you are deeply involved in implementing the 
Act's approximately 2,400 pages. Which provisions of the Dodd-
Frank Act are proving particularly difficult to implement? Have 
you discovered any technical or substantive errors in the Dodd-
Frank legislation? If so, please describe them.

A.5. It is still relatively early in the implementation 
process. As you know, the Act charges the FDIC and other 
regulators with interpreting a number of new statutory 
provisions through rulemakings with differing time lines. While 
some final rules are in place (such as the FDIC's initial 
orderly liquidation authority interim final rule and the final 
rule changing the Deposit Insurance Fund assessment base), much 
still needs to be done.
    Agency rulemaking typically involves notice and opportunity 
for comment. One benefit of that process is that it helps 
identify the more difficult interpretive issues and flesh out 
reasonable options for addressing them.
    So far, the most difficult practical issue has been 
identifying substitutes for credit ratings in some particular 
contexts. Section 939A of the statute requires the elimination 
of credit ratings rather than supplementing their use. While 
the FDIC's final large bank pricing rule adopted earlier this 
month has eliminated reliance on long-term debt issuer ratings, 
we are still in the process of developing substitute measures 
for creditworthiness in other areas, such as the capital rules.

Q.6. What steps are you taking to understand the impact that 
(the) your agency's rules under Dodd-Frank will have on the 
U.S. economy and its competitiveness? What are the key ways in 
which you anticipate that requirements under the Dodd-Frank Act 
will affect the U.S. economy and its competitiveness? What are 
your estimates of the effect that the Dodd-Frank Act 
requirements will have on the jobless rate in the United 
States?

A.6. As you know, the FDIC is required or authorized by 
Congress to implement some 44 regulations, including 18 
independent and 26 joint rulemakings. As we proceed with 
implementing the provisions of the Dodd-Frank Act as 
expeditiously and transparently as possible, we undertake the 
same steps that we follow in any regulatory process, from 
providing a comment period through meeting requirements of the 
Paperwork Reduction Act, Regulatory Flexibility Act, the Riegle 
Community Development and Regulatory Improvement Act of 1992, 
and the FDIC's own Statement of Policy for rulemaking (all 
discussed in further detail in response to Question 7).
    The FDIC has not conducted an empirical analysis of the 
potential impact of Dodd-Frank Act on the economy and market 
competitiveness. However, we remain mindful of the devastating 
effects that the 2008 financial crisis visited on the U.S. 
economy, and the lingering consequences of the crisis on the 
functioning of the U.S. financial system. For example, in the 
6-month period following the failure of Lehman Brothers in 
September of 2008, the U.S. economy lost some 3.9 million 
payroll jobs, and the monthly volume of domestically produced 
steel declined by approximately one-half. As you know, it was 
with these types of economic consequences in mind that the 
FDIC, Federal Reserve, and U.S. Department of Treasury 
undertook the programs of extraordinary assistance that helped 
to stabilize U.S. financial markets and institutions. Without 
those programs, the economic consequences would surely have 
been much worse.
    Although these stabilization programs have mostly been 
wound down, U.S. financial markets and institutions have been 
slow in recovering from the crisis. FDIC-insured institutions 
have seen their total loan balances shrink for 9 of the past 10 
quarters, with the only quarter of growth resulting from 
accounting changes in early 2010 that resulted in billions of 
dollars in securitized assets returning to bank balance sheets. 
Meanwhile, the volume of private asset-backed securitization 
remains at just a small fraction of its precrisis level, as 
investors continue to be reluctant to purchase the types of 
securities that were the result of hundreds of billions of 
dollars of losses during the crisis.
    Proper implementation of the provisions of the Dodd-Frank 
Act can do much to improve the functioning of U.S. financial 
markets and restore their ability to support economic activity. 
For example, the forthcoming risk retention rule requiring 
issuers of asset-backed securities to retain at least 5 percent 
of the credit risk should help to reassure investors that newly 
issued securities will be much more likely to perform over the 
long-term than the mortgage-related securities issued in the 
middle of the last decade.
    Financial stability is not an end in itself. It is a means 
to an end, which is to support economic activity and put 
Americans back to work. As we have seen, the economic costs of 
financial instability are high and long-lasting. The FDIC is 
committed to fulfilling its responsibilities under the Dodd-
Frank Act, restoring investor confidence, and laying the 
foundation for a stronger U.S. economy.

Q.7. What steps are you taking to assess the aggregate costs of 
compliance with each Dodd-Frank rulemaking? What steps are you 
taking to assess the aggregate costs of compliance with all 
Dodd-Frank rulemakings, which may be greater than the sum of 
all of the individual rules' compliance costs? Please describe 
all relevant reports or studies you have undertaken to quantify 
compliance costs for each rule you have proposed or adopted.
    Please provide an aggregate estimate of the compliance 
costs of the Dodd-Frank rules that you have proposed or adopted 
to date.

A.7. As we have described, the Dodd-Frank Act mandates more 
than 70 studies, many of which relate to the effects of its 
provisions on the economy and the functioning of financial 
markets. In addition, there also are a number of preexisting 
statutory provisions requiring the FDIC to consider costs 
imposed on insured depository institutions by new regulations, 
both as a general matter and through specific provisions. For 
example:

    Section (7)(b)(2)(B)(iii) of the FDI Act requires 
        the FDIC Board, when setting assessments, to consider 
        the ``projected effects of the payment of assessments 
        on the capital and earnings of insured depository 
        institutions'' among other factors.

    Section 302 of the Riegle Community Development and 
        Regulatory Improvement Act of 1994 requires the FDIC 
        and the other banking agencies to consider--consistent 
        with the principles of safety and soundness and the 
        public interest--(1) any administrative burdens that 
        such regulations place on depository institutions, 
        including small depository institutions and customers 
        of depository institutions; and (2) the benefit of such 
        regulations.

    The Paperwork Reduction Act, 44 U.S.C. 3501 et 
        seq., requires OMB approval of any ``information 
        collection,'' including review of whether any paperwork 
        burden imposed by the proposed regulation is warranted 
        by the benefits to be accrued.

    The Regulatory Flexibility Act, 5 U.S.C. 601 et 
        seq., generally requires a Federal agency to provide a 
        regulatory flexibility analysis for a proposed rule 
        describing the impact on small entities, as defined by 
        the Small Business Administration.

    Further, the FDIC's Statement of Policy for rulemaking 
expressly states, ``Prior to issuance, the potential benefits 
associated with the regulation or statement of policy are 
weighed against the potential costs.'' The FDIC remains 
committed to fulfilling all of these statutory requirements to 
study the economic impact of its rulemaking as it also fulfills 
its extensive rulemaking mandate under the Dodd-Frank Act.

Q.8. Section 115 of the Dodd-Frank Act asks the Financial 
Stabilty Oversight Council to make recommendations to the 
Federal Reserve on establishing more stringent capital 
standards for large financial institutions. In addition, 
Section 165 requires the Fed to adopt more stringent standards 
for large financial institutions relative to smaller financial 
institutions. Chairman Bernanke's testimony for this hearing 
implied that the Basel III framework satisfies the Fed's 
obligation to impose more stringent capital on large financial 
institutions. As a member of the Financial Stabilty Oversight 
Council, do you agree with Chairman Bernanke that the Basel III 
standards are sufficient to meet the Dodd-Frank Act requirement 
for more stringent capital standards? Please explain the basis 
for your answer.

A.8. The Basel III agreement stated that heightened capital 
standards would be developed for the largest banks. To the 
extent such standards are developed and require additional 
loss-absorbing capital, there is a potential that such 
standards could meet the requirements of Section 165.

Q.9. The Fed, the SEC, the FDIC, and the CFTC are all 
structured as boards or commissions. This means that before 
they can implement a rule they must obtain the support of a 
majority of their board members. How has your board or 
commission functioned as you have been tackling the difficult 
job of implementing Dodd-Frank? Have you found that the other 
members of your board or commission have made positive 
contributions to the process?

A.9. As you know, section 2 of the Federal Deposit Insurance 
Act provides that the FDIC is to be managed by a five-member 
Board of Directors. Our existing Board structure and governance 
procedures have functioned well as we work to fulfill our 
responsibilities under the Dodd-Frank Act. The expertise and 
perspective the Board members have brought to each stage of the 
Act's implementation to date has been very valuable. Board 
members have provided constructive feedback and candid 
comments, demonstrating their understanding of both the 
challenges and opportunities that the Act presents for the FDIC 
and the other regulatory agencies. In addition, Board members 
have supported the FDIC's numerous and continuing efforts to 
make implementation of the Act and the Board's deliberative 
process as open and transparent as possible. As Chairman, I 
have appreciated their ongoing support and guidance as we 
continue to move forward through the rulemaking and functional 
implementation process.

Q.10. Numerous calls have arisen for a mandatory ``pause'' in 
foreclosure proceedings during the consideration of a mortgage 
modification. Currently, what is the average number of days 
that customers of the institutions that you regulate are 
delinquent at the time of the completed foreclosure? If 
servicers were required to stop foreclosure proceedings while 
they evaluated a customer for mortgage modification, what would 
be the effect on the foreclosure process in terms of time and 
cost. What effect would these costs have on the safety and 
soundness of institutions within your regulatory jurisdiction. 
Please differentiate between judicial and nonjudicial States in 
your answers and describe the data that you used to make these 
estimates.

A.10. FDIC-supervised banks are not required to report the 
number of days customers are delinquent at the time of a 
completed foreclosure. However, there is evidence that the time 
needed to complete foreclosure has been rising. Industry data 
as of August 2010 suggests that the number of consecutive 
missed payments prior to foreclosure had risen to 5.5, up from 
2.9 missed payments at year-end 2007, The length of a 
foreclosure proceeding (judicial and nonjudicial) would vary 
widely by State based on rules and standards governing notice 
of default, mandatory mediation or counseling, and cure or 
redemption periods, as well as backlogs that have resulted from 
the rapid rise in foreclosure filings during the past 2 years.
    The FDIC believes loss mitigation is essential to stabilize 
the housing market and minimize losses to insured banks and 
thrifts. Far from being simply a socially desirable practice to 
preserve home ownership, effective loss mitigation is 
consistent with safe-and-sound banking practice and has 
positive macroeconomic consequences. Modification may improve 
the value of distressed mortgages by achieving long-term 
sustainable cash flows for lenders and investors that exceed 
the value that can be gained through foreclosure. A net present 
value test is typically used to confirm that a modification 
would minimize losses to financial institutions and investors. 
In cases where the borrower cannot afford the lowest payment 
allowed, foreclosure should proceed expeditiously to minimize 
the financial impact on institutions, communities, and the 
housing market. In some cases it may be reasonable to begin 
conducting preliminary filings for seriously past-due loans in 
States with long foreclosure time lines. Nonetheless, it is 
vitally important that the modification process be brought to 
conclusion before a foreclosure sale is scheduled. Failure to 
coordinate the foreclosure and modification processes could 
confuse and frustrate homeowners and could result in 
unnecessary foreclosures. Servicers should identify a single 
point of contact to work with homeowners once it becomes 
evident the homeowner is in distress. This single point of 
contact must be appropriately authorized to provide current, 
accurate information about the status of the borrower's loan or 
loan modification application, as well as provide a sign-off 
that all loan modification efforts have failed before a 
foreclosure sale. This approach will go a long way toward 
eliminating the potential conflict and miscommunication between 
loan modifications and foreclosures and providing borrowers 
assurance that their modification application is being 
considered in good faith.

Q.11. The burden of complying with Dodd-Frank will not affect 
all banks equally. Which new Dodd-Frank Act rules will have the 
most significant adverse impact on small and community banks? 
Which provisions of Dodd-Frank will have a disparate impact on 
small banks as compared to large banks? Do you expect that the 
number of small banks will continue to decline over the next 
decade? If so, is the reason for this decline the Dodd-Frank 
Act? Have you conducted any studies on the costs Dodd-Frank 
will impose on small and community banks? If so, please 
describe the results and provide copies of the studies.

A.11. The FDIC believes the Dodd-Frank Act financial reform 
legislation will not cause undue burden or costs on community 
banks. The legislation's primary focus is on large financial 
institutions. Provisions that specifically apply to large 
institutions include new rules on proprietary trading, the 
composition of capital, and risk retention by asset-backed 
securities issuers, as well the provisions in Title I and Title 
II that, together, will establish an orderly liquidation 
process for systemically important institutions and end the 
perception that a large institution are ``too big to fail.'' We 
believe there are tangible benefits for community banks in the 
Dodd-Frank Act, such as and end to ``too big to fail,'' 
increased oversight of their nonbanks competitors (which will 
help level the financial services playing field), an increase 
in the coverage limit and an expansion of the assessment base 
for Federal deposit insurance, and community bank exemptions 
from certain other new requirements. The change in the deposit 
insurance assessment base alone, one based on domestic deposits 
to one focused on assets, will effectively reduce community 
bank premiums by about 30 percent.
    Further, the FDIC believes that certain aspects of the 
Dodd-Frank Act will have a significant positive impact on small 
and community banks, particularly regarding the development of 
a more level playing field with respect to regulatory capital 
requirements. For instance, the Collins Amendment will place a 
floor under the so-called advanced approached to risk-based 
capital rules, which will ensure the resulting capital 
requirements for large banks and bank holding companies are no 
lower than the capital requirements required of small and 
community banks that hold similar exposures. In addition, the 
Dodd-Frank Act will require large bank holding companies to 
hold additional capital beyond that required of smaller 
institutions to account for the greater risk that large bank 
holding companies pose to the financial system.
    As I discussed during the Committee's hearing, new rules on 
interchange fees may present an issue for community banks, and 
we are discussing this with the Federal Reserve. There is some 
concern about the interchange rule's effectiveness and whether 
community banks can continue to charge higher fees, 
particularly if networks are not required to have a two-tiered 
pricing structure.
    We have seen significant consolidation in the number of 
U.S. banks in recent decades, as a result of both economic 
forces and statutory changes that facilitate branching. This 
process of consolidation tends to accelerate during periods of 
industry distress, But there is no regulatory policy, 
intention, or goal to reduce the number of banks. The FDIC has 
long supported the community bank model, and believes that 
community banks play an essential role in a U.S. economy where 
more than two thirds of all new jobs are created by small 
businesses. Ultimately, we need healthy banks that can provide 
credit in their communities.
    We have not performed a study on the costs of the Dodd-
Frank Act for small community banks; however, we believe that 
any costs will be relatively low as the legislation primarily 
impacts large institutions. Further, any major rulemaking will 
require that we conduct an impact analysis on community banks, 
The FDIC shares the public's concern about unnecessary 
regulatory burden, and we are engaging in dialogue with the 
banking industry through the FDIC Advisory Committee on 
Community Banking and our examination process to ensure the 
supervisory process is not burdensome and the potential effect 
on credit availability is mitigated.

Q.12. When the Dodd-Frank Act passed, President Obama said 
``There will be no more tax-funded bailouts--period.'' 
Nevertheless, Secretary Geithner recently said: ``In the future 
we may have to do exceptional things again if we face (another 
financial crisis).'' \2\ Presumably, Secretary Geithner means 
more taxpayer bailouts when he talks about the need to do 
``exceptional things.'' Can you envision any situation in which 
the FDIC could use the new resolution authority to bail out 
creditors, regardless of whether they are long-term bondholders 
or short-term commercial paper lenders? Which types of 
creditors will fall within the ``essential services'' exception 
to the mandatory clawback provision under Title II of Dodd-
Frank? Trade creditors? Commercial paper lenders? Repurchase 
agreement lenders?
---------------------------------------------------------------------------
     \2\ See, ``Special Inspector General for the Troubled Asset Relief 
Program, Extraordinwy Assistance Provided to Citigroup, Inc.'' (SIGTARP 
11-002) (Jan. 13, 2011) (available at: http://www.sigtarp.gov/reports/
audit/2011/
Extraordinary%20Financia1%20Assistance%20Provided%20to%20Citigroup,%20In
c.pdf), at 44.

A.12. Irrespective of how creditors are treated in a Title II 
resolution, there can be no taxpayer bailout. The Dodd-Frank 
Act permits the FDIC as receiver for a systemically significant 
financial company to borrow funds from the U.S. Treasury to 
ensure an orderly liquidation. The Act makes very clear, 
however, that in the event that the assets of the receivership 
estate are not sufficient to repay the Treasury borrowings in 
full, the FDIC must assess the industry in an amount sufficient 
to repay all borrowings from the Treasury. As a result, no 
taxpayer funds will ever be at risk.
    With respect to the ability of the FDIC as receiver to 
transfer the operations of a failed systemically significant 
financial company to a third party or to operate the business 
through a bridge financial company after the receiver has been 
appointed and shareholders and creditors have taken appropriate 
losses, it is possible in such a resolution that certain 
creditors could be paid more than their liquidation share. The 
receiver may do so in the event that it would result in lower 
losses to the entire operation of the company since the 
receiver would be able to transfer the intangible franchise 
value of the company to a third party. It is possible that 
commercial paper lenders or unsecured derivative counterparties 
could fall into this category. If either of those types of 
creditors received additional payments from the receiver in 
order to benefit all creditors, they would be subject to the 
clawback provision. The Act requires the FDIC to clawback any 
additional funds paid to creditors (other than those deemed 
essential) prior to assessing the industry in the event the 
assets of the receivership estate are insufficient to repay the 
Treasury for funds borrowed.
    As noted above, commercial paper lenders would not be 
considered essential and exempt from the clawback requirement. 
Instead, creditors deemed essential are more likely to be 
service providers that cannot be easily replaced. Our 
experience is that if a service provider is not paid for its 
prefailure work, then it typically will not want to continue to 
provide services after the failure, In most cases, the receiver 
would simply replace the service provider. In limited 
instances, the receiver may determine that it can not replace 
the service provider and so make payment on prefailure 
expenses. The simplest example is the local utility. If the 
receiver does not pay the prefailure electric bill, the lights 
will be turned off. The receiver would not be able to find 
another provider of electricity and obviously could not fulfill 
its mission without electrical power. Similarly, if unique 
software were provided by a small company and such company 
would go out of business if its prefailure bills were not paid, 
the receiver may also determine that such a service is 
essential.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                      FROM SHEILA C. BAIR

Q.1. Capital Rules for Systemically Important Financial 
Institutions--The Basel Committee on Banking Supervision set 
the so-called ``Basel III'' minimum capital requirements for 
banks at 8 percent, with an additional 2.5 percent buffer. But 
a study by the Bank for International Settlements suggests that 
the optimal capital ratio would actually be about 13 percent. A 
Government-sponsored panel in Switzerland has said that massive 
banks UBS and Credit Suisse should hold 19 percent capital.
    The Financial Stabilty Oversight Council, or FSOC, will 
recommend capital requirements for the largest financial 
institutions--the so-called ``Systemically Important Financial 
Institutions.''
    Do you favor increasing capital for systemically important 
financial companies above the 10.5 percent Basel III ratio? If 
so, what is the right number?

A.1. The Basel Committee agreed that systemically important 
banks would be required to have additional loss-absorbing 
capacity over and above the requirements announced for smaller 
banks. We continue to support these heightened expectations. 
Given the unique risk to the financial system posed by these 
organizations, it is important that these organizations are 
more resilient to stress. We are working closely with the other 
Federal banking agencies to determine the appropriate capital 
surcharge.

Q.2. Wall Street often argues that increased capital and equity 
requirements will lead to decline in lending. However, a recent 
paper by professors at the Stanford Business School argues that 
large banks with access to diverse sources of funding can both 
continue lending and meet higher equity requirements, either by 
replacing some liabilities with equity or by expanding their 
balance sheets. Do you agree with this conclusion?
    Wall Street often argues that higher capital means higher 
costs for borrowers. Do you believe that banks could adapt to 
new capital requirements in ways that do not pass costs on to 
customers and borrowers, for example, by cutting outsized 
salaries and bonuses?

A.2. Although it will not be cost free to move to a stronger 
capital regime, we do not agree that the new requirements will 
reduce the availability of credit or significantly raise 
borrowing costs. Furthermore, the new standards allow a 
substantial phase-in period that will provide banks with ample 
time to raise capital through retained earnings. In addition, 
the new standards will help to level the playing field between 
large and small banks in the U.S. as well as between U.S. banks 
and their overseas competitors.
    In addition to the Stanford Business School paper, studies 
by economists at Harvard, the University of Chicago, and the 
Bank for International Settlements argue persuasively that the 
impact on the cost of credit will be modest, and that these 
costs will be far outweighed by the benefits of a more stable 
financial system.

Q.3. Banks, Capital, and Losses--The ongoing foreclosure crisis 
and the foreclosure fraud scandal are issues of great national 
importance, and of particular importance in my home State.
    And right now the four largest banks are the most exposed 
to the shaky real estate market--they have over 40 percent of 
the mortgage servicing contracts and second lien mortgages.
    Despite this exposure to potential housing-related losses, 
as well as looming new capital rules from Dodd-Frank and the 
Basel Committee, the Federal Reserve is conducting stress tests 
that will pave the way for 19 of the largest banks to once 
again buy back their stock and issue dividends.
    The three largest banks also have about $121 billion in 
debt guaranteed by the FDIC which costs taxpayers, gives this 
debt a funding advantage, and is not being counted by the 
stress tests.
    By easing dividend and stock restrictions on big banks, are 
we adding to the advantage that they have over their smaller 
competitors?

A.3. We believe large banks should hold more capital than their 
smaller competitors commensurate with their heightened risk 
profile and any potential systemic implications of financial 
distress. With respect to your question on easing dividend and 
stock restrictions on large banks, we do not believe that 
dividend and capital repurchases, which involve significant 
cash outlays, should be allowed until we are fully confident 
that these firms will have the financial resources to remain 
strong under a stressed scenario and to repay debt guaranteed 
by the FDIC.

Q.4. Everyone agrees that lending has contracted but bonuses 
are booming. Won't paving the way for dividend payments to 
investors--including their own executives--limit the banks' 
ability to deploy their capital to support the recovery?

A.4. We are in favor of a strong earnings retention policy to 
ensure banks continue prudent lending to support the economic 
recovery. We would be concerned about prematurely resuming or 
increasing capital distributions without first determining that 
the capital and liquidity position of a bank would remain 
strong under a stressed scenario.

Q.5. There is a lot of uncertainty about the future of the 
housing market and new capital requirements, and each dollar 
paid out to shareholders is a dollar less in equity for the 
bank. How can we ensure that allowing big banks to issue 
dividends now won't damage their capital levels and future 
stability?

A.5. Banks must plan for the heightened capital requirements 
under Basel III, capital surcharges needed for banks that are 
systemically important, and any potential changes to business 
models that might result from the Dodd-Frank Act. Furthermore, 
the banking agencies historically have expected banks to 
operate with capital positions well above the minimum 
requirements to account for risks that are not adequately 
captured by the risk-based capital framework. Banks need to be 
prudent with their capital positions, especially in uncertain 
economic times.
    Finally, banks need to have adequate liquidity reserves in 
place to repay TLGP debt guaranteed by the FDIC. Regulators 
should not approve dividend and capital repurchases, which 
involve significant cash outlays by financial firms, until we 
are all fully confident that these firms will have the 
financial resources to repay debt guaranteed by the FDIC.

Q.6. Should one of these 19 companies encounter issues with 
their capital base, are the Fed and FDIC ready to use their new 
authorities under Dodd-Frank right now--the ``Grave Threat 
Divestiture'' and ``Orderly Liquidation Authority,'' 
respectively?
    If not now, when will those authorities be ready?

A.6. Yes, the FDIC stands ready to serve as receiver should it 
be appointed under the authorities established under Title II 
of the Dodd-Frank Act.
    With regard to the orderly liquidation authority, the FDIC 
issued a notice of proposed rulemaking (published October 19, 
2010) to implement certain orderly liquidation provisions of 
Title II. The FDIC approved an Interim Final Rule on January 
18, 2011, which addressed the payment of similarly situated 
creditors, the honoring of personal services contracts, the 
recognition of contingent claims, the treatment of any 
remaining shareholder value in the case of a covered financial 
company that is a subsidiary of an insurance company, and 
limitations on liens that the FDIC may take on assets of a 
covered financial company that is an insurance company or 
covered subsidiary.
    A second notice of proposed rulemaking was approved by our 
Board on March 15 and included the orderly additional questions 
for public comment. The proposed rule provides details of the 
orderly liquidation process including additional details on the 
role of the FDIC as receiver for a covered financial company, 
claims processes and priorities, recoupment of compensation 
from certain senior executive officers of covered financial 
companies, criteria to be applied by the FDIC in determining if 
a company is ``predominantly engaged in activities that are 
financial in nature or incidental thereto'' (and therefore a 
financial company subject to the Title II orderly liquidation 
authority), and insights regarding preferential and fraudulent 
transfers. The FDIC will issue additional rules to address 
receivership termination, receivership purchaser eligibility 
requirements, and records retention requirements.
    With regard to the Title I provisions granting authority to 
the FDIC to issue orders compelling divestiture, the authority 
is confined to those firms properly subject to the resolution 
planning requirement of section 165 of the Dodd-Frank Act. 
Section 165 provides authority to the FDIC to act jointly with 
the Federal Reserve to issue an order to correct deficiencies 
identified in a firm's resolution plan. The standards for 
review, and the process by which firms will be found deficient 
and curative actions taken, will be the subject of joint 
rulemaking by the FDIC and the Federal Reserve, as required by 
section 165(d) of the Act. The FDIC is working closely with the 
Federal Reserve to implement section 165, and we expect to 
issue a proposed rulemaking in the very near term.

Q.7. Mortgage Servicing and Examinations--In November, the GAO 
released a study on abandoned foreclosures, also known as 
``bank walkaways.'' With respect to mortgage servicing, the 
report found:
    According to our interviews with Federal banking 
regulators, mortgage servicers' practices . . . have not been a 
major focus covered in their supervisory guidance in the past. 
The primary focus in these regulators' guidance is on 
activities undertaken by the institutions they oversee that 
create the significant risk of financial loss for the 
institutions. Because a mortgage servicer is generally managing 
loans that are actually owned or held by other entities, the 
servicer is not exposed to losses if the loans become 
delinquent or if no foreclosure is completed. As a result, the 
extent to which servicers' management of the foreclosure 
process is addressed in regulatory guidance and consumer 
protection laws has been limited and uneven. For example, 
guidance in the mortgage banking examination handbook that OCC 
examiners follow when conducting examinations of banks' 
servicing activities notes that examiners should review the 
banks' handling of investor-owned loans in foreclosure, 
including whether servicers have a sound rationale for not 
completing foreclosures in time or meeting investor guidelines. 
In contrast, the guidance included in the manual Federal 
Reserve examiners use to oversee bank holding companies only 
contained a few pages related to mortgage servicing activities, 
including directing examiners to review the income earned from 
the servicing fee for such operations, but did not otherwise 
address in detail foreclosure practices.
    In addition, until recently, the extent to which these 
regulators included mortgage servicing activities in their 
examinations of institutions was also limited. According to OCC 
and Federal Reserve staff, they conduct risk-based examinations 
that focus on areas of greatest risk to their institutions' 
financial positions as well as some other areas of potential 
concern, such as consumer complaints. Because the risks from 
mortgage servicing generally did not indicate the need to 
conduct more detailed reviews of these operations, Federal 
banking regulators had not regularly examined servicers' 
foreclosure practices on a loan-level basis, including whether 
foreclosures are completed. For example, OCC officials told us 
their examinations of servicing activities were generally 
limited to reviews of income that banks earn from servicing 
loans for others and did not generally include reviewing 
foreclosure practices.
    Please describe your agencies' views of the risks related 
(to) the banks' servicing divisions, including:

    The losses stemming from the servicing divisions of 
        the banks that you regulate.

    What further losses, if any, you expect.

    How your agencies have changed your examination 
        procedures relating to banks' servicing divisions.

    Whether there will be uniform standards for 
        servicing examination across all Federal banking 
        agencies.

A.7. To date, there is no evidence of serious mortgage 
servicing deficiencies or losses related to such deficiencies 
at State nonmember banks supervised by the FDIC. Overall, FDIC-
supervised banks tend to be less involved in mortgage servicing 
activities than larger institutions. Mortgage servicing is 
significantly concentrated in a handful of large financial 
institutions regulated by the OCC or Federal Reserve. For 
example, according to data in the September 30, 2010, Reports 
of Condition and Income, the top six servicers in the U.S. are 
national banks and account for almost 84 percent of all loans 
serviced by federally insured institutions. As noted in the GAO 
report excerpted above, the FDIC is the primary regulator for 
servicers that represent only 1.2 percent of the market.
    When the FDIC is the primary Federal regulator for a bank 
with mortgage banking activities, our examiners follow an 
examination process that includes a core review of the 
institution's mortgage banking policies and procedures, 
origination and underwriting standards, internal controls, 
audit, and information systems.
    The FDIC participated in an interagency review of certain 
financial institutions' mortgage servicing departments in late 
2010 and early 2011. Based on the results of this review, we 
see opportunities to strengthen standards governing mortgage 
servicing, foreclosure processes, and loss mitigation. This may 
require more stringent oversight of servicers' risk management 
and operational controls as well as ensuring internal and 
external audits are designed to identify weaknesses and report 
them to management. It may also require that more attention be 
paid to the reputational risks associated with servicing 
failures. In addition, the FDIC is working with other bank 
regulatory agencies to develop national mortgage servicing 
standards. Once these standards are finalized, the agencies 
will consider what revisions may need to be made to existing 
examination procedures to ensure servicing operations meet 
specified requirements.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                      FROM SHEILA C. BAIR

Q.1. For each of the witnesses, though the Offce of Financial 
Research does not have a Director, what are each of you doing 
to assist OFR in harmonizing data collection, compatibility, 
and analysis?

A.1. The FDIC has ongoing discussions with the Office of 
Financial Research (OFR) staff. We look forward to sharing our 
considerable experience in obtaining, aggregating, analyzing 
and reporting financial data and information, and expect to 
contribute significant support to the OFR.

Q.2. Chairman Bair, each of your agencies was charged with 
working together to develop orderly liquidation plans for 
systemically significant financial institutions so that they 
can avoid needing resolution under Title 2 if they fail. Where 
are we in that process and when can we expect companies to 
start submitting plans to you for review and approval?

A.2. Section 165 of the Dodd-Frank Act requires the FDIC to 
promulgate joint rules with the Federal Reserve that set forth 
the regulatory standards and filing requirements for resolution 
plans. The plans are to be jointly reviewed and enforced by the 
FDIC and Federal Reserve. The FDIC is working closely with the 
Federal Reserve to jointly promulgate rules under section 165 
of Title I. It is the FDIC's publicly expressed desire to issue 
these standards in the very near term. The standards would 
establish a time line and process for firms to submit 
resolution plans.

Q.3. Chairman Bair, most of the companies subject to the 
requirement for an orderly liquidation plan are multinational 
in at least some respect. What cross border issues have you 
uncovered and how are you working to address those issues? Are 
there any legal barriers to resolving those issues in a way 
that ensures the plans work?

A.3. A primary challenge the FDIC is addressing in the area of 
international coordination is conforming resolution regimes and 
the adoption of consistent resolution and receivership 
mechanisms, standards and policies in order to more effectively 
conduct an orderly resolution of internationally active firms. 
In coordination with the Financial Stability Board (FSB) Cross-
Border Crisis Management Group and as Chair of the Basel 
Committee on Banking Supervision (BCBS) Cross-Border 
Resolutions Group, the FDIC has led a number of meetings during 
2010 with international resolution authorities and supervisors 
to address these challenges and identify obstacles to 
overcoming them.
    In order to address the challenges presented by cross-
border resolutions, the Financial Stability Board (FSB) has 
made various recommendations to be adopted by participating 
jurisdictions. In its recently published paper titled, 
``Reducing the Moral Hazard Posed by Systemically Important 
Financial Institutions (SIFIs),'' the FSB outlines 
recommendations to assist in resolving a systemically important 
international financial institution. The paper recommends that 
comprehensive resolution regimes and tools must be established 
in order for SIFIs to be resolved properly. The various 
recommendations are:

    All jurisdictions should undertake the necessary 
        legal reforms to ensure that they have in place a 
        resolution regime which would make feasible the 
        resolution of any financial institution without 
        taxpayer exposure to loss from solvency support while 
        protecting vital economic functions through mechanisms 
        which make it possible for shareholders and unsecured 
        and uninsured creditors to absorb losses in their order 
        of seniority.

    Each country should have a designated resolution 
        authority responsible for exercising resolution powers 
        over financial institutions. The resolution authority 
        should have the powers and tools proposed in the FSB 
        note on Key Attributes of Effective Resolution Regimes 
        and in the BCBS Cross-Border Bank Resolution Group 
        Recommendations and the flexibility to tailor 
        resolution measures to the specific nature of financial 
        institutions' domestic and international business 
        activities.

    National authorities should consider restructuring 
        mechanisms to allow recapitalization of a financial 
        institution as a going concern by way of contractual 
        and/or statutory (i.e., within-resolution) debt-equity 
        conversion and write-down tools, as appropriate to 
        their legal frameworks and market capacity. Such 
        mechanisms require that a robust resolution regime be 
        in place.

    The FSB's program has built on work undertaken by the BCBS 
Cross-Border Bank Resolution Group, cochaired by the FDIC since 
2007. In support of these efforts, the FDIC is participating in 
multiple international working groups that are analyzing 
resolution challenges associated with derivatives booking 
practices, business line management and legal entity 
operations, global payment systems, intragroup guarantees and 
interconnectedness, resolvability, contingent capital, and 
similar issues. Also, to inform decision making and assist in 
the conformance of resolution regimes, the FSB is conducting a 
stock-taking of the resolution regimes and approaches in 
multiple jurisdictions. The FDIC has been an active participant 
in these efforts. There are ongoing institution-specific Crisis 
Management Group meetings involving relevant international 
supervisors and resolution authorities relative to firm-
specific recovery and resolution planning.

Q.4. Chairman Bair, I believe that the Qualified Residential 
Mortgage is a significant effort towards repairing our 
underwriting problems and lack of private sector investment in 
the housing market right now. I understand there is concern 
that because these qualified mortgages will be exempted from 
risk retention standards, we want this type of mortgage to be 
affordable and available. Can you tell us how you are weighing 
the construct of a QRM--including down payment, income, LTV, 
and the use of private insurance?

A.4. Section 941 of the Dodd-Frank Act, titled, Regulation of 
Credit Risk Retention, requires the FDIC (together with the 
Federal Reserve Board, Office of the Comptroller of the 
Currency, Securities and Exchange Commission, Department of 
Housing and Urban Development, and the Federal Housing Finance 
Agency) to require securitizers to retain no less than 5 
percent of the credit of any assets transferred to investors 
through the issuance of an asset-backed security (ABS). Section 
941 exempts certain ABS issuances from the general risk 
retention requirement, including ABS issuances collateralized 
exclusively by ``qualified residential mortgages'' (QRMs), as 
jointly defined by the agencies.
    An interagency working group is near completion of a notice 
of proposed rulemaking to implement section 941. I anticipate 
the proposed rule will solicit public comment on various 
options for satisfying the credit risk retention requirements 
of section 941, as well as the appropriateness of certain 
exemptions. In considering how to determine whether a mortgage 
qualifies for the QRM exemption, the agencies are examining 
data from several sources. One data set consists of 10 years of 
performance information on more than 78 million mortgage loans, 
and includes data on loan products and terms, borrower 
characteristics (for example, income and credit score), and 
performance data through the third quarter of 2010.
    I believe the underwriting and product features for QRM 
loans should include standards related to the borrower's 
ability and willingness to repay the mortgage (as measured by 
the borrower's debt-to-income (DTI) ratio); the borrower's 
credit history; the borrower's down payment amount and sources; 
the loan-to-value (LTV) ratio for the loan; the form of 
valuation used in underwriting the loan; the type of mortgage 
involved; the owner-occupancy status of the property securing 
the mortgage; and whether the loan documents include mortgage 
servicing standards that require the servicer to work with the 
borrower if the borrower is past due or in default.
    The proposed QRM standards should be transparent to, and 
verifiable by, originators, securitizers, investors, and 
supervisors. This approach should assist originators of all 
sizes in determining whether residential mortgages will qualify 
for the QRM exemption, and assist ABS issuers and investors in 
assessing whether a pool of mortgages will meet the 
requirements of the QRM exemption. In addition, I believe the 
approach taken by the proposal should allow individual QRM 
loans to be modified after securitization without the loan 
ceasing to be a QRM in order to avoid creating a disincentive 
to engaging in appropriate loan modifications.
    As required by section 941, the agencies will also consider 
information regarding the credit risk mitigation effects of 
mortgage guarantee insurance or other credit enhancements 
obtained at the time of origination. If such guarantees are 
backed by sufficient capital, they likely lower the credit risk 
faced by lenders or purchasers of securities because they 
typically payout when borrowers default. However, the agencies 
have not identified studies or historical loan performance data 
adequately demonstrating that mortgages with such credit 
enhancements are less likely to default than other mortgages, 
after adequately controlling for loan underwriting or other 
factors known to influence credit performance--especially LTV 
ratios. Therefore, at this time I do not believe the proposal 
should include any criteria regarding mortgage guarantee 
insurance or other types of insurance or credit enhancements. 
The proposal should, however, solicit public comment on the 
appropriateness of recognizing such insurance or credit 
enhancements, and the appropriate definition, characteristics, 
and requirements for QRM loans for purposes of the final rule.
    Again, the proposed rule will be open to public comment and 
the FDIC and the other agencies will take such comments into 
account in their deliberations.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                      FROM SHEILA C. BAIR

Q.1. Community Banks and Economic Growth--I have heard from 
some of my local community banks that certain capital, 
accounting, and examination rules may be working at cross 
purposes with the ability of community banks to serve the 
economic growth needs of the families and small businesses they 
serve in their communities, especially when compared to 
standards applied to the largest national banks. I wish to 
bring several to your attention and ask that you comment:
    The Financial Accounting Standards Board's proposed 
exposure draft on ``Troubled Debt Restructurings'' (TDRs) has 
been pointed out as possibly creating a capital disincentive 
for banks to engage in work-outs and modifications with their 
business borrowers because of the effect of immediately having 
to declare those loans ``impaired.'' In addition, for banks 
over $10 billion in asset size, there may be additional direct 
costs for FDIC premiums based on a formula that considers TDR 
activity.
    The disallowance to Risk-Based Capital of the amount of 
Allowance for Loan Losses (ALLL) in excess of 1.25 percent of 
Risk Weighted Assets has been flagged as a challenge in this 
environment, where some firms have ALLL that significantly 
exceeds that threshold. This may serve to understate the risk-
based capital strength of the bank, adding to costs and 
negatively impacting customer and investor perceptions of the 
bank's strength.
    It has been reported that examiners have rejected 
appraisals that are less than 9 months old when regulatory 
guidance calls for accepting appraisals of up to 12 months.
    Community banks are subject to examination in some cases as 
frequently as every 3 months. In contrast, some suggest that 
our largest national banks may not ever undergo an examination 
as thorough, with the challenges surrounding loan 
documentation, foreclosure, and MERS as a glaring example of 
the results.
    Are there regulatory or supervisory adjustments in these or 
related areas that need to be made to facilitate community 
banks' abilities to serve their communities?
    In addition, have you considered ways in which capital 
charges, accounting rules, and examination rules for community 
banks in particular can be adapted to be less procyclical, such 
that they do not become stricter into an economic downturn and 
lighter at the top of an upturn?
    Finally, what procedures do you have in place to ensure 
that our community banks and our largest national banks are not 
subject to differing examination standards, even when they are 
examined by different regulators?

A.1. The FDIC reviews its supervisory programs regularly to 
ensure they are effective, consistent, and applied equitably. 
We agree that the past several years have been very difficult 
for financial institutions as they have experienced the effects 
of weakness in economic and real estate markets. As you point 
out, loan accounting and related financial reporting standards 
can significantly impact financial institutions during economic 
downturns as the volume of problem credits increases. As banks 
work with borrowers to prudently restructure loans--an activity 
that has been encouraged by the banking regulators to help 
troubled borrowers--U.S. generally accepted accounting 
principles (GAAP) require certain modified loans to be 
designated as Troubled Debt Restructurings (TDRs). This is not 
a regulatory directive but rather a longstanding accounting 
requirement. The FDIC believes that accurate and timely 
financial and regulatory reporting in conformity with GAAP, 
which is required by statute, fosters transparency and provides 
decision-useful information for financial institution 
stakeholders.
    The Financial Accounting Standards Board (FASB) October 
2010 proposal on TDRs is intended to clarify the existing 
accounting standards on TDRs by providing additional guidance 
on aspects of these standards for which diversity in practice 
has developed. We presume the proposal is not designed to 
change existing criteria for determining when a loan 
modification constitutes a TDR, i.e., when a borrower is 
experiencing financial difficulties and a concession has been 
granted by the lender. For the most part, the proposed 
clarifications would provide useful guidance to institutions. 
However, we urged the FASB to revise one portion of the 
proposal to ensure a restructuring is not automatically a TDR 
simply because a borrower does not have access to funds at a 
market rate for debt with similar risk characteristics as the 
restructured note. In an environment where some otherwise 
creditworthy borrowers have found it difficult to obtain or 
renew credit, we are concerned this proposed clarification may 
be interpreted in a manner that would result in many 
modifications, extensions, and renewals of loans being 
mischaracterized as TDRs. In its redeliberations on this 
proposal to address issues raised by commenters, the FASB has 
decided to modify the provision that concerned us.
    The FDIC Board approved a final rule revising the risk-
based assessment system for large insured depository 
institutions on February 7, 2011. Large institutions generally 
are those with at least $10 billion in total assets. Under the 
final rule, assessment rates for these institutions will be 
calculated using scorecards that combine CAMELS ratings and 
certain forward-looking financial measures to assess the risk a 
large institution poses to the Deposit Insurance Fund. The 
multiple quantitative measures in these scorecards are intended 
to differentiate risk based on how large institutions would 
fare during periods of economic stress. One of these measures 
considers the volume of underperforming loans--a component of 
which is loans that are TORs--as a percentage of capital and 
reserves. In developing the revised large institution 
assessment system, computations of the scorecards' new measures 
using financial data from 2005 through 2008 were found to be 
predictive of the performance of large institutions in 2009. 
Therefore, we believe it is appropriate to consider TORs as one 
of many data inputs to this assessment system.
    The Allowance for Loan and Lease Losses (ALLL) covers 
estimated credit losses on individually evaluated loans 
determined to be impaired, as well as estimated credit losses 
inherent in the remainder of the loan and lease portfolio. As 
such, the ALLL is set aside to absorb specific losses that have 
yet to be recognized for accounting purposes. Therefore, the 
ALLL's loss absorbing capacity is limited to certain credit 
losses and is unavailable to absorb losses in the same manner 
as other capital instruments. To recognize this limited loss-
absorbing capability, the current risk-based capital rules 
provide that ALLL is only included in tier 2 capital up to 1.25 
percent of risk-weighted assets. This view of the limited loss-
absorbing capacity of ALLL was reinforced by the recent Basel 
II agreement released by the Basel Committee for Banking 
Supervision which retained the existing treatment.
    Real estate appraisals are also a significant issue during 
real estate downturns, and this economic cycle has been no 
exception. Many institutions have been prudently updating 
appraisals to better understand collateral position and, as you 
point out, examiners review appraisal reports as part of their 
loan review process. There have been some misconceptions about 
regulatory expectations for appraisals, and we believe recent 
guidance has helped clarify requirements. On December 2, 2010, 
the Federal banking agencies issued the Interagency Appraisal 
and Evaluation Guidelines. These guidelines provide banks with 
the regulators' perspective on how valuations should be used in 
the loan modification process, clarifies criteria for 
inspecting mortgaged properties' physical condition, eliminates 
confusing terminology, provides explanations on the use of 
automated valuation models, and strengthens the independence of 
the collateral valuation function. Overall, we believe this 
guidance will enhance banks' understanding of regulatory 
expectations and flexibilities related to collateral valuation.
    We agree that there are differences in the examination 
approach for large and community financial institutions. Large 
banks are typically supervised by examiners stationed at the 
institution on a resident basis and perform continuous 
supervisory activities during the year. In such cases, one 
annual Report of Examination is generated under statutory 
examination timeframes as well as ``targeted'' examinations at 
various intervals. Targeted reviews delve into a financial 
institution's specific business lines and are used to examine 
the safety and soundness of certain activities through 
transaction testing and reviews of policies and procedures. For 
example, targeted reviews recently have been completed at 
several large institutions to investigate internal foreclosure 
processes. On the other hand, community bank supervision relies 
on point-in-time annual on-site examinations and off-site 
surveillance during interim periods. We also conduct 
visitations at certain community institutions to determine 
their success in achieving the goals of corrective programs or 
look into any areas of emerging risk. The on-site component of 
these visitations typically lasts a week or less. Although 
there is a different approach for supervising large and small 
institutions, both rely on a risk-focused methodology 
customized to each institution's size, business lines, and 
inherent risk.
    The Federal banking agencies recognize the importance of 
consistent examinations for all institution sizes, and we take 
steps to ensure the supervisory process is applied fairly for 
large banks and community institutions. The Federal Financial 
Institutions Examination Council (FFIEC) was created, in part, 
to ensure that financial institutions are subject to 
appropriate examination standards. Accordingly, the FFIEC 
sponsors a variety of collaborative workstreams among the 
Federal banking agencies relating to examination procedures, 
data collection efforts, and training processes that help 
ensure financial institutions are supervised consistently.

Q.2. International Coordination Regarding Resolution--Our 
largest financial firms today operate across many national 
boundaries. Some firms are aiming to conduct 50 percent or more 
of their business internationally. Can you update the Committee 
on the status and any challenges regarding the establishment of 
mechanisms, plans, and other aspects of coordination between 
international regulatory bodies to ensure that financial firms 
operating internationally can be effectively placed into the 
Dodd-Frank resolution regime and are not otherwise able to 
attain ``too big to fail'' status through international 
regulatory arbitrage?

A.2. Given the complexity and complications of resolving 
internationally active institutions, the FDIC continues to 
engage counterparts in other countries to develop greater 
understanding and coordination to improve the ability of 
achieving an orderly liquidation in the event of the failure of 
such an institution. While some of this work involves working 
toward Memorandums of Understanding (MOUs) with other 
countries, much of the focus of bilateral and multilateral 
efforts (through the Basel Committee on Bank Supervision and 
the Financial Stability Board (FSB)) are on reforming foreign 
laws to allow better coordination with U.S. law, and 
identifying and addressing potential conflicts.
    With respect to MOUs, for example, the FDIC entered into an 
MOU with the Bank of England in January 2010 to expand 
cooperation when we act as resolution authorities in resolving 
troubled deposit-taking financial institutions with activities 
in the U.S. and the United Kingdom. In addition, the FDIC and 
the China Banking Regulatory Commission signed an agreement in 
May 2010 to expand cooperation on contingency planning, 
coordination and information sharing related to crisis 
management and the potential resolution of banks active in the 
two countries.
    Further, in coordination with the FSB Cross-Border Crisis 
Management Group, and as Chair of the Basel Committee on 
Banking Supervision (BCBS) Cross-Border Resolutions Group, the 
FDIC has led a number of meetings during 2010 with 
international resolution authorities and supervisors to address 
the challenges in the area of international coordination and 
identify obstacles to overcoming them.
    In order to address the challenges presented by cross-
border resolutions, the FSB has made various recommendations to 
be adopted by participating jurisdictions. In its October 2010 
paper titled, ``Reducing the Moral Hazard Posed by Systemically 
Important Financial Institutions (SIFIs),'' the FSB outlines 
recommendations to assist in resolving a systemically important 
international financial institution. The paper recommends that 
comprehensive resolution regimes and tools must be established 
in order for SIFIs to be resolved properly. The various 
recommendations are:

    All jurisdictions should undertake the necessary 
        legal reforms to ensure that they have in place a 
        resolution regime which would make feasible the 
        resolution of any financial institution without 
        taxpayer exposure to loss from solvency support while 
        protecting vital economic functions through mechanisms 
        which make it possible for shareholders and unsecured 
        and uninsured creditors to absorb losses in their order 
        of seniority.

    Each country should have a designated resolution 
        authority responsible for exercising resolution powers 
        over financial institutions. The resolution authority 
        should have the powers and tools proposed in the FSB 
        note on Key Attributes of Effective Resolution Regimes 
        and in the BCBS Cross-border Bank Resolution Group 
        Recommendations and the flexibility to tailor 
        resolution measures to the specific nature of financial 
        institutions' domestic and international business 
        activities.

    National authorities should consider restructuring 
        mechanisms to allow recapitalization of a financial 
        institution as a going concern by way of contractual 
        and/or statutory (i.e., within-resolution) debt-equity 
        conversion and write-down tools, as appropriate to 
        their legal frameworks and market capacity. However, to 
        be effective, such mechanisms require that a robust 
        resolution regime already be in place.

    In support of these efforts, the FDIC is participating in 
multiple international working groups that are analyzing 
resolution challenges associated with derivatives booking 
practices, business line management and legal entity 
operations, global payment systems, intragroup guarantees and 
interconnectedness, resolvability, contingent capital, and 
similar issues.
    Another important aspect of the FDIC's efforts to promote 
cooperative efforts with international regulators is through 
the FDIC's work with the Federal Reserve to formalize the 
structure and content of resolution plans (living wills). For 
an internationally active institution, one function of a 
resolution plan will be to identify business lines that operate 
in international jurisdictions and delineate how such 
operations could be addressed in the event of a failure, 
recognizing that such operations may be subject to the laws of 
other countries.

Q.3. Please also update the Committee on the status of the 
regulation of international payments systems and other internal 
systemic financial market utilities so that the entities that 
manage or participate in them are not able to avoid the 
resolution regime through international regulatory arbitrage.

A.3. The Financial Stability Oversight Council (FSOC) has 
issued an advance notice of proposed rulemaking addressing the 
designation of financial market utilities (FMUs) as 
systemically significant and subject to heightened supervision 
under Title VIII of the Dodd-Frank Act. A notice of proposed 
rulemaking is expected to be issued by the FSOC sometime later 
this month. While these entities are not subject to heightened 
prudential standards under Title I of the Act, they will be 
subject to further rulemaking and prudential standards under 
Title VII. Furthermore, to the extent that such activities are 
carried out through a bank holding company or nonbank financial 
company designated under Title I for heightened supervision, 
the entity and the activities it engages in will be subject to 
supervision by the Federal Reserve.
    An FMU typically would be resolved under applicable State 
or Federal insolvency law, including liquidation or 
reorganization under the Bankruptcy Code. One of these entities 
could potentially be subject to resolution under title II of 
the Dodd-Frank Act if it is a financial company predominantly 
engaged in financial activities and a systemic risk 
determination were to be made under section 203 of the Dodd-
Frank Act. However, such a determination would be made at the 
time an FMU were to become troubled. While U.S. entities may be 
subject to resolution under Title II of the Dodd-Frank Act, 
Title II orderly liquidation authority does not extend to 
foreign-based corporate entities. International bodies, such as 
the FSB, International Organization of Securities Commissions 
(IOSCO) and the Basel Committee on Banking Supervision provide 
a forum to monitor the nature and extent of any differences in 
the implementation of supervisory standards on an international 
basis. These international bodies are working to address issues 
associated with international payment systems and the potential 
destabilizing effects that could occur if a major payment 
system were to fail or suffer severe disruptions due to the 
failure of a large member. In particular, the FSB Cross-Border 
Crisis Management Group has established a work stream relating 
to global payments operations and is developing recommendations 
related to global payments operations in the context of a 
cross-border resolution. This work also is being conducted on a 
firm-specific basis through the FSB Crisis Management Group.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM SHEILA C. BAIR

Q.1. Dodd-Frank requires that risk retention be jointly 
considered by the regulators for each different type of asset 
and includes a specific statutory mandate related to any 
potential reforms of the commercial mortgage-backed securities 
to limit disruptions. Given the importance of rigorous cost-
benefit and economic impact analyses and the need for due 
consideration of public comments, do your agencies need more 
time than is provided by the looming April deadline?

A.1. Section 941 of the Dodd-Frank Act, titled, Regulation of 
Credit Risk Retention, requires the FDIC (together with the 
Federal Reserve Board, Office of the Comptroller of the 
Currency, Securities and Exchange Commission, Department of 
Housing and Urban Development, and the Federal Housing Finance 
Agency) to require securitizers to retain no less than 5 
percent of the credit of any assets transferred to investors 
through the issuance of an asset-backed security (ABS). Section 
941 exempts certain ABS issuances from the general risk 
retention requirement, including ABS issuances collateralized 
exclusively by assets insured or guaranteed by the U.S. 
Government or an agency thereof, or ``qualified residential 
mortgages'' (QRMs), as jointly defined by the agencies.
    An interagency working group has convened well over 50 
times since the enactment of the Dodd-Frank Act for purposes of 
developing a proposal to implement section 941. All 
implementation issues have been analyzed and vetted thoroughly 
and we expect to reach an appropriate consensus informed by the 
unique supervisory expertise of the respective agencies.
    The interagency working group is near completion of a 
notice of proposed rulemaking. It is my expectation that the 
proposed rule would solicit public comment on various options 
for satisfying the credit risk retention requirements of 
section 941, including an option that recognizes widely used 
industry practices in structuring commercial mortgage-backed 
securities, as well as the appropriateness of certain 
exemptions. The proposed rule also will set forth and solicit 
public comment on the economic and cost-benefit analyses 
required under the Administrative Procedure Act, the Regulatory 
Flexibility Act, and Unfunded Mandates Reform Act of 1995.
    I believe that the many options included in the proposed 
rules with respect to the risk retention requirements should 
ensure that securitizers retain a meaningful amount of credit 
risk in a way that minimizes the potential adverse impact of 
the proposed rule on the availability and costs of credit to 
consumers and businesses. At the same time, the proposed rules 
should be consistent with the stated objectives of section 941 
and foster sound underwriting and prudent risk management 
practices with respect to loans that are originated for 
securitization. The FDIC Board is expected to approve and adopt 
the proposed rule in advance of the statutory deadline.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                      FROM SHEILA C. BAIR

Q.1. A Bloomberg news story, citing a Financial Stabilty 
Oversight Council (FSOC) staff report marked ``confidential,'' 
indicates that there is a parallel regulatory track with 
respect to the designation of systemically significant nonbank 
financial companies. The Bloomberg story mentions FSOC staff 
are moving forward with ``confidential'' criteria that will be 
used to designate systemically important nonbank financial 
institutions. However, unlike the proposed rule, which merely 
restates the statutory language, these confidential criteria 
are not subject to public comment and has yet to be reviewed by 
anyone outside of the council aside from this news report. This 
raises serious questions about the transparency of FSOC's 
rulemaking process.
    From what has been reported, portions of the leaked report 
conclude that an insurer failure could create adverse 
macroeconomic impact. This conclusion appears to have been 
reached without the required insurance expertise, which has yet 
to be appointed. A similar conclusion was made with respect to 
hedge funds.
    Unfortunately, there has been no public disclosure of the 
criteria or metrics that were used to arrive at this 
conclusion. As such, could you explain what metrics were 
applied and by whom in reaching this conclusion? What basis did 
the FSOC staff use to select these criteria?

A.1. The FSOC continues to develop the criteria and metrics 
that will be used in identifying firms as systemic, drawing 
upon relevant information from both public and supervisory 
sources. We also believe that we will likely need to gather 
information from firms given their complexity and the lack of 
readily available information that is necessary to measure 
their potential systemic impact. The FDIC believes that it is 
important to identify firms that could possibly need to be 
resolved under Title II authority since all firms designated as 
systemically significant are required to provide the FDIC and 
FRB with resolution plans. Resolution plans will significantly 
aid in our preparation efforts, resulting in a more orderly 
resolution. The FSOC has issued a notice of proposed rulemaking 
regarding the designation of nonbank financial firms under 
Title I of the Dodd-Frank Act. The notice of proposed 
rulemaking seeks public comment on the best methods to approach 
the designation of firms, and the application of systemic 
determination criteria on an institution-specific basis. The 
FDIC believes that the FSOC rulemaking on this issue should 
include significant detail on the process to be used by the 
FSOC in making designations, but also the criteria that the 
FSOC will employ when making designations.
    The FDIC has been a strong advocate for transparency and 
public engagement in the regulatory processes surrounding the 
implementation of Act, adopting an ``open door'' policy under 
which the public has and will continue to have a larger role in 
the process than ever before. Under the policy, public 
disclosure of meetings between senior FDIC officials and 
private sector individuals is required to enhance openness and 
accountability. In addition, the FDIC has conducted various 
public forums and roundtables, seeking public engagement and 
feedback regarding related issues in the Dodd-Frank Act.

Q.2. Chairwoman Bair's written testimony to this Committee 
states:

        The nonbank financial sector encompasses a multitude of 
        financial activities and business models, and potential 
        systemic risks vary significantly across the sector. A 
        staff committee working under the FSOC has segmented 
        the nonbank sector into four broad categories: (1) the 
        hedge fund, private equity firm, and asset management 
        industries; (2) the insurance industry; (3) specialty 
        lenders; and (4) broker-dealers and futures commission 
        merchants. The council has begun developing measures of 
        potential risks posed by these firms.

        The FSOC is committed to adopting a final rule on this 
        issue later this year, with the first designations to 
        occur shortly thereafter.

    Since the rulemaking process is already underway, do you 
know if the Administration is planning to make this report 
public?

A.2. We are not aware of any plans to make this report public; 
however, we believe it is important that any final rule should 
include significant detail on the process to be used by the 
FSOC in making designations and the criteria that the FSOC will 
employ when making designations.

Q.3. Will there be an opportunity for public comment on it 
before any final rules are promulgated?

A.3. The FSOC issued a notice of proposed rulemaking regarding 
the designation of nonbank financial firms under Title I of the 
Dodd-Frank Act on January 26, 2011, and the comment period 
closed on February 25, 2011. The FSOC received 39 comments. The 
notice of proposed rulemaking sought public comment on the 
application of systemic determination criteria on an 
institution-specific basis. This is important from the FDIC's 
perspective, since all firms designated as systemic will be 
required to provide us and the FRB with resolution plans, that 
detail their assets, liabilities, counterparty exposures, and 
other key structural aspects of their organization on a legal 
entity and consolidated basis. The proposal suggests using a 
framework to analyze the firms and applying metrics that would 
be tailored to that firm's business model and industry sector. 
As provided in the proposed rule: ``The Council would evaluate 
nonbank financial companies in each of the (six categories of 
the framework as proposed under the rule) using quantitative 
metrics where possible. The Council expects to use its 
judgment, informed by data on the six categories, to determine 
whether a firm should be designated as systemically important 
and supervised by the Board of Governors. This approach 
incorporates both quantitative measures and qualitative 
judgments.''
    As stated, the FDIC believes that the rule should include 
significant detail on the process to be used by the FSOC in 
making designations and the criteria that the FSOC will employ 
when making designations.

Q.4. What is your logic behind identifying these four 
categories?

A.4. These four broad categories of nonbank financial firms are 
considered reflective of the nonbank financial services 
industry generally. These broad groupings need to be 
established for purposes of creating appropriate analytic 
tools, and allows for thoughtful analysis and judgment by the 
FSOC. The broad delineations characterize groups as firms that 
invest assets for themselves or others and seek an equity-like 
return (asset managers), firms that primarily underwrite risks 
other than credit risk, such as life or casualty risks 
(insurers), firms that create or trade financial instruments as 
market-makers or for the account of others (broker/dealers), 
and other nonbank firms that extend credit (specialty lenders). 
There will be firms that do not clearly fit within a particular 
category, and for this reason these categories are not being 
suggested as fixed elements of the FSOC proposed analytic 
framework. The proposed framework addresses factors that 
analyze the firm's possible impact to U.S. financial stability 
in the event of financial distress, analyzes characteristics of 
the firm in six broad categories (size, substitutability, 
interconnectedness, leverage, liquidity risk, existing 
regulatory scrutiny) in order to assess the impact of spillover 
effects in the event of insolvency and the firm's vulnerability 
to financial distress. These standards are being proposed for 
public comment and are designed to be consistent with 
congressional mandate as set forth in the Dodd-Frank Act.

Q.5. Will you publish and seek comment on the industry-specific 
metrics that will (be) applied, before such assessments begin, 
so that Congress can have confidence that FSOC is exercising 
its authority appropriately and impacted financial companies 
can be assured that they are not being treated arbitrarily?

A.5. The FSOC is responsible for making such a determination in 
conformance with the law and its transparency policy. As a 
voting member of the FSOC, the FDIC believes that these 
transparency and public openness standards should be vigorously 
applied. The FDIC believes that any rule should include 
significant detail on the process to be used by the FSOC in 
making designations and the criteria that the FSOC will employ 
when making designations.

Q.6. In 2004, the FDIC issued a report assessing the banking 
industry's exposure to an implicit Government guarantee of the 
GSEs. The report indicated that, ``As of September 30, 2003, 
the initial effect of eliminating the implicit guarantee would 
reduce the value of banking industry GSE-related securities by 
$12 billion, or 1.1 percent. This initial loss of market value 
of securities would not severely harm overall liquidity of the 
banking industry. Individual institutions could be affected 
more depending on the amount, maturity structure, and mix of 
their GSE-related holdings.'' As you know Basel III and Dodd-
Frank both continue the favored treatment of GSE debt. What are 
you and other regulators doing to reduce the exposure of the 
banking industry to Fannie Mae and Freddie Mac?

A.6. Basel III liquidity standards would require banks to hold 
unencumbered liquid assets sufficient to meet 30 days of a 
predefined stressed outflow. The published standard limits the 
amount of GSE exposures in this pool of liquid assets to not 
more than 40 percent of the total pool. The standards further 
limit the reliance on GSEs by requiring a 15 percent 
``haircut'' on their balances prior to the calculation of the 
pool.
    Additionally, from a supervisory perspective, the FDIC and 
the other banking agencies review banks' fixed income 
portfolios and attendant policies at each supervisory 
examination, and analyze the institution's investment decision-
making process. The FDIC will continue to monitor GSE debt 
investments at State nonmember institutions and will ensure 
that banks have effective investment portfolio management 
processes to mitigate risk.

Q.7. Do you believe that our banking industry would be more 
stable if the favored treatment of GSE debt was removed?

A.7. When the recent financial crisis was in full swing, the 
activities of the GSEs supported financial stability. Without 
the ability of GSEs to support prudently underwritten mortgage 
credit during the last few years, the cyclical downturn in 
housing markets we have experienced would doubtless have been 
far worse. The more difficult question is, what is the effect 
of GSE activities during the upward phase of the business 
cycle: whether explicit and implicit Federal support for the 
housing sector encouraged the formation of the housing price 
bubble in the years leading to the crisis. It is difficult to 
disentangle all the factors that contributed to that bubble. To 
the extent GSEs can maintain and promote prudent credit 
underwriting standards for the loans they guarantee, they may 
be a force to constrain speculative excess during ``boom'' 
periods.
    We also would note that policy changes in the treatment of 
GSE obligations could have implications for the ability of 
banks to meet capital and liquidity requirements. Removing the 
preferential treatment GSEs receive would make compliance with 
the new Basel III requirements more costly for U.S. banks. 
Moreover, such a change also could adversely affect the 
liquidity of GSE obligations. For example, at present GSE's 
obligations frequently serve as collateral in a debt repurchase 
agreement market that enhances the liquidity of banks that hold 
these obligations even as they hold assets with higher returns 
that could be earned by holding liquid U.S. Treasury 
securities.

Q.8. Has the FDIC done any follow up of this 2004 study so that 
it has a clear understanding of the exposure of our banking 
system to GSE debt given the fact that the GSE's are in 
conservatorship? If so, can you provide those details to this 
Committee? If not, why not?

A.8. No, the FDIC has not published a follow-up to our 2004 
study. We do, however, continue to monitor closely GSE debt 
investments at all institutions through our internal 
supervisory processes. These efforts enable us to understand, 
analyze, and monitor the exposure of the banking system to GSE 
debt.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WICKER
                      FROM SHEILA C. BAIR

Q.1. Chairman Bair, I am concerned that in our haste to 
identify institutions that pose a systemic risk, we may rely 
too heavily on the top line amount of assets a company may hold 
or manage and overlook the fact that many of these assets may 
be in individual smaller funds.
    Can you please tell me how you will determine a way to look 
at individual investment funds and not the aggregate amount of 
assets under a manager in determining if a fund is systemically 
important?

A.1. In order to make a determination regarding systemic 
importance, it will be crucial for the FSOC to have a robust 
set of metrics that can be used to appropriately measure the 
factors that contribute to systemic risk. While total assets 
under management is one important measure, it is only one of 
many different quantitative and qualitative metrics that must 
be viewed together in order to develop a complete picture of 
systemic importance. Since any measure is only as good as the 
data that is used to calculate it, it is vitally important that 
the FSOC have a robust set of detailed data at its disposal. 
The FSOC has taken the SIFI designation process seriously and 
has sought public input into the development of robust metrics. 
On October 2, 2010, the FSOC issued an Advance Notice of 
Proposed Rulemaking (ANPR), followed up a Notice of Proposed 
Rulemaking on January 26, 2011. The ANPR sought public comment 
on a host of issues, particularly the metrics that should be 
used to make SIFI determinations. In light of public comments 
received, the FSOC is considering issuing a revised notice of 
proposed rulemaking in the coming months to provide the public 
with an opportunity to comment on a more refined set of 
metrics.

Q.2. I am wondering if we should be worried more about funds 
collapsing rather than managers collapsing. If the funds are 
independent of each other's liabilities, what is our 
responsibility or concern about an individual manager?

A.2. We should be concerned about systemic risk associated with 
both the fund and the fund manager. From the fund perspective, 
it is possible that the interconnectedness of the fund with the 
broader financial market could cause systemic instability in 
the event that the fund suffered financial distress. It is also 
possible that a particular fund or group of funds are highly 
interconnected with their fund managers, such that financial 
distress at the fund manager could lead to systemic instability 
either through the interactions of the fund manager with the 
financial markets or out of market concern that the fund 
manager may be unable to provide liquidity or capital support 
to a particular fund in a time of distress. As one example, 
during the recent financial crisis, money market mutual funds 
with financially weaker managers were more susceptible to 
investment withdrawals and much more likely to ``break the 
buck'' than similar funds that were managed by more financially 
secure managers.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                     FROM MARY L. SCHAPIRO

Q.1. Recently, some have voiced concerns that the timeframe for 
the rulemakings required by the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank) is too short to allow 
for adequate consideration of the various comments submitted or 
to review how the new rules may impact our financial markets. 
Does the current timeframe established by Dodd-Frank allow each 
rulemaking to be completed in a thoughtful and deliberative 
manner?

A.1. Implementation of the Dodd-Frank Act is a substantial 
undertaking. The Act's requirement that a significant number of 
Commission rulemakings be completed within 1 year of the date 
of enactment poses significant challenges to the Commission. 
Throughout, the staff and Commission have been diligent in 
working to meet the deadlines imposed by the Dodd-Frank Act 
while also taking the time necessary to thoughtfully consider 
the issues raised by the various rulemakings.
    We recognize that many of our new rules may have 
substantial market implications. As a result, we must be sure 
we have assessed those implications and provide market 
participants sufficient time to understand the obligations that 
may apply to them. We are considering how to sequence the 
implementation of rules so that market participants have 
sufficient time to develop the infrastructure needed to comply, 
and we also anticipate that many final rules will include 
implementation periods that will provide additional time for 
market participants to take necessary steps to achieve 
compliance. We also are taking steps to gather additional input 
on our implementation process where appropriate, such as the 
joint roundtable held on May 2-3 with the CFTC regarding the 
adoption of derivatives rules under Title VII.
    Given the significant issues involved in many of the Dodd-
Frank rules, it will not always be possible to meet the 
statutory deadlines imposed under the Act. Indeed, we have 
missed certain of the deadlines set forth in that Act and 
expect we similarly will miss others in the future. While we 
obviously are desirous of meeting the Act's deadlines, it is 
critical that we get the rules right.

Q.2. In carrying out the required rulemaking under Title VII, 
the SEC and the CFTC are instructed under Dodd-Frank to ``treat 
functionally or economically similar products or entities . . . 
in a similar manner.'' However, some of the rules defining the 
key infrastructure for the new derivatives regime that have 
been proposed by the SEC and CFTC contain some significant and 
important differences, as is demonstrated by the different 
definitions for rules governing Swap Execution Facilities. How 
do your two agencies plan to reconcile these differences before 
the final rules are adopted later this year?

A.2. Since the Dodd-Frank Act was passed last July, the 
Commission staff has been engaged in ongoing discussions with 
CFTC staff regarding our respective approaches to implementing 
the statutory provisions for SEFs and security-based SEFs. In 
many cases, these discussions have led to a common approach--
for example, both proposals have similar registration programs, 
as well as similar filing processes for rule changes and new 
products. As you note, however, there are differences in 
certain areas, such as the treatment of requests for quotes, 
block trades, and voice brokerage.
    Our proposal reflects the Commission's preliminary views as 
to how the Dodd-Frank Act would best be applied to the trading 
of security-based swaps, which differ in certain ways from the 
swaps that will be regulated by the CFTC. We look forward to 
input from the public as to whether these differences are 
adequately supported by functional distinctions in the trading 
and liquidity characteristics of swaps and security-based 
swaps, as well as comments as to how the agencies' rules may be 
further harmonized. Based on this feedback, we plan to work 
with the CFTC to achieve greater harmonization of the rules for 
SEFs and security-based SEFs to the extent practicable.
    Throughout this process, we are particularly mindful of the 
potential burdens on entities that will be dually registered 
with the Commission and the CFTC. To this end, we have 
specifically requested comment in our proposal on the impact of 
the overall regulatory regime for such registrants, such as 
areas where differences in the Commission and the CFTC 
approaches may be particularly burdensome. We are also 
sensitive to the opportunity for regulatory arbitrage with 
respect to non-U.S. markets, and my staff has been working 
closely with their international colleagues to find common 
ground with respect to the regulation of SEFs. We expect to 
benefit from significant public input on both of these issues, 
and we will carefully consider such input in crafting our final 
rule.

Q.3. Please identify the key trends in the derivatives market 
that your agencies are currently monitoring to ensure systemic 
stability.

A.3. Although the Commission will not have direct electronic 
access to detailed swap and security-based swap data until the 
Dodd-Frank Act's requirements are fully implemented, the 
Commission currently receives periodic updates of available 
trade information that covers substantially all single-name and 
index credit default swap transactions. Commission staff 
currently is using this data to develop better information 
regarding net exposures of U.S-based market participants (or 
market participants trading in a U.S.-based reference entity). 
Commission staff intends to assess and monitor how these net 
exposures vary by market participant, time, and instruments to 
better understand when or if concentrations of risk develop.
    Commission staff also is supporting an ongoing effort to 
classify the more than 1,400 market participants and 8,000 
trading accounts managed by these participants to develop a 
better understanding of how swap and security-based swap 
transactions are being used. Because there is no standard 
formatting for the reporting of such transactions or the 
details of the relevant counterparties, considerable effort is 
required to assemble and verify the underlying data. Based on 
this experience, Commission staff has been meeting regularly 
with representatives of potential data repositories to discuss 
specifications for the Commission's direct electronic access to 
data in order to make such data as useful as possible to the 
Commission.
    Though these efforts have been somewhat limited in scope 
(e.g., equity swaps and debts swaps have not yet been covered), 
we expect that the data-related requirements of the Dodd-Frank 
Act will assist the Commission in developing better resources 
for identifying key trends in the security-based swap market.

Q.4. In defining the exemption for ``qualified residential 
mortgages,'' are the regulators considering various measures of 
a lower risk of default, so that there will not just be one 
``bright line'' factor to qualify a loan as a Q.R.M.?

A.4. The definition of ``qualified residential mortgage'' in 
the proposed rule issued jointly by the Commission and other 
regulators at the end of March 2011 takes into account 
underwriting and product features that historical loan 
performance data indicate result in a lower risk of default as 
required by the statute. Specifically, the underwriting and 
product features established by the Commission and other 
regulators for qualified residential mortgages include 
standards related to the borrower's ability and willingness to 
repay the mortgage (as measured by the borrower's debt-to-
income ratio); the borrower's credit history; the borrower's 
down payment amount; the loan-to-value ratio for the loan; the 
form of valuation used in underwriting the loan; the type of 
mortgage involved; and the owner-occupancy status of the 
property securing the mortgage. As stated in the Agencies' 
Notice of Proposed Rulemaking, a substantial body of evidence, 
both in academic literature and developed for rulemaking, 
supports the view that loans that meet the minimum standards 
established by the agencies have low credit risk even in 
stressful economic environments that combine high unemployment 
with sharp drops in house prices.

Q.5. What data are you using to help determine the definition 
of a Qualified Residential Mortgage?

A.5. In considering how to determine the definition of 
``qualified residential mortgage,'' the relevant agencies 
examined data from several sources. For example, the agencies 
reviewed data on mortgage performance supplied by the Applied 
Analytics division (formerly McDash Analytics) of Lender 
Processing Services (LPS). To minimize performance differences 
arising from unobservable changes across products, and to focus 
on loan performance through stressful environments, the 
agencies for the most part considered data from prime fixed-
rate loans originated from 2005 to 2008. This data set included 
underwriting and performance information on approximately 8.9 
million mortgages. As is typical among data provided by 
mortgage servicers, the LPS data do not include detailed 
information on borrower income and on other debts the borrower 
may have had in addition to the mortgage. For this reason, the 
agencies also examined data from the 1992 to 2007 waves of the 
triennial Survey of Consumer Finances (SCF). \1\ Because 
families' financial conditions will change following the 
origination of a mortgage, the analysis of SCF data focused on 
respondents who had purchased their homes either in the survey 
year or the previous year. This data set included information 
on approximately 1,500 families. The agencies also examined a 
combined data set of loans purchased or securitized by Federal 
National Mortgage Association and Federal Home Loan Mortgage 
Corporation (the ``Enterprises'') from 1997 to 2009. The 
Enterprises' data set consisted of more than 75 million 
mortgages, and include data on loan products and terms, 
borrower characteristics (e.g., income and credit score), and 
performance data through the third quarter of 2010.
---------------------------------------------------------------------------
     \1\ The SCF is conducted every three years by the Board of 
Governors of the Federal Reserve System, in cooperation with the 
Department of the Treasury, to provide detailed information on the 
finances of U.S. families. The SCF collects information on the balance 
sheet, pension, income, and other demographic characteristics of U.S. 
families. To ensure the representativeness of the study, respondents 
are selected randomly using a scientific sampling methodology that 
allows a relatively small number of families to represent all types of 
families in the Nation. Additional information on the SCF is available 
at http://www.federalreserve.gov/pubs/oss/oss2/method.html.

Q.6. The Congress considered that a significant contributor to 
the crisis were compensation systems that encouraged management 
to take excessive risks. What is the experience so far with the 
---------------------------------------------------------------------------
new ``say on pay'' rules for public companies?

A.6. Public companies subject to the federal proxy rules are 
required to conduct ``say-on-pay'' votes at annual meetings 
beginning on January 21, 2011. The Commission's rules on the 
say-on-pay vote became effective on April 4, 2011. Although 
many companies have begun to conduct these votes, it is too 
early to gauge how these votes will be received and how 
shareholders will react to the opportunity to cast an advisory 
vote on executive compensation.

Q.7. Dodd-Frank required the SEC to conduct a 6-month study on 
investor protection and the duty of care observed by broker-
dealers and by investment advisers who provide personalized 
investment advice to retail investors and gave it new 
rulemaking authority. In January, the majority of the 
Commission voted to issue a staff report on this subject. The 
Report recommended rulemaking to create a new uniform fiduciary 
duty standard and harmonize the regulation of broker-dealers 
and investment advisors. Two Commissioners said that additional 
study is needed, and called for more analysis of the existing 
problems and justification that the study's recommendations 
would improve investor protection.
    Does the Commission or staff plan to further study all 
Commissioners' questions? How do you plan to proceed in this 
area to assure that such significant questions are addressed 
prior to making new rules?

A.7. In the study required under Section 913 of the Dodd-Frank 
Act, Commission staff recommended implementing a uniform 
fiduciary standard that would accommodate different existing 
business models and fee structures, preserve investor choice, 
and not decrease investors' access to existing products, 
services, or service providers. In preparing the study, the 
staff considered the comment letters received in response to 
the Commission's solicitation of comment and considered the 
potential costs and other burdens associated with implementing 
the recommended fiduciary standard. We will continue to be 
mindful of the potential economic impact going forward. In 
light of this ongoing focus, I have asked a core team of 
economists from the Commission's Division of Risk, Strategy and 
Financial Innovation (Risk Fin) to study among other things, 
data pertaining to the standards of conduct in place under the 
existing broker-dealer and investment adviser regulatory 
regimes to further inform the Commission.
    Ultimately, if the Commission does engage in rulemaking 
under Section 913, as with any proposed rulemaking, the 
Commission would conduct an economic analysis regarding the 
impact of any proposed rules. Such analysis would include the 
views of Risk Fin, which has broad experience analyzing 
economic and empirical data. The Commission would then consider 
public comment on any such proposal, including public comment 
on the Commission's analysis of costs and benefits. Any final 
rulemaking would also take into account not only the views of 
all interested parties, but also the potential impact of such 
rules on the financial marketplace, including the impact on 
retail investors and the advice they receive from financial 
professionals.

Q.8. Please discuss the current status and timeframe of 
implementing the Financial Stability Oversight Council's (FSOC) 
rulemaking on designating nonbank financial companies as being 
systemically important. As a voting member of FSOC, to what 
extent is the Council providing clarity and details to the 
financial marketplace regarding the criteria and metrics that 
will be used by FSOC to ensure such designations are 
administered fairly? Is the intent behind designation decisions 
to deter and curtail systemically risky activity in the 
financial marketplace? Are diverse business models, such as the 
business of insurance, being fully and fairly considered as 
compared with other financial business models in this 
rulemaking?

A.8. The process of designating institutions as systemically 
important financial institutions, or SIFIs, is designed to 
identify large, nonbank financials that might pose a risk to 
the financial system and provide heightened prudential 
regulation of such firms by the Federal Reserve, and to reduce 
the moral hazard risks of ``too big to fail.''
    The Council published a Notice of Proposed Rulemaking (NPR) 
early this year concerning the SIFI designation process, but 
has not yet made determinations regarding the application 
specific criteria for greater review or designation. In 
general, I think differences in industries and business models 
need to be closely considered and that an identical set of 
quantitative criteria may not be equally helpful to different 
types of institutions. For example, the factors that would be 
relevant in looking at insurance companies may differ from 
those that should be considered for hedge funds.
    Given the important public interest in this exercise, and 
the inevitable judgment that will be required, I believe it is 
important to establish an FSOC decision-making framework that 
(1) is built to the maximum extent possible on the use of 
objective criteria; (2) provides a fair and transparent 
process; and (3) provides for the regular review and revisiting 
of determinations to ensure they are current and meaningful. I 
also think it is vital to try to identify the objective factors 
that the Council will consider with as much specificity as 
possible, and to make the process generally as transparent and 
responsive to public input as possible. As a member of the 
Council, I will be especially focused on providing transparency 
in the process in considering the adoption of final rules. The 
Council plans to provide additional guidance regarding its 
approach to designations and will seek public comment on it.

Q.9. The Dodd-Frank Act created an important program to help 
the SEC identify major violations of the securities laws by 
motivating persons with original information about such 
violations to come forward and act as whistleblowers, subject 
to very limited statutory exceptions.
    Please describe the experience thus far with the program.
    The National Whistleblower Center has recently reported 
that the existence of a whistleblower rewards program does not 
negatively impact the willingness of employees to use internal 
corporate compliance program, based on its analysis of cases 
filed under the False Claims Act in recent years and other 
data. What is your appraisal of the study by the National 
Whistleblower Center? Do you intend to consider such 
statistical analysis and data in arriving at final rules for 
the SEC Whistleblower Program?

A.9. Since the passage of the Dodd-Frank Act, we have been 
working hard to establish our new whistleblower program. Last 
November, we proposed rules to implement the statute. To date, 
the Commission has received hundreds of comments from a wide 
variety of interested persons and entities. Staff is in the 
process of reviewing and analyzing those comments, which will 
be considered in connection with the adoption of final 
Commission rules. We recently have seen an uptick in high 
quality, detailed complaints from whistleblowers, and we expect 
this trend to grow once the Commission's rules are finalized.
    In February, we announced the hiring of Sean McKessy, the 
first Chief of our new Office of the Whistleblower, to oversee 
the program. In addition, the whistleblower fund that will be 
used to pay awards to qualifying whistleblowers is fully 
funded.
    Not surprisingly, the issue of the rules' possible impact 
on internal compliance programs was among the most common of 
the comments we received in response to our proposed rules. Any 
staff recommendation on final rules will take into 
consideration the National Whistleblowers Center study and any 
additional empirical data provided to us.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                     FROM MARY L. SCHAPIRO

Q.1. The Dodd-Frank Act requires an unprecedented number of 
rulemakings over a short period of time. As a result, some 
deadlines have already been missed and some agencies expect to 
miss additional deadlines. It appears that many of the 
deadlines in Dodd-Frank are not realistic. Which Dodd-Frank 
deadlines do you anticipate not being able to meet? If Congress 
extended the deadlines, would you object? If your answer is 
yes, will you commit to meeting all of the statutory deadlines? 
If Congress affords additional time for rulemaking under the 
Dodd-Frank Act, will you be able to produce higher-quality, 
better coordinated rules?

A.1. As your question suggests, implementation of the Dodd-
Frank Act is a substantial undertaking. The Act's requirements 
that a significant number of Commission rulemakings be 
completed within 1 year of the date of enactment poses 
significant challenges to the Commission. Throughout, the staff 
and Commission have been diligent in working to meet the 
deadlines imposed by the Dodd-Frank Act while also taking the 
time necessary to thoughtfully consider the issues raised by 
the various rulemakings.
    We recognize that many of our new rules may have 
substantial market implications. As a result, we must be sure 
we have assessed those implications and provide market 
participants sufficient time to understand the obligations that 
may apply to them.
    Given the significant issues involved in many of the Dodd-
Frank rules, it will not always be possible to meet the 
statutory deadlines imposed under the Act. Indeed, we have 
missed certain of the deadlines set forth in that Act and 
expect we similarly will miss others in the future. While we 
obviously are desirous of meeting the Act's deadlines, it is 
critical that we get the rules right.
    To help keep the public informed, we have created a new 
section on our Web site that provides detail about the 
Commission's implementation of the Act. We also are taking 
steps to gather additional input on our implementation process 
where appropriate, such as the joint roundtable held on May 2 
and 3 with the CFTC regarding the adoption of derivatives rules 
under Title VII. We value, and are committed to seeking, the 
broad public input and consultation needed to promulgate these 
important rules.

Q.2. Secretary Geithner recently talked about the difficulty of 
designating nonbank financial institutions as systemic. He 
said, ``it depends too much on the state of the world at the 
time. You won't be able to make a judgment about what's 
systemic and what's not until you know the nature of the 
shock.'' If it is impossible to know which firms are systemic 
until a crisis occurs, the Financial Stability Oversight 
Council will have a very difficult time objectively selecting 
systemic banks and nonbanks for heightened regulation. As a 
member of the Council, do you believe that firms can be 
designated ex ante as systemic in a manner that is not 
arbitrary? If your answer is yes, please explain how.

A.2. It is important to begin by distinguishing between 
designations made pursuant to Title I of the Dodd-Frank Act 
(i.e., as a systemically important financial institutions, or 
SIFIs, subject to heightened prudential oversight by the 
Federal Reserve) and ``systemic risk determinations'' for 
special resolution of financial companies made pursuant to 
Title II.
    Regarding Title II systemic risk determinations for special 
resolution of financial companies, I agree that regulators 
would not normally make such determinations without first 
understanding the nature of the shock that gave rise to risk 
and the potential need for the determination.
    The SIFI designation, however, is separate and apart from 
the Title II designation. Although it is not likely possible to 
identify all potential causes of, and conditions leading to, 
systemic risk, it should be possible to identify firms that 
engage in levels of activity sufficient to warrant further 
oversight. The purpose of SIFI, then, is to examine a broader 
range of firms so that large, interconnected and potentially 
systemic firms do not ``fall through the regulatory cracks.''
    Furthermore, through additional consolidated Federal 
Reserve oversight, the goal of SIFI designations should be to 
proactively address the risks in such firms so that they do not 
become ``too big to fail'' institutions. It is important to 
note that large interconnected firms exist whether or not SIFI 
designations are made. The purpose of SIFI is not to create a 
new type of entity, but rather to acknowledge that such large 
entities may exist, identify them when possible, and to bring 
them under the fold of prudential oversight in a way that may 
enable a bankruptcy--or orderly wind down--for firms that might 
otherwise have posed ``too big to fail risks'' on the market 
and the Government. There is always the possibility that new 
risks will develop that were not considered systemic, or even 
well-understood, as designations are made. But that should not 
deter regulators from identifying firms that are susceptible to 
the risk that are presently well understood. For these 
designations, FSOC will seek to determine whether the 
``material financial distress; or the nature, scope, size, 
scale, concentration, interconnectedness, or mix of the 
activities of [a] U.S. nonbank financial company, could pose a 
threat to the financial stability of the United States.'' This 
will require a deep understanding of the ongoing 
characteristics of a nonbank financial company (for example, 
its size and leverage, among other things) rather than the 
nature of particular ``shocks'' that might give rise to a 
specific near term systemic risk.
    Accordingly, I do believe SIFI designations can be made ex 
ante without being arbitrary. Given the inevitable judgment 
involved, however, I believe it is important to establish an 
FSOC decision-making framework that (1) is built, to the 
maximum extent possible, on the use of objective criteria; (2) 
provides a fair and transparent process; and (3) provides for 
the regular review and revisiting of determinations to ensure 
they are both current and meaningful.

Q.3. Section 112 of the Dodd-Frank Act requires the Financial 
Stability Oversight Council to annually report to Congress on 
the Council's activities and determinations, significant 
financial market and regulatory developments, and emerging 
threats to the financial stability of the United States. Each 
voting member of the Council must submit a signed statement to 
the Congress affirming that such member believes the Council, 
the Government, and the private sector are taking all 
reasonable steps to ensure financial stability and mitigate 
systemic risk. Alternatively, the voting member shall submit a 
dissenting statement. When does the Council expect to supply 
the initial report to Congress?

A.3. I expect the Council will supply its initial report to 
Congress at some point later this year.

Q.4. Which provisions of Dodd-Frank create the most incentives 
for market participants to conduct business activities outside 
the United States? Have you done any empirical analysis on 
whether Dodd-Frank will impact the competitiveness of U.S. 
financial markets? If so, please provide that analysis.

A.4. There are a number of provisions in the Federal securities 
laws that require the Commission to consider the competitive 
effects of its rules. Many of those provisions further require 
the Commission, before approving a rule, to determine that the 
rule is necessary and appropriate in the public interest, and 
for the protection of investors. Section 3(f) of the Exchange 
Act generally requires the Commission to consider whether the 
rules will promote efficiency, competition, and capital 
formation. In addition, the Commission must consider the impact 
these rules would have on competition under Section 23(a) of 
the Exchange Act.
    The releases that accompany our rules include our analysis 
of these issues. To the extent that the Commission believes 
that a proposed rule would create an incentive for market 
participants to conduct business activities outside the United 
States, that effect would be discussed in the analysis 
contained in the release. We also seek comment on the 
competitive impact of our rules, both to elicit this 
information as well as to better inform us of the potential 
effects of our rules.
    In addition, the Commission is consulting bilaterally and 
through multilateral organizations with counterparts abroad 
regarding the international consequences of implementation of 
the Dodd-Frank Act. The Commission, for example, together with 
the CFTC, is directed by the Dodd-Frank Act to consult and 
coordinate with foreign regulators on the establishment of 
consistent international standards with respect to the 
regulation of swaps, security-based swaps, swap entities and 
security-based swap entities. We believe that the recently 
formed IOSCO Task Force on OTC Derivatives Regulation, which 
the Commission cochairs, as well as other international fora, 
will help this effort.

Q.5. More than 6 months have passed since the passage of the 
Dodd-Frank Act, and you are deeply involved in implementing the 
Act's approximately 2,400 pages. Which provisions of the Dodd-
Frank Act are proving particularly difficult to implement? Have 
you discovered any technical or substantive errors in the Dodd-
Frank legislation? If so, please describe them.

A.5. The Dodd-Frank Act includes over 100 rulemaking provisions 
applicable to the SEC. As discussed above, we recognize that 
many of the rules that result may have substantial market 
implications. Accordingly, we are taking the time to 
thoughtfully consider how to sequence the implementation of 
rules so that market participants have sufficient time to 
develop the infrastructure needed to comply. We also anticipate 
that certain final rules will include implementation periods 
that will provide additional time for market participants to 
take the necessary steps to achieve compliance.
    In the course of our efforts to implement the Dodd-Frank 
Act, we have discovered technical errors or inconsistencies in 
some of the provisions of the statute. To date, we have been 
able to work around these errors in our rulemaking. If we find 
that we cannot do so in a particular circumstance, we will 
reach out to Congress with potential legislative fixes.

Q.6. What steps are you taking to understand the impact that 
your agency's rules under Dodd-Frank will have on the U.S. 
economy and its competitiveness? What are the key ways in which 
you anticipate that requirements under the Dodd-Frank Act will 
affect the U.S. economy and its competitiveness? What are your 
estimates of the effect that the Dodd-Frank Act requirements 
will have on the jobless rate in the United States?

A.6. As with all of the Commission's rulemaking, we are 
carefully analyzing the costs and benefits of the rules we are 
implementing under the Dodd-Frank Act. In its proposing 
releases, the Commission includes a cost-benefit analysis and 
invites public comment. In adopting releases, the Commission 
responds to those comments and revises its analysis as 
appropriate.
    In addition, as set forth in various administrative law 
provisions, the Commission undertakes other types of analyses 
in its rulemaking. For example, the Commission estimates the 
information collection burdens under the Paperwork Reduction 
Act, and also assesses the potential effects on small entities 
under the Regulatory Flexibility Act.
    The Commission also is subject to particular provisions in 
the federal securities laws that require it generally to 
consider the effects of its rules on competition, efficiency 
and capital formation (e.g., Section 3(f) of the Securities 
Exchange Act of 1934 and similar provisions in the Securities 
Act of 1933, Investment Company Act of 1940, and Investment 
Advisers Act of 1940). Moreover, under Section 23(a) of the 
Exchange Act, the Commission must consider the impact any rule 
would have on competition. The Commission has included these 
analyses in its rulemaking releases under the Dodd-Frank Act 
and solicited comment on the analyses.

Q.7. What steps are you taking to assess the aggregate costs of 
compliance with each Dodd-Frank rulemaking? What steps are you 
taking to assess the aggregate costs of compliance with all 
Dodd-Frank rulemakings, which may be greater than the sum of 
all of the individual rules' compliance costs? Please describe 
all relevant reports or studies you have undertaken to quantify 
compliance costs for each rule you have proposed or adopted. 
Please provide an aggregate estimate of the compliance costs of 
the Dodd-Frank rules that you have proposed or adopted to date.

A.7. As noted, the Commission undertakes various types of 
analyses to determine the costs and impacts of its rules. In 
its cost-benefit analyses, the rulemaking staff from the 
responsible Division works closely with the economists from our 
Division of Risk, Strategy, and Financial Innovation (Risk Fin) 
to identify the proposed rule's possible costs and benefits 
(including the compliance costs and other economic impacts of 
rules) and to develop an analysis that takes into account the 
relevant data and economic literature. Once senior members of 
the division primarily responsible for the rule and Risk Fin 
have reviewed this information, each of the Commissioners 
review and comment extensively on the draft proposing release. 
Ultimately, the proposing release, including the economic and 
cost-benefit analyses, is voted on by the Commission for 
release to the public.
    Specifically with respect to compliance costs resulting 
from paperwork burdens, the Commission in each proposed 
rulemaking seeks comment from the public on the estimated 
paperwork burden associated with each rule. It analyzes the 
comments received, makes appropriate changes based on these 
comments, and includes a discussion of the comments received 
and any changes made in the adopting release.
    To better inform the Commission of the aggregate cost of 
its rules, in several proposing releases related to Dodd-Frank, 
the Commission has specifically asked commenters about the 
interaction of a particular rulemaking with other provisions of 
the Dodd-Frank Act or rules adopted thereunder. In the 
proposing release regarding the process for review of security-
based swaps for mandatory clearing, for example, the Commission 
requested comment in its cost-benefit analysis on whether other 
provisions of the Dodd-Frank Act for which Commission 
rulemaking was required were likely to have an effect on the 
costs and benefits of the proposed rules.

Q.8. Section 115 of the Dodd-Frank Act asks the Financial 
Stability Oversight Council to make recommendations to the 
Federal Reserve on establishing more stringent capital 
standards for large financial institutions. In addition, 
Section 165 requires the Fed to adopt more stringent standards 
for large financial institutions relative to smaller financial 
institutions. Chairman Bernanke's testimony for this hearing 
implied that the Basel III framework satisfies the Fed's 
obligation to impose more stringent capital on large financial 
institutions. As a member of the Financial Stability Oversight 
Council, do you agree with Chairman Bernanke that the Basel III 
standards are sufficient to meet the Dodd-Frank Act requirement 
for more stringent capital standards? Please explain the basis 
for your answer.

A.8. While the Commission is not a member of the Basel 
Committee, I understand that the Basel III standards will be 
phased in gradually and that the Committee will use that 
transition period to assess whether the proposed design and 
calibration of the standards is appropriate over a full credit 
cycle and for different types of business models. The capital 
requirements in the Basel III standards also will be subject to 
an observation period and will include a review clause to 
address any unintended consequences. I look forward to 
reviewing these standards with other members of the Financial 
Stability Oversight Council to determine whether they fulfill 
the Dodd-Frank Act requirement for increased capital standards.

Q.9. The Fed, the SEC, the FDIC, and the CFTC are all 
structured as boards or commissions. This means that before 
they can implement a rule they must obtain the support of a 
majority of their board members. How has your board or 
commission functioned as you have been tackling the difficult 
job of implementing Dodd-Frank? Have you found that the other 
members of your board or commission have made positive 
contributions to the process?

A.9. The Commission has begun implementing the Dodd-Frank Act 
in the same manner as it performs its other responsibilities--
with dedication and the benefits that each Commissioner's 
insights, experience and expertise provide. To assist 
Commissioners in handling the significantly increased workload 
represented by the Dodd-Frank rulemaking, each has been 
authorized to hire an additional counsel. I feel strongly that 
our rulemaking--be it Dodd-Frank or otherwise--is better 
informed, considers a wider array of potential outcomes, and is 
articulated more clearly because of the combined contributions 
of each Commissioner.

Q.10. The SEC and CFTC are both spending many resources on 
writing rules and initiating the oversight programs for over-
the-counter derivatives. These parallel efforts are in many 
respects redundant, costly, and potentially damaging to the 
market. Would a combined SEC-CFTC unit to deal with swaps and 
security-based swaps reduce implementation costs, eliminate the 
redundancy of having two sets of rules, and provide for a more 
certain and effective regulatory regime?

A.10. There are important similarities between swaps and 
security-based swaps that warrant close coordination between 
the SEC and the CFTC--just as there are similarities between 
other products for which jurisdiction is divided between the 
two agencies. A combined SEC-CFTC unit to deal with swaps and 
security-based swaps would be one way of addressing the 
challenges of parallel oversight of these two categories of 
products. Even with a combined effort, however, differing 
approaches to regulation and oversight may be warranted for 
different types of swaps and security-based swaps. For example, 
differing approaches to regulating security-based swaps that 
are economic substitutes for securities (such as total return 
swaps on single equity securities, where the total return swap 
provides economic exposure equivalent to owning a single 
security) may be warranted to avoid arbitrage opportunities 
between the securities markets and these security-based swaps. 
Such regulatory arbitrage could, among other things, lead to 
further fragmentation in U.S. equity markets and reduce 
investor confidence in these markets.

Q.11. Title VIII of Dodd-Frank deals with more than 
systemically important financial market utilities. Under Title 
VIII, the SEC and CFTC are authorized to prescribe and enforce 
regulations containing risk management standards for financial 
institutions engaged in payment, clearance, and settlement 
activities designated by the Financial Stability Oversight 
Council as systemically important. Should the Council designate 
any activities under Title VIII? If the Council designates any 
activities as systemically important, what are the limits to 
your authority under Title VIII with respect to your regulated 
entities that engage in designated activities? What specific 
actions are beyond the authority of the CFTC and SEC?

A.11. The Financial Stability Oversight Council has the 
authority to apply the same standards used for designating 
financial market utilities (FMUs) to financial institutions' 
payment, clearing and settlement (PCS) activity that is--or is 
likely to become--systemically important. This approach 
reflects a view that financial institutions may, in some 
circumstances, perform PCS activities that pose risks to the 
financial system broadly comparable to those posed by certain 
FMUs. Accordingly, additional supervision that may be warranted 
in such cases should not be limited simply because of the 
organizational structure of the entity performing the activity. 
That said, such organizational differences do require that 
appropriate additional supervisory controls be implemented 
differently. This is reflected in the differing powers provided 
to the Council with respect to PCS activity--versus FMU 
activity--under Title VIII of the Dodd-Frank Act. To date the 
Council has focused its attention on rulemaking concerning FMUs 
and financial institutions themselves, but I look forward to 
working with my colleagues on the Council to develop an 
approach for reviewing PCS activity.

Q.12. One of the purposes of joint rulemaking was to bring the 
best minds of both agencies together to design a uniform 
regulatory approach for OTC derivatives. In one recent joint 
proposal, the SEC and CFTC took two different approaches to 
further defining ``swap dealer'' and ``security-based swap 
dealer.'' Specifically, the release applied the dealer-trader 
distinction that has been used to interpret the term ``dealer'' 
under the 1934 Act only to security-based swap dealers, not to 
swap dealers. Does this violate the Dodd-Frank mandate that you 
work together?

A.12. The Commission and CFTC have worked closely in developing 
rules and related interpretations regarding the definitions of 
``swap dealer'' and ``security-based swap dealer.'' In so 
doing, we have been mindful of practical differences between 
how ``swaps'' and ``security-based swaps'' are used and traded. 
These differences include the use of swaps for hedging purposes 
by ``natural long'' entities in the agricultural, energy and 
resource sectors, as well as the use of aggregators in the 
swaps markets.
    I believe that the proposed interpretations of the ``swap 
dealer'' and the ``security-based swap dealer'' definitions are 
generally parallel, while appropriately accounting for those 
differences between swaps and security-based swaps and 
reflecting the Commission's historic use of the ``dealer-
trader'' distinction.
    I expect the staff and Commission will carefully consider 
commenters' views on the rules and interpretations regarding 
the dealer definitions prior to promulgating a final rule.

Q.13. One of the concerns of foreign regulators and foreign 
market participants is a lack of clarity about the application 
of your derivatives regulation. What are the limits of your 
ability to regulate foreign swap participants and foreign 
transactions in the swap market? Do you think that the CFTC and 
SEC should define the bounds of their regulatory authority in a 
formal rulemaking? If not, why not?

A.13. The Commission has been actively considering how the 
mandates in the Dodd-Frank Act should interact with the global 
derivatives market and its participants, particularly those 
entities and transactions that may be subject to regulation by 
a foreign regulatory authority. We are keenly aware that the 
existing derivatives market is global in nature, and that 
cross-border issues abound, as derivatives transactions often 
involve counterparties and products from around the world.
    The application of Title VII provisions to foreign market 
participants raises difficult issues regarding competition, 
arbitrage and international comity, among others. We believe 
that providing guidance on the reach of Title VII to the market 
either through rulemaking or other means is important. Given 
the complicated, interwoven nature of these matters, we have 
sought to avoid a piecemeal approach through the rules we have 
proposed thus far.
    As we have been working through the implementation of each 
of the provisions in Title VII, we have been meeting with 
foreign and domestic market participants to understand their 
views. Additionally, the Commission continues to be actively 
engaged in ongoing bilateral and multilateral discussions with 
foreign regulators regarding the direction of international 
derivatives regulation generally, and the Commission's efforts 
to implement Title VII's requirements.

Q.14. So far, the SEC's Dodd-Frank rulemakings total more than 
4,300 pages. Even if the SEC gets the additional staff it 
believes it needs to implement Dodd-Frank, the Commissioners 
still have to review every rule under consideration. Chairman 
Schapiro, how much of your own time is taken up reviewing all 
these rules? Have you personally read each proposed and final 
rule release? To which areas are you devoting less time than 
you otherwise would because you must devote so much of your 
time to Dodd-Frank implementation?

A.14. On average, I am spending close to two-thirds of my time 
on Dodd-Frank rulemaking. By the time that each proposing and 
adopting release is voted on by the Commission, I have (a) met 
with staff in multiple meetings to discuss policy options, pros 
and cons (including the costs and benefits), and Commission 
views; (b) read and commented upon a term sheet and multiple 
drafts of each release, and (c) had numerous meetings with 
outside parties on the rules. Because of the responsibility to 
implement Dodd-Frank, I am spending less time on other non-
Dodd-Frank rulemaking, and am accepting fewer public speaking 
requests that require travel, than was the case prior to Dodd-
Frank's adoption.

Q.15. The Dodd-Frank Act established a reserve fund for the 
SEC, which was intended to enable the SEC to respond quickly to 
unexpected events, like the flash crash, and to help the SEC 
through an extended Continuing Resolution. The President's 
budget, however, includes $20 million in direct obligations 
from the reserve fund to pay for routine information technology 
needs. If the SEC uses its emergency reserve fund to cover 
routine expenses that should be on budget, what will the SEC do 
when it faces a true emergency?

A.15. In establishing the Reserve Fund for the SEC starting in 
FY2012, the Dodd-Frank Act gives the agency authority to use 
the Fund for expenses the Commission determines are necessary 
to carry out the agency's functions. The Reserve Fund will be 
helpful in addressing three main kinds of funding issues: 
multiyear technology initiatives, extended Continuing 
Resolutions (CR), and emergencies such as the ``flash crash'' 
that may require the quick expenditure of funds to address 
issues that arise.
    The SEC is required to deposit into the Fund $50 million a 
year in registration fees, and the balance of the Fund cannot 
exceed $100 million. Under the Act, the SEC can cover salaries 
and expenses from this Fund, and then must notify Congress of 
each expense.
    Since the provision takes effect in FY2012, the President's 
Budget contains an estimate of how much will be obligated from 
the Reserve Fund in that year. The estimate is $20 million, and 
it assumes that those funds will be spent primarily on 
technology. Potential projects include an e-Discovery system 
for the enforcement, examination, and other programs; knowledge 
management; and security improvements.
    This estimate would leave $30 million available in the 
Reserve Fund for FY2012, which could be used for emergency 
needs should they arise.

Q.16. The SEC staff recently completed a study on whether a 
fiduciary duty should be imposed on broker-dealers, many of 
whom serve small towns. The study, however, failed to conduct 
an empirical analysis of the costs of imposing such a legal 
obligation. Before moving forward on any rulemaking in this 
area, do you believe that it is important for the SEC to 
conduct an empirical analysis of both the compliance costs and 
the impact on the availability of financial services, 
especially in rural communities?

A.16. The Commission solicited comments and data as part of the 
study required by Section 913 of the Dodd-Frank Act and 
received over 3,500 comment letters. Commission staff reviewed 
all of the comment letters and considered the many complex 
issues raised in them. In conjunction with drafting the study, 
Commission staff also met with interested parties representing 
investors, broker-dealers, investment advisers, other 
representatives of the financial services industry, academics, 
state securities regulators, the North American Securities 
Administrator Association, and the Financial Industry 
Regulatory Authority.
    As part of the Section 913 study, Commission staff did 
consider the impact of the study's recommendation of a uniform 
fiduciary duty on rural broker-dealers--most directly in 
connection with the staff's consideration of potential loss of 
investor choice, as mandated by the study. \1\
---------------------------------------------------------------------------
     \1\ Staff of the U.S. Securities and Exchange Commission, Study on 
Investment Advisers and Broker-Dealers as required by Section 913 of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, 162 
(January 2011).
---------------------------------------------------------------------------
    Commission staff considered whether potentially underserved 
portions of the retail investor population, including those 
located in rural areas, might be adversely affected by any of 
the options considered under Section 913. The staff concluded 
that the recommended uniform fiduciary standard would, in and 
of itself, not adversely impact such populations' access to 
financial products and services. In fact, the staff concluded 
that retail investors generally would benefit from the uniform 
fiduciary standard because it would better assure the integrity 
of the advice they receive, while continuing to allow for 
various compensation schemes (commissions and flat fees) and 
product offerings.
    The staff does not expect the uniform fiduciary standard to 
have a disproportionate impact in rural areas. Many financial 
planners and other investment advisers operate in small towns 
today, subject to a fiduciary standard of conduct. The staff's 
recommendations were designed to be flexible and to accommodate 
different existing business models and fee structures.
    In preparing the study, the staff considered the potential 
costs and other burdens associated with implementing the 
recommended fiduciary standard. We will continue to be mindful 
of the potential economic impact going forward. In light of 
this ongoing focus, I have asked a core team of economists from 
the Commission's Division of Risk, Strategy and Financial 
Innovation (Risk Fin) to review, among other things, data 
pertaining to the standards of conduct in place under the 
existing broker-dealer and investment adviser regulatory 
regimes to further inform the Commission.
    Ultimately, if the Commission does engage in rulemaking 
under Section 913, as with any proposed rulemaking, the 
Commission would conduct an economic analysis regarding the 
impact of any proposed rules. Such analysis would include the 
views of Risk Fin, which has broad experience analyzing 
economic and empirical data. The Commission would then consider 
public comment on any such proposal, including public comment 
on the Commission's analysis of costs and benefits. Any final 
rulemaking would also take into account not only the views of 
all interested parties, but also the potential impact of such 
rules on the financial marketplace, including the impact on 
retail investors and the advice they receive from financial 
professionals. Like you, I want our regulations to promote 
retail investor access to affordable investment products, 
including those investors in rural communities.

Q.17. The Department of Labor recently proposed to broaden the 
definition of ``fiduciary'' under ERISA. This proposal may have 
substantial effects on retail investors and SEC registrants. 
Phyllis Borzi of the Department of Labor mentioned last week 
that the Department has been working closely with the SEC on 
the issue. \2\ Which members of the SEC staff and which 
Commissioners have consulted with the Department of Labor on 
its fiduciary rulemaking and what has the nature of those 
consultations been?
---------------------------------------------------------------------------
     \2\ Meredith Z. Maresca, ``Borzi Says DOL Focusing on Initiatives 
For Disclosures, Exchanges, Lifetime Income'', BNA Daily Report for 
Executives (Feb. 23, 2011) (available at: http://news.bna.com/drln/
display/
no_alpha.adp?mode=si&frag_id=19639762&item=9DA7A4B5F927841A448E47A7E5934
B24) (``Borzi added that the Labor Department has been working closely 
with the Securities and Exchange Commission on the fiduciary 
regulations to make sure that the definition of fiduciary is 
`compatible and harmonized' for both agencies.'').

A.17. Since the Commission issued its Section 913 study, 
Commission staff has received and reviewed additional comments 
on the study, has continued to meet with interested parties to 
discuss their reactions to the study, and has discussed with 
staff of the Department of Labor its proposed rulemaking on 
fiduciary status. For example, with respect to developing 
business conduct standards for swap and security-based swap 
dealers and major participants, senior staff of the Division of 
Trading and Markets and Commodity Futures Trading Commission 
are coordinating with staff of the Department of Labor 
regarding the relationship between these business conduct 
standards and rules (both existing and proposed) under ERISA. 
Senior members of Commission staff, including Douglas J. 
Scheidt, Chief Counsel and Associate Director of the Division 
of Investment Management, and Lourdes Gonzalez, Acting Co-Chief 
Counsel of the Division of Trading and Markets, together with 
the staff from the CFTC and the Department of Labor, have 
participated in joint briefings with Congressional staff on 
these issues. Commission staff also attended the hearings held 
by the Department of Labor on March 1 and 2 to hear the 
concerns raised by affected parties. Commission staff is 
committed to continuing this consultative process. Similarly, 
if the Commission engages in rulemaking to address the 
recommendations in the Section 913 study, we would do so in 
consultation with the staff of the Department of Labor, 
recognizing, of course, the different mandates of the statutes 
---------------------------------------------------------------------------
that the agencies administer.

Q.18. The SEC describes its treatment of small companies under 
the say-on-pay rule as an exemption, but it is more 
appropriately described as delayed implementation. Why did the 
SEC choose not to exempt small companies from the say-on-pay 
requirements as permitted by Section 951 of the Dodd-Frank Act? 
More generally, what efforts are you making to assess and 
address the unique burdens faced by smaller public companies 
under Dodd-Frank Act requirements?

A.18. After reviewing and considering comments received from 
the public on the say-on-pay proposing release, the Commission 
adopted a temporary exemption for smaller reporting companies 
so that these issuers will not be required to conduct either a 
shareholder advisory vote on executive compensation or a 
shareholder advisory vote on the frequency of say-on-pay votes 
until their first annual or other meeting of shareholders 
occurring on or after January 21, 2013. Based on the comments 
received, the Commission believes investors in smaller 
reporting companies have the same interest as investors in 
larger reporting companies in voting on executive compensation 
and in clear and simple disclosure of golden parachute 
compensation in connection with mergers and similar 
transactions. However, after reviewing comments on the 
potential burdens on smaller reporting companies, the 
Commission determined it was appropriate to provide additional 
time before smaller reporting companies are required to conduct 
the shareholder advisory votes on executive compensation and 
the frequency of say-on-pay votes.
    In providing a delayed effective date for the say-on-pay 
and frequency votes for smaller reporting companies, the 
Commission noted that the delay should allow those companies to 
observe how the rules operate for other companies and permit 
them to better prepare for implementation of the rules. The 
Commission also noted that delayed implementation for smaller 
reporting companies will allow us to evaluate the 
implementation of the adopted rules by larger companies and 
provide us an additional opportunity to consider whether 
adjustments to the rules would be appropriate for smaller 
reporting companies before the rules become applicable to them.
    The Dodd-Frank Act authorizes the Commission to exempt an 
issuer or class of issuers from the requirements, but only 
after considering, among other things, whether the requirements 
disproportionately burden small issuers. The 2-year deferral 
period is designed to assist the Commission in its 
consideration of these factors and will enable us to adjust the 
rule, if appropriate, before it applies to smaller issuers.
    More generally, in implementing the Dodd-Frank Act, the 
Commission is carefully considering the unique burdens faced by 
smaller public companies. For example, the Commission recently 
issued a rule proposal to modify the calculation of ``net 
worth'' for purposes of the ``accredited investor'' definition 
to exclude the value of an individual's primary residence when 
calculating net worth. In developing the proposal, the 
Commission was mindful of the potential burden on small 
businesses and drafted the proposal to balance concerns 
relating to the impact on small businesses and the regulatory 
purpose of the proposal by specifying that debt secured by an 
individual's primary residence, up to the value of such primary 
residence, is excluded from the net worth calculation, thereby 
deducting only the equity value in the primary residence in the 
net worth calculation. Before we adopt the final rule, the 
Commission and staff will carefully weigh the public comments 
to ensure we strike the right balance.
    As we continue to implement the provisions of the Dodd-
Frank Act, we will continue to consider how the rules will 
impact smaller public companies, with particular focus on 
public comments we receive regarding the burdens they face and 
ways we can reduce those burdens.

Q.19. Recent SEC failures like Stanford and Madoff illustrate 
that even when resources are dedicated to inspecting a 
particular firm, fraud may go unchecked. If the SEC receives 
the resources it asks for, what will it do to ensure that those 
resources are used productively?

A.19. The SEC already has taken significant action over the 
past 2 years to ensure resources are used productively. We have 
new management across the major divisions and offices, and we 
created a new Division of Risk, Strategy, and Financial 
Innovation to refocus the agency's attention on--and response 
to--new products, trading practices, and risks. We also created 
new Chief Operating Officer and Chief Compliance Officer 
positions, and have moved to modernize our information 
technology, including a centralized system for tips and 
complaints, enforcement and examination management systems, 
risk analysis tools, and financial management systems.
    To better ensure effective performance in detecting and 
addressing fraud, the agency has carried out a comprehensive 
restructuring of its two largest programs--enforcement and 
examinations. These reforms are intended to maximize our use of 
resources and permit the agency to move more swiftly and 
strategically.
    Specifically, the Division of Enforcement has streamlined 
its procedures to bring cases more quickly; removed a layer of 
management to permit more staff to be allocated to front-line 
investigations; created five national specialized investigative 
groups dedicated to high-priority areas of enforcement; and 
created a new Office of Market Intelligence to serve as the hub 
for the effective handling of tips, complaints, and referrals. 
The Office of Compliance Inspections and Examinations (OCIE) 
reorganized the agency's national examination program in 
response to rapidly changing Wall Street practices and lessons 
learned from the Madoff and Stanford frauds. The changes 
provide greater consistency and efficiencies across our 11 
regions and sharpen the staff's focus on identifying the higher 
risk firms that it targets for examination. OCIE also 
implemented new policies requiring examiners to routinely 
verify the existence of client assets with third party 
custodians, counterparties, and customers. Going forward, the 
national exam program will continue to conduct sweeps in 
critical areas from trading practices to market manipulation to 
structured products.

Q.20. You have made a number of structural changes in the 
Division of Enforcement and Office of Compliance Inspections 
and Examinations. What performance metrics is the SEC using to 
assess the effectiveness of those changes? Does the SEC track 
the number of hours that a compliance examination or 
enforcement action takes?

A.20. The structural reforms implemented within the Division of 
Enforcement are composed of several initiatives with the 
overarching goal of increasing the speed, efficiency, and 
expertise with which the division investigates potential 
violations of the Federal securities laws and makes enforcement 
recommendations to the Commission. The Enforcement Division 
tracks the number of investigations opened and closed, the 
number of enforcement actions filed, the timeliness in which 
actions are filed, and the relative efficiency of various 
investigative groups (including the handling of 
programmatically significant matters by those groups). Much of 
this information is broken down by office as well as by senior 
managers (Associate Directors) who supervise investigative 
groups nationwide. In addition, in annual publications (either 
its Performance and Accountability Report or Select SEC and 
Market Data publication) the Commission provides the following 
performance information relating to the work of the Enforcement 
Division:

    Percentage of enforcement actions successfully 
        resolved (``successfully resolved'' means a favorable 
        outcome for the SEC whether through a settlement, 
        litigation, or the issuance of a default judgment). In 
        fiscal year 2010, 92 percent of enforcement actions 
        were successfully resolved.

    Percentage of first enforcement actions filed 
        within 2 years of an investigation commencing. In 
        fiscal year 2010, 67 percent of first enforcement 
        actions were filed within 2 years.

    Amount of disgorgement and penalties ordered. In 
        fiscal year 2010, SEC obtained orders in judicial and 
        administrative proceedings requiring securities law 
        violators to disgorge illegal profits of approximately 
        $1.82 billion and to pay penalties of approximately 
        $1.03 billion.

    Trading halts where inadequate public disclosure. 
        In fiscal year 2010, SEC halted trading in securities 
        of 254 issuers about which there was inadequate public 
        disclosure.

    Orders barring service as officer or director of 
        public companies. In fiscal year 2010, SEC sought 
        orders barring 71 defendants and respondents from 
        serving as officers and directors of public companies.

    While the number of enforcement actions that we bring each 
year and the speed with which we bring them are important 
performance factors, we also recognize that meaningful and 
effective investor protection requires that significant, 
complex, and difficult cases be investigated and filed. For 
this reason, Enforcement, as part of its recent structural 
reforms, generates a national priority case report that 
identifies and tracks cases deemed programmatically 
significant. Matters are designated as high priority based on 
criteria, such as the deterrent impact of a case, the 
egregiousness of the conduct, the nature of the parties 
involved, and the extent of investor harm. Enforcement tracks 
the number of pending national priority investigations as well 
as the number of national priority investigations that have 
resulted in enforcement actions. In addition to the national 
priority case report, the division is in the pilot stage of 
establishing qualitative metrics for all of its enforcement 
actions. Under the new qualitative metrics, enforcement actions 
will be rated qualitatively in the following four areas: (1) 
the deterrent message of the case; (2) the seriousness and 
scope of the misconduct; (3) the nature of the parties involved 
in the misconduct; and (4) the priority of the subject matter. 
Once implemented, Enforcement believes that these qualitative 
metrics will assist in ensuring that programmatic priorities 
are being met and that the measurement of the Division's 
performance is fair and consistent.
    The Enforcement Division does not track the number of hours 
that an enforcement action takes. As noted above, the division 
tracks--and the Commission reports on--the percentage of 
actions filed within 2 years after an investigation commenced.
    The mission of OCIE's National Exam Program is to improve 
compliance with Federal securities laws, prevent fraud, monitor 
risks, and inform Commission policy. OCIE has established key 
performance indicators (KPIs) to help assess the efficiency and 
effectiveness of its National Exam Program. Currently, OCIE 
monitors--or is in the process of establishing processes to 
monitor--the following KPIs related to each of these four 
objectives:

    Improve compliance

      Number of exams completed;

      Percentage of exams completed within 180 days;

      Percentage of firms receiving deficiency letters 
        asserting that they have taken corrective action in 
        response to findings; and

      Number of industry outreach and education 
        programs targeted to areas identified as raising 
        particular compliance risk.

    Prevent fraud

      Percentage of exams receiving deficiency letters 
        and/or referred to Enforcement;

      Percentage of Enforcement investigations arising 
        from National Exam Program referrals, as well as the 
        frequency with which enforcement investigations arise 
        from such referrals;

      Percentage of completed examinations identifying 
        significant findings; and

      Recoveries to investors from examinations.

    Monitor risk

      Percentage of examinations that are conducted for 
        cause; and

      Number of cause exams that result from tips.

    Inform Commission policy

      Number of exams that inform policy;

      Number of consultations, coordinated events, 
        reports or initiatives with other divisions; and

      Coordinated exams and other efforts with SROs and 
        other regulators.

    OCIE does not monitor the number of hours that a compliance 
exam takes.

Q.21. Section 965 of the Dodd-Frank Act directed the Commission 
to set up staffs to conduct examinations of investment 
advisers, investment companies, and broker-dealers within the 
Division of Investment Management and Division of Trading and 
Markets. Instead of eliminating OCIE and moving OCIE examiners 
back into the divisions, the SEC is preserving OCIE and 
creating a redundant examination staff within the divisions. In 
light of SEC budget concerns, wouldn't it make sense to comply 
with the Dodd-Frank directive by moving existing examiners back 
into the relevant divisions rather than creating a duplicative 
set of examiners?

A.21. In seeking to comply with Section 965 of the Dodd-Frank 
Act, we are sensitive to the need to maximize the use of 
limited resources and avoid ineffective or duplicative 
examinations. While I believe it will be helpful to have 
experienced and well-trained examiners operating in the policy 
divisions (for example, to help ensure ``real world'' 
examination findings inform our rule writing and to assist in 
integrating the expertise of our policy divisions into our 
examinations), I do not believe that all OCIE examiners should 
be placed into these two divisions.
    The convergence of the financial services industry over the 
past several decades has made it increasingly important to have 
significant interdisciplinary skills available for any given 
examination. Housing all of the Commission's examiners in two 
different policy divisions would result in an examination 
program divided along statutory lines that does not generally 
reflect business realities. Moreover, a centralized examination 
program is better positioned to look for risks across entire 
markets, effectively examine the integrated operations of 
today's financial service providers, internally share 
information and examination skills, procedures and practices 
and ensure that examinations are conducted and managed in a 
consistent and cohesive manner. Splitting the OCIE staff into 
two divisions may therefore create inefficiencies and weaken 
the effectiveness of the examination program.

Q.22. The SEC recently proposed rules to implement the venture 
capital exemption adviser in Section 407 of the Dodd-Frank Act. 
Nevertheless, the SEC subjected venture capital advisers to 
significant reporting obligations, thereby seemingly violating 
the exemption's purpose of treating venture capital fund 
advisers differently than other private fund advisers. Could 
the SEC take an alternative approach that would respect the 
spirit as well as the letter of the Congressionally mandated 
exemption for venture capital advisers?

A.22. The Dodd-Frank Act provides that the Commission shall 
require venture capital fund advisers pursuant to Section 407 
of the Act to submit such reports as the Commission determines 
necessary or appropriate in the public interest or for the 
protection of investors. To implement this Congressional 
requirement, the Commission proposed those reporting 
requirements for public comment in November 2010. Those 
proposed requirements are a subset of the information required 
of registered private fund advisers, specifically, basic 
information about the adviser in a check-box or short answer 
format. The Commission did not propose, for example, to require 
exempt venture capital fund advisers to complete and file the 
narrative disclosure brochure required of registered advisers. 
We have received numerous comments from industry and the public 
about the proposed reporting requirements, and the Commission 
will take those comments into account when considering changes 
to the proposals before adopting these reporting requirements. 
In January, the Commission proposed for public comments 
systemic risk reporting requirements (i.e., new Form PF). As 
proposed, the requirement to file Form PF would apply only to 
registered advisers and therefore would not apply to exempt 
venture capital fund advisers.

Q.23. One of the frequently cited concerns about the SEC's 
proposed approach to implementing the whistleblower provisions 
of the Dodd-Frank Act is that it will undermine companies' 
existing compliance programs. How is the SEC taking these 
concerns into account?

A.23. On November 3, 2010, the Commission proposed rules to 
reward individuals who provide the agency with high-quality 
tips that lead to successful enforcement actions. To date, the 
Commission has received hundreds of comments from a wide 
variety of interested persons and entities concerning the 
proposed rules. Staff is in the process of reviewing and 
analyzing those comments, which will be considered in 
connection with the adoption of final Commission rules.
    Whistleblowers can be an invaluable source of information 
to uncover securities fraud and better protect investors. I 
believe it is important--consistent with the statute's language 
and our mission to protect investors--to ensure that 
whistleblowers can bring us their evidence of securities 
violations expeditiously. Although there is great value in 
whistleblowers reporting matters internally when appropriate, 
there may be numerous instances when such reporting is not 
appropriate.
    When the Commission proposed its rules, we attempted to 
achieve a balance that preserved the important role that 
internal compliance programs play while remaining true to the 
statute's purpose of encouraging whistleblowers to come 
forward. With that in mind, we included provisions in the 
proposed rules intended to encourage, but not require, 
employees to continue to report potential violations through 
existing company processes in addition to making whistleblower 
submissions. For example, the proposed rules provide that an 
employee who reports information through appropriate company 
procedures would be treated as a whistleblower under the SEC's 
program as of the date the employee reported internally so long 
as the employee provides the same information to the SEC within 
90 days. By taking advantage of this provision, employees would 
be able to report internally first while preserving their 
``place in line'' for a possible award from the SEC. 
Additionally, the proposed rules provide that the Commission 
can consider, as a basis for paying a higher percentage award, 
whether a whistleblower first reported the violation through 
effective company compliance programs. Additional ideas in this 
area have been raised during the public comment process which 
will be considered before adoption of final rules.
    In sum, I believe we can adopt rules which achieve a 
balance that preserves the important role that internal 
compliance programs can play while remaining consistent with 
the statute's purpose of encouraging whistleblowers to come 
forward.

Q.24. In response to one of my questions at the hearing, you 
stated ``We are actively and aggressively recruiting for a 
Chief Economist at the SEC.'' Yet, the SEC Chief Economist 
position has remained unfilled since last summer. Why have your 
recruiting efforts been unsuccessful for so long? How has your 
new Division of Risk, Strategy, and Financial Innovation 
changed the role that economic analysis plays in informing the 
SEC's formulation, proposal, and adoption of rules? Please give 
an example of a Dodd-Frank rulemaking or study in which the 
Division played a particularly important role. Given that you 
noted at the hearing that you are trying to grow the number of 
economists at the SEC, how many of the 780 new positions (612 
FTE) that the SEC is requesting for FY2012 does the SEC intend 
to fill with Ph.D. economists?

A.24. As I noted in my testimony, our search for a new Chief 
Economist was active and aggressive. We interviewed a number of 
highly qualified candidates from a distinguished field 
comprised of individuals suggested by a wide variety of 
sources, including our former Chief Economists. In connection 
with this process, I made clear that the Chief Economist will 
report directly to me with respect to all economic matters. In 
addition, as I testified, the Chief Economist also will serve 
as Director of Risk Fin.
    On May 20, 2011, Dr. Craig M. Lewis, the Madison S. 
Wigginton Professor of Finance at Vanderbilt University's Owen 
Graduate School of Management, was named the Commission's Chief 
Economist and Director of Risk Fin. Professor Lewis is a 
distinguished economist with a clear understanding of the 
complexities of financial markets. As the head of the Division, 
he will not only lead our qualified team of expert economists, 
but will also help to inject strong data-driven analysis into 
the SEC's decision-making process.
    In creating Risk Fin, we made economic analysis a core 
function within the broader Risk Fin mission. In so doing, I 
believe we have created conditions in which economic analysis 
at the SEC can flourish. Putting our economists together with 
mathematicians and financial engineers will enhance the 
Division's ability to provide timely and reliable empirical 
analysis of current market phenomena and their implications. 
Risk Fin had also begun to tap the deep pool of talent 
experienced market professionals offer, until recent budgetary 
constraints temporarily curtailed those efforts. Bringing a 
broad range of analytic disciplines and experienced 
practitioners into a single division that has economic analysis 
of rule proposals as a core responsibility will, in my view, 
generate synergies that can only assist the Commission in 
fulfilling its responsibilities.
    Risk Fin assists and supports the rulemaking initiatives of 
other divisions, and does not itself write rules. Risk Fin 
continues to be actively involved in all SEC rulemaking 
initiatives, including those stemming from Dodd-Frank. 
Moreover, examples of Dodd-Frank-related studies for which Risk 
Fin has taken the lead SEC role include the recent joint SEC-
CFTC staff Study on the Feasibility of Requiring Use of 
Standardized Algorithmic Descriptions for Financial Derivatives 
(April 7, 2011, pursuant to Dodd-Frank sec. 719(b)) and the 
Security-Based Swap Block Trade Definition Analysis (Jan. 13, 
2011) appended to Regulation SBSR--Reporting and Dissemination 
of Security-Based Swap Information (Release No. 34-63346 (Nov. 
19, 2019)), both posted on the SEC's Web site. The Division 
also made a significant contribution to the joint SEC-CFTC 
staff Report on the Market Events of May 6, 2010 (Sept. 30, 
2010).
    The SEC's request for 780 new positions in FY2012 
incorporates approximately 21 economists--10 in the Division of 
Trading and Markets and 11 in Risk Fin. The agency hopes to 
fill most, if not all, of those 21 positions with Ph.D. 
economists. If that is not possible, other factors (including 
analytical expertise and practical experience in key areas of 
focus) would determine which individuals are selected for the 
positions.
    The SEC has a history of employing Ph.D. economists, and we 
continue to believe that the breadth of training and depth of 
experience entailed in earning a Ph.D. degree prepares an 
economist particularly well for the range of work and complex 
data sets at the SEC. The market for top quality Ph.D. 
economists is, however, very competitive. The SEC is just one 
of many entities, public and private, that compete in the 
market for high quality Ph.D. economists each year. Given our 
desire to strengthen the role and quality of economic analysis 
at the SEC, as well as the additional demands placed on our 
economists in connection with Dodd-Frank Act mandates, if we 
could not fill all positions with Ph.D. economists, we would 
have to consider whether we could meet our unmet staffing needs 
by hiring at least some non-Ph.D. economists.

Q.25. The SEC has historically suffered from a culture of poor 
management. If you get additional staff to help with your 
increased workload under Dodd-Frank, what steps will you take 
to ensure that the new staff are managed effectively? What are 
you doing to monitor relative workloads of employees and to 
redeploy those who are underworked to assist those who are 
overworked?

A.25. The SEC has moved aggressively in recent years to develop 
management tools and techniques to build a stronger management 
culture. New leadership development programs have been put in 
place at all levels of our leadership structure and a new 
performance management system is being implemented agency-wide 
that should be significantly more robust then previous systems 
used at the agency. This system requires more effective 
feedback and coaching for improvement where necessary at all 
levels of the organization. It also proactively identifies 
career growth and developmental needs, allowing the agency to 
create flexibilities regarding job assignments when needed. The 
current funding environment has limited the agency's ability to 
fully execute these programs on an ongoing basis.

Q.26. The Dodd-Frank Act gave the SEC a number of new 
enforcement powers. Which of these Dodd-Frank provisions do you 
believe applies retroactively and why?

A.26. Because the Dodd-Frank Act contains many different types 
of enforcement provisions that have different effects on prior 
law, no single approach applies uniformly. In addition, the 
Commission has not yet had occasion to address all of the 
potential retroactivity issues that may arise. In general, 
however, the Commission's approach is to follow case law 
guidance concerning whether application of a statute would be 
impermissibly retroactive.
    With respect to provisions that change the legal standards 
governing liability, we have not applied them to conduct that 
occurred before the effective date of the statute absent a 
clearly expressed Congressional intention for retroactive 
application.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                     FROM MARY L. SCHAPIRO

Q.1. A serious topic of discussion in the financial markets 
these past few days is the announcement of a proposed merger 
between the NYSE-Euronext and the Deutsche Borse.
    If this merger takes place, what will be the potential 
impact on the implementation of the provisions of the Dodd-
Frank Act, particularly in respect to the trading and clearing 
of derivatives?
    Is there a potential that this merger will enhance the 
availability of regulatory arbitrage by allowing market 
participants the ability to circumvent the requirements of 
Dodd-Frank by providing easier access to foreign trading and 
clearing venues?
    Should we be concerned with any anticompetitive 
implications of this further consolidation of trading and 
clearing platforms?

A.1. I do not anticipate that this proposed business 
combination alone would have a significant impact on our 
implementation of the Dodd-Frank Act. In developing rules that 
would govern the trading and clearing of security-based swaps, 
the Commission has sought to consider issues regarding the 
derivatives markets broadly and without limiting its focus to 
any specific entity's role in those markets.
    Requirements regarding access to foreign trading and 
clearing venues, including those under the Dodd-Frank Act, are 
generally not determined or applied based on which entity owns 
the trading or clearing venue. Accordingly, although the 
Commission is sensitive to the issue, such proposed changes in 
ownership alone would not typically increase the potential for 
circumvention of the requirements of the Dodd-Frank Act. More 
broadly, in connection with these cross-border combinations of 
exchanges, each market has continued to operate as a separate 
liquidity pool in its respective jurisdiction and has continued 
to be regulated subject to its home country's requirements--
that is, European exchanges continue to be overseen by the 
relevant European regulator, and the Commission continues to 
oversee the U.S. exchanges. Currently, U.S. Federal securities 
laws generally require all exchanges operating in the United 
States, and all securities traded on those exchanges, to be 
registered with--and regulated by--the Commission. However, as 
U.S. and non-U.S. exchanges continue to seek increased 
integration of their markets and foreign markets seek greater 
direct access to U.S. investors, the potential regulatory 
considerations increase. Accordingly, such direct access by 
foreign markets to U.S. investors generally is not currently 
permitted without registering with the Commission.
    Competition is an important issue that the Commission will 
be considering carefully as we proceed in our review of the 
proposed business combination.

Q.2. To what extent is your agency working with your relevant 
domestic and foreign counterparts in respect to the possible 
merger between the New York Stock Exchange and the Deutsche 
Borse? Are you working to ensure that arrangements will be in 
place for cooperation in supervision and enforcement and for 
information sharing, all of which will be required as a result 
of this potential merger? Should we expect formal MOUs on 
supervisory cooperation to precede a cross-border merger?

A.2. The Commission has existing Memoranda of Understanding 
(MOUs) for consultation, cooperation, and the exchange of 
information related to supervisory matters with both the 
College of Euronext Regulators and the German federal 
securities authority (German BaFin). The Commission also has 
multilateral and bilateral arrangements in place for 
enforcement cooperation with all five of the European 
authorities that comprise the College, as well as with the 
German BaFin. See, http://www.sec.gov/about/offices/oia/
oia_cooparrangements.shtml.
    The Commission staff has been consulting regularly with its 
European counterparts in relation to the possible merger 
between NYSE Euronext and Deutsche Borse. The staff anticipates 
that, if the merger goes through, cooperation between the 
Commission and the relevant European regulators will continue 
pursuant to existing or similar arrangements.

Q.3. The Securities, Insurance, and Investment Subcommittee 
held a hearing in December that focused, in part, on the 
increasing interconnectedness of today's modern markets and the 
need for effective oversight of trading across products and 
venues. Today's traders buy and sell options, futures, and 
equities interchangeably in dozens of marketplaces around the 
world. Yet, our regulatory oversight mechanism largely relies 
on a model where each marketplace is primarily responsible for 
policing the activities on its platform. Given the recently 
announced potential merger of NYSE Euronext with Deutsche Borse 
Group, it seems as though the trading marketplaces are only 
becoming more interconnected. What are your thoughts regarding 
how to implement an effective regulatory oversight 
infrastructure to police trading done both by Americans around 
the world and by traders around the world in our increasingly 
interconnected and international marketplaces?

A.3. In recent years, several U.S. exchanges have combined with 
non-U.S. exchanges, including NYSE's combination with Euronext, 
Eurex's acquisition of ISE, and Nasdaq's combination with OMX. 
In connection with these cross-border combinations of 
exchanges, each market has continued to operate as a separate 
liquidity pool in its respective jurisdiction and has continued 
to be regulated subject to its home country's requirements--
that is, European exchanges continue to be overseen by the 
relevant European regulator, and the Commission continues to 
oversee the U.S. exchanges. In addition, the Commission seeks 
to cooperate fully with the non-U.S. exchange's home regulator.
    Currently, U.S. Federal securities laws generally require 
all exchanges operating in the United States, and all 
securities traded on those exchanges, to be registered with--
and regulated by--the Commission. However, as U.S. and non-U.S. 
exchanges continue to seek increased integration of their 
markets and foreign markets seek greater direct access to U.S. 
investors, the potential regulatory considerations increase. 
Accordingly, such direct access by foreign markets to U.S. 
investors generally is not currently permitted without 
registering with the Commission. Through our ongoing dialogue 
with the EU and other foreign jurisdictions, we have sought to 
improve our understanding of the differences and similarities 
in the regulation of exchanges as practiced in the United 
States and in foreign jurisdictions. In addition, we are 
committed to developing globally consistent standards that 
reduce the possibilities of regulatory arbitrage.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ
                     FROM MARY L. SCHAPIRO

Q.1. Exchanges and Clearinghouses--I'm concerned that the 
exchanges or clearinghouses, both for derivatives and 
securities, could themselves become ``too big to fail'' and 
systemically significant. What steps are you taking to ensure 
that their size and risks are properly managed so that they do 
not become ``too big to fail''?

A.1. Clearing Agencies--When structured and operated 
appropriately, clearing agencies can provide benefits to the 
markets such as improving the management of counterparty risk 
and reducing outstanding exposures through multilateral netting 
of trades. It is clear, however, that while playing a critical 
role in the markets, clearing agencies need to appropriately 
manage risk. To support its oversight of clearing agencies, 
including their risk management practices, the Commission 
recently began taking several actions, including:

    Developing a clearing agency monitoring group 
        within our Division of Trading and Markets, which is an 
        effort in the early stages to more closely monitor and 
        evaluate clearing agency risk management and 
        operational systems;

    Enhancing our examination program for clearing 
        agencies, including by developing dedicated staff for 
        the clearing agency exam program; and

    Engaging in rulemaking, including proposing new 
        risk management, governance, and operational standards 
        for clearing agencies.

    Specifically, in March, the Commission proposed rules that 
seek to establish standards for the operation and governance of 
clearing agencies, as well as appropriate standards for risk 
management. We also are actively contributing to the work of 
the Financial Stability Oversight Council, which has the 
authority to recognize financial market utilities (FMUs) such 
as clearing agencies that are determined to be, or are likely 
to become, systemically important. Designated FMUs will be 
subject to such additional risk management standards as may be 
prescribed by the Federal Reserve Board, in consultation with 
supervisory agencies like the Commission, as well as enhanced 
examination and enforcement standards.
    These new rules and standards are designed to help ensure 
that risks at clearing agencies are properly managed. Our 
ability to implement any such proposed rules or standards--as 
well as implement other new initiatives and sustain our 
oversight functions--depends heavily on adequate staffing and 
resources.
    Exchanges--Exchanges and similar trading platforms are 
situated somewhat differently from clearing agencies with 
respect to the risks they may pose. Structurally, the exchange 
business in the United States is highly competitive and 
interconnected. The vast majority of equity securities can 
trade on multiple venues. As a result, if an exchange were to 
fail, other exchanges would likely be available to pick up the 
volume in securities previously traded in the failed exchange. 
With respect to the relatively few equity securities that are 
available to trade on only one exchange (for example, many 
index options), the Commission has encouraged exchanges to 
enter into reciprocal trading arrangements to enable those 
securities to trade in other venues if the exchange trading 
such a security were unable to trade following a disruption.
    In addition, staff from the Division of Trading and 
Market's Automation Review Policy program works regularly with 
exchanges and certain other markets to review the capacity, 
resiliency and security of their market-related systems. A 
similar ``ARP'' program also is in place for clearing agencies.

Q.2. CEO to Median Worker Pay Disclosure--A provision I 
successfully included in Dodd-Frank would require publicly 
listed companies to disclose in their SEC filings the amount of 
CEO pay, the median company worker pay at that company, and the 
ratio of the two. Do you believe this information would be 
useful for investors who want to know about a company's pay 
practices and their effect on performance? Also for employees 
or potential employees who want to know about their company's 
pay practices relative to others in the industry?

A.2. As you know, we have a number of disclosure requirements 
regarding executive compensation which have been updated from 
time to time. Our rules do not currently require information of 
the nature required by the provision I believe you were 
referring to, Section 953(b) of the Dodd-Frank Act. Although 
the Commission has not yet proposed a rule to implement Section 
953(b), the staff currently is considering how this requirement 
could be implemented in a manner consistent with the statutory 
language. When we issue our proposed rule to implement this 
provision, we expect to hear from issuers, investors and other 
interested parties regarding the utility of the disclosure and 
the costs of preparing it.
    To facilitate public input on the Dodd-Frank Act, the 
Commission has provided a series of e-mail links, organized by 
topic, on its Web site at http://www.sec.gov/spotlight/
regreformcomments.shtml. The Commission already has received 
many comments from the public on Section 953(b), available at 
http://www.sec.gov/comments/df-title-ix/executive-compensation/
executive-compensation.shtml.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                     FROM MARY L. SCHAPIRO

Q.1. The Department of Labor recently announced new regulations 
redefining fiduciary duty which would seem to have the 
potential to undermine the thoughtful work that the SEC has 
done to look at actually harmonizing standards of care for 
different types of advisors. Have you been in conversations 
with the Department of Labor on these issues or raised concerns 
about potential inconsistencies and conflicts between your 
efforts? Will the SEC take steps to address any further 
inconsistency and uncertainty that could arise from the 
Department of Labor's rulemaking for advisors?

A.1. The Commission and its staff are working hard to avoid 
inconsistent regulatory standards among Government agencies. If 
the Commission engages in rulemaking to address the 
recommendations in its Dodd-Frank Act section 913 study to 
implement a uniform fiduciary duty for broker-dealers and 
investment advisers providing personalized investment advice 
about securities to retail customers, we would do so in 
consultation with the Department of Labor and other interested 
regulators. In addition, since the Commission issued the 
Section 913 study, Commission staff has received and reviewed 
additional comments on the study and has continued to meet with 
interested parties to discuss their reactions to it. As such, 
the Commission's process leading up to any potential rulemaking 
under Section 913 would take into account, with deliberation, 
the views of all interested parties, and the potential impact 
of such rules on the financial marketplace, as well as the 
existing regulations and proposed actions of our fellow 
regulators.
    In addition, staff of the Department of Labor has consulted 
with Commission staff regarding the Department of Labor's 
proposed rulemaking on fiduciary status, and those discussions 
and consultations are ongoing. Ultimately, however, the 
definition of fiduciary under ERISA is for the Department of 
Labor to decide.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                     FROM MARY L. SCHAPIRO

Q.1. For each of the witnesses, though the Office of Financial 
Research does not have a Director, what are each of you doing 
to assist OFR in harmonizing data collection, compatibility, 
and analysis?

A.1. Over the past few months, Commission staff has 
participated in the cross-agency meetings that Treasury has 
organized related to OFR and data collection initiatives. The 
staff also has worked on cataloguing existing Commission 
databases and presented current and anticipated data 
capabilities at such meetings, laying the foundations for 
potential harmonization of data collection, compatibility, and 
analysis. Commission staff also has worked directly with their 
colleagues at the CFTC and staff at Treasury/OFR on harmonizing 
published requirements for the production of legal entity 
identifiers to be used by industry market participants that 
identify counterparties to derivative transactions, with 
potential applicability for the universal identification of all 
legal entities engaging in financial transactions.

Q.2. Chairman Schapiro, can each of you explain what budget 
cuts will mean for the ability of your agencies to ensure 
markets are safe, protected from abuse, and don't create the 
types of risks that nearly destroyed our economy?

A.2. For the first six and a half months of FY2011, the agency 
already had curtailed its core program activities such as 
technology, staff hiring, travel, and litigation support, to 
name a few, to operate under its previous continuing resolution 
level. Additionally, the SEC had begun to implement the Dodd-
Frank Act without additional funding, taking on significant new 
rulemaking and other responsibilities almost entirely with 
existing staff. This has taken staff time from base program 
operations.
    The SEC's budget for FY2011 contained within the broader 
budget compromise would permit the SEC to continue reforms to 
our operations and implement much-needed improvements to our 
technology. However, if this budget were to be followed by 
significant budget cuts, then such cuts would have a profound 
impact on the SEC's ability to oversee the securities markets. 
Depending on their magnitude, budget cuts could leave the SEC 
further behind in its efforts to close the existing gap with 
the rapidly growing markets. The SEC only now is returning to 
the staffing levels of 2005, while during that time the 
securities markets have grown significantly in size and 
complexity. For example, in 2005, the SEC had 19 examiners for 
each trillion dollars in investment advisor assets, and today 
there are only 12 examiners per trillion dollars. Significant 
budget cuts could also stymie efforts to modernize the SEC's 
technology infrastructure, which continue to need significant 
investments to improve risk assessment and operational 
efficiency, support enforcement and examination processes, and 
modernize EDGAR.
    As you know, the SEC also has received sizable new 
responsibilities in areas such as the oversight of the over-
the-counter derivatives market and hedge fund advisers; 
registration of municipal advisors and security-based swap 
market participants; enhanced supervision of nationally 
recognized statistical rating organizations and clearing 
agencies; heightened regulation of asset-backed securities; and 
creation of a new whistleblower program. In acknowledgement of 
this substantially increased workload, the Dodd-Frank Act 
includes increased budget authorization levels for the SEC of 
$1.3 billion in FY2011 and $1.5 billion in FY2012. If budget 
cuts were enacted, then the SEC would be unable to add the 
resources necessary to conduct enforcement, examine for 
compliance, and analyze trends and risks in these new markets.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                     FROM MARY L. SCHAPIRO

Q.1. Repo and Prime Brokerage--During the financial crisis, the 
instability of the triparty repurchase agreement (repo) markets 
and prime brokerage relationships played critical roles in the 
collapse of several major financial firms. As the quality of 
the repo collateral began to decline and as both repo and prime 
brokerage ``depositors'' began to doubt the stability of their 
counterparties (because of the toxic positions in the trading 
accounts of the counterparties), a classic bank run emerged, 
only this time it was at the wholesale level. Please provide an 
update on rulemaking and other policy changes designed to 
reduce risks to our financial system in the repo markets and in 
prime brokerage.

A.1. In the area of repos, the Commission is involved in a 
number of initiatives that are designed to reduce risks to the 
financial system. Commission staff has provided assistance to 
the Tri-Party Repo Infrastructure Reform Task Force that was 
formed at the request of the Federal Reserve Bank of New York 
to address weaknesses that became visible over the course of 
the 2008 financial crisis. This initiative is aimed at reducing 
the intraday credit exposure of the clearing banks who act as 
intermediaries in the triparty repo market, creating 
efficiencies for both lenders and borrowers, and increasing 
confidence in the use of this financing method. Further, in 
connection with its ongoing monitoring of the risk management 
processes of the largest broker-dealers, the Commission's staff 
is focused on the potential liquidity needs of these firms in 
times of market stress, as well as the adequacy of existing and 
backstop liquidity arrangements.
    In the prime brokerage area, the Commission is engaged in 
additional initiatives designed to help reduce risks to the 
financial system. Commission staff is undertaking a review of 
prime brokerage margin practices at the largest broker-dealers. 
This review is focused on the ability of the prime broker to 
fund collateral in the repo market, and the prime broker's 
reliance on that collateral to fund its business. It also 
includes understanding the different collateral requirements 
for liquid and illiquid assets, and reviewing the process for 
entering into and managing margin agreements.
    Finally, as you are aware, the Commission is no longer 
engaged in consolidated supervision. The liquidity issues you 
raise can impact an entire financial institution, however, and 
the Commission coordinates regularly with the Federal Reserve 
to facilitate cooperative approaches to addressing these 
issues.

Q.2. Derivatives Oversight--Counterparty risk and other risks 
associated with derivatives played a central role in the 
financial crisis, especially in fueling the argument that firms 
such as AIG were too big or too interconnected to fail. What 
oversight systems do plan to have in place to ensure that any 
accommodations made in the course of rulemaking for 
nonfinancial commercial parties do not create holes in the 
regulatory structure that permit the accumulation of hidden or 
outsized risk to the U.S. financial system and economy.

A.2. The Dodd-Frank Act, through a variety of mechanisms, 
provides regulators with authority to limit systemic risks 
posed by activities of previously unregulated entities. In 
particular, the Act provides the Commission, CFTC, and banking 
regulators with authority to impose prudential limits on so-
called ``major security-based swap participants'' and ``major 
swap participants''--a category that, broadly speaking, can 
encompass otherwise unregulated entities that hold large 
unhedged derivatives positions (such as AIG did). Such entities 
would be subject to capital and margin requirements established 
by regulators, which should help mitigate the accumulation of 
hidden or outsized risks. The Commission and the CFTC proposed 
joint rules last December to further define the scope of 
entities that would fall under this regime, and I expect that 
the Commission will propose rules in the near future concerning 
the capital and margin requirements for major participants and 
other intermediaries in the security-based swap market.
    In addition, the Commission has proposed rules for the 
reporting of security-based swap transactions to registered 
data repositories, and the CFTC has proposed similar rules with 
respect to the reporting of swap transactions. Assuming that 
the agencies have adequate resources to analyze and monitor 
this information, such reporting should increase the 
transparency of these markets to regulators and help prevent 
the accumulation of hidden risks.

Q.3. Derivatives Disclosure--One of the key exacerbating 
factors in the financial crisis was that firms were hesitant to 
do business with one another because they feared a potential 
counterparty may be unable to fulfill its obligations. In 
particular, they feared that their potential counterparty might 
be financially constrained by liabilities from undisclosed and/
or uncleared derivatives transactions. Similarly, as the 
bankruptcy examiner of Lehman Brothers reported, investors and 
regulators are often also similarly unaware of the risks from 
firms' derivatives positions.
    Given what we have seen, do you believe that public 
disclosure to shareholders and other market participants 
regarding a company's derivatives positions should be improved? 
If so, how do you plan to incorporate in that enhanced 
disclosure regime the theme from the Dodd-Frank Act that 
uncleared derivatives should be subject to additional 
obligations?

A.3. Clear and transparent disclosure is critically important 
to an investor's understanding of a company's financial 
position. In this regard, we have a number of requirements in 
our rules designed to elicit disclosure about a company's 
ability to fulfill its commitments and obligations. For 
example, Item 303 of Regulation S-K requires a company to 
discuss, in its Management's Discussion and Analysis, any known 
trends, demands, commitments, events or uncertainties it 
reasonably expects to have a material favorable or unfavorable 
impact on its results of operations, liquidity, and capital 
resources. In effect, we require companies to allow investors 
to see the company ``though the eyes of management.'' The rule 
also requires a company to disclose its contractual obligations 
in tabular format. In addition, Item 303 requires a company to 
disclose off-balance sheet arrangements that have, or are 
reasonably likely to have, a current or future effect on the 
company's financial condition, revenues or expenses, results of 
operations, liquidity, and capital expenditures. In doing so, a 
company must disclose information necessary to an understanding 
of the arrangements, including information about the nature and 
business purpose of the arrangement and the importance of the 
arrangement to the company. Additionally, Item 305 of 
Regulation S-K requires a company to provide qualitative and 
quantitative information about market risk.
    In addition to these SEC rules, U.S. GAAP requires 
extensive disclosures about a company's derivatives portfolio. 
For example, companies must provide disclosures about:

    how and why an entity uses derivative instruments;

    how derivative instruments and related hedged items 
        are accounted for; and

    how derivative instruments and related hedged items 
        affect an entity's financial position, financial 
        performance, and cash flows.

    The disclosures provided are distinguished by derivative 
instruments that are used for risk management purposes and 
derivative instruments that are used for other purposes. 
Information also is separately disclosed in the context of each 
instrument's primary risk exposure, such as interest rate, 
credit, foreign exchange, and overall price risk. While we 
believe companies generally understand and comply with these 
requirements, we will continue to monitor this area and 
consider whether additional guidance is necessary, particularly 
as we see how changes to the derivatives regulatory structure 
may affect reporting companies.

Q.4. Markets Oversight--As you may know, Korean securities 
regulators recently imposed a six month ban on a large European 
bank from engaging in proprietary trading in Korean markets 
after it came to light that the bank manipulated the Seoul 
stock market. With the proposed acquisition of the New York 
Stock Exchange by a European borse, markets are becoming more 
international and interconnected than ever before. Do you feel 
you have the tools you need to monitor trading across multiple 
markets and across multiple products? If not, what steps do you 
need to take and what additional tools do you need from 
Congress to assist you in accomplishing your critical mission 
of ensuring our markets operate with integrity?

A.4. Commission staff currently has access to a limited set of 
tools to monitor trading in the United States, including the 
ability to obtain and utilize information about trading from 
the audit trails of the exchanges and FINRA. However, these 
audit trails are limited in their scope, required data 
elements, and format. Accordingly, the Commission proposed in 
May 2010 to require the exchanges and FINRA to create and 
implement a consolidated audit trail that captures customer and 
order event information for all equities and options orders 
across all markets--from the time of order inception through 
routing, cancellation, modification, or execution. This 
consolidated audit trail would create a single, comprehensive, 
and readily accessible database of information about orders and 
executions in the United States for regulators. If adopted, I 
believe the consolidated audit trail would become a critical 
tool and a significant first step toward more effectively 
detecting and deterring illegal trading.
    However, as you note, securities markets are becoming more 
international and interconnected than ever before. To address 
the issues arising from cross-border securities transactions, 
the Commission pursues international regulatory and enforcement 
cooperation, promotes the adoption of high regulatory standards 
worldwide, and formulates technical assistance programs to 
strengthen the regulatory infrastructure in global securities 
markets. The Commission also works within our global network of 
securities regulators and law enforcement authorities to 
facilitate cross-border regulatory compliance and to ensure 
that international borders are not used to escape detection and 
prosecution of fraudulent securities activities.
    In terms of Congressional support, the SEC is at an 
especially critical juncture in its history. Not only does the 
Dodd-Frank Act create significant additional work for the SEC, 
both in the short and long term, but the agency also must 
continue to carry out its longstanding core responsibilities to 
prevent securities fraud, review public company disclosures and 
financial statements, inspect the activities of investment 
advisers and broker-dealers, and ensure fair and efficient 
markets. The Commission must have adequate resources so that it 
can fulfill these responsibilities and promote investor 
confidence and trust in our financial institutions and markets.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM MARY L. SCHAPIRO

Q.1. SEC Commissioners Kathleen Casey and Troy Paredes issued a 
statement calling for more rigorous analysis on the SEC staff 
study on Investment Advisers and Broker-dealers required by 
Dodd-Frank. The two commissioners stated: ``Indeed, the Study 
does not identify whether retail investors are systematically 
being harmed or disadvantaged under one regulatory regime as 
compared to the other and, therefore, the Study lacks a basis 
to reasonably conclude that uniform standard or harmonization 
would enhance investor protection.'' Do you intend to gather 
this type of economic analysis so that these kinds of questions 
can be answered before proposing any new rule?

A.1. In the study required by Section 913 of the Dodd-Frank 
Act, Commission staff recommended implementing a uniform 
fiduciary standard that would accommodate different existing 
business models and fee structures, preserve investor choice, 
and not decrease investors' access to existing products, 
services, or service providers. In preparing the study, the 
staff considered the comment letters received in response to 
the Commission's solicitation of comment and considered the 
potential costs and other burdens associated with implementing 
the recommended fiduciary standard. We will continue to be 
mindful of the potential economic impact going forward. In 
light of this ongoing focus, I have asked a core team of 
economists from the Commission's Division of Risk, Strategy and 
Financial Innovation (Risk Fin) to study, among other things, 
data pertaining to the standards of conduct in place under the 
existing broker-dealer and investment adviser regulatory 
regimes to further inform the Commission.
    Ultimately, if the Commission does engage in rulemaking 
under Section 913, as with any proposed rulemaking, the 
Commission would conduct an economic analysis regarding the 
impact of any proposed rules. Such analysis would include the 
views of Risk Fin, which has broad experience analyzing 
economic and empirical data. The Commission would then consider 
public comment on any such proposal, including public comment 
on the Commission's analysis of costs and benefits. Any final 
rulemaking would also take into account not only the views of 
all interested parties, but also the potential impact of such 
rules on the financial marketplace, including the impact on 
retail investors and the advice they receive from financial 
professionals.

Q.2. I understand that you and your staff are working very hard 
and talking to each other during the proposal stage, but from 
the outside it looks like too often the agencies are proposing 
inconsistent approaches to the same rule sets. For instance, on 
the Swap Execution Facility rules, the SEC seems to be taking a 
more flexible approach relative to what you've developed. And 
their approach seems to be more consistent with what the 
Europeans are looking at so it will minimize the risk of 
regulatory arbitrage. Rather than one agency jumping out in 
front of the other agency the point of coordination should be 
to propose consistent approaches to the same rule sets. How do 
you intend to achieve great harmonization, timing, minimize 
inconsistent rules and avoid regulatory arbitrage--specifically 
with respect to the SEF?

A.2. Since the Dodd-Frank Act was passed last July, the 
Commission staff has been engaged in ongoing discussions with 
CFTC staff regarding our respective approaches to implementing 
the statutory provisions for SEFs and security-based SEFs. In 
many cases, these discussions have led to a common approach--
for example, both proposals have similar registration programs, 
as well as similar filing processes for rule changes and new 
products. As you note, however, there are differences in 
certain areas, such as the treatment of requests for quotes, 
block trades, and voice brokerage.
    Our proposal reflects the Commission's preliminary views as 
to how the Dodd-Frank Act would best be applied to the trading 
of security-based swaps, which differ in certain ways from the 
swaps that will be regulated by the CFTC. We look forward to 
input from the public as to whether these differences are 
adequately supported by functional distinctions in the trading 
and liquidity characteristics of swaps and security-based 
swaps, as well as comments as to how the agencies' rules may be 
further harmonized. Based on this feedback, we plan to work 
with the CFTC to achieve greater harmonization of the rules for 
SEFs and security-based SEFs to the extent practicable.
    Throughout this process, we are particularly mindful of the 
potential burdens on entities that will be dually registered 
with the Commission and the CFTC. To this end, we have 
specifically requested comment in our proposal on the impact of 
the overall regulatory regime for such registrants, such as 
areas where differences in the Commission and the CFTC 
approaches may be particularly burdensome. We are also 
sensitive to the opportunity for regulatory arbitrage with 
respect to non-U.S. markets, and my staff has been working 
closely with their international colleagues to find common 
ground with respect to the regulation of SEFs. We expect to 
benefit from significant public input on both of these issues, 
and we will carefully consider such input in crafting our final 
rule.

Q.3. Dodd-Frank requires that risk retention be jointly 
considered by the regulators for each different type of asset 
and includes a specific statutory mandate related to any 
potential reforms of the commercial mortgage-backed securities 
to limit disruptions. Given the importance of rigorous cost-
benefit and economic impact analyses and the need for due 
consideration of public comments, do your agencies need more 
time than is provided by the looming April deadline?

A.3. As you note, the statute is fairly complex. The staff of 
the agencies have worked together to develop a joint 
recommendation, meeting multiple times a week for many months 
in order to consider all the various issues and implications. 
The agencies proposed rules at the end of March and the comment 
period will close on June 10, 2011. The staff of the agencies 
will then begin another deliberative process to consider the 
comments received and to work to a consensus recommendation for 
adoption of final rules. I recognize the importance of getting 
these rules right and expect that we will take the time needed 
to do that.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                     FROM MARY L. SCHAPIRO

Q.1. In 2010 the SEC issued proposed revisions to Regulation AB 
(asset backed) that had several requirements that could impact 
regulations required in Dodd-Frank. Are those regulations on 
hold?

A.1. The April 2010 ABS proposals sought to address a number of 
issues, some of which were subsequently referenced in the Dodd-
Frank Act, but others that were not.
    Issues addressed in the ABS proposals also referenced in 
the Dodd-Frank Act include:

    repealing the current credit rating references in 
        shelf eligibility criteria for asset-backed issuers and 
        establishing new shelf eligibility criteria, including 
        a requirement that the sponsor of a shelf-eligible 
        offering retain five percent of the risk; and

    requiring that, with some exceptions, prospectuses 
        for public offerings of ABS and ongoing Exchange Act 
        reports contain specified asset-level information 
        (i.e., loan level data) about each asset in the pool. 
        Under the Commission's proposal, the asset-level 
        information would be provided according to proposed 
        standards and in a tagged data format using eXtensible 
        Markup Language, or XML.

    Issues addressed in the ABS proposals not referenced in the 
Dodd-Frank Act include:

    revising filing deadlines for ABS offerings to 
        provide investors with more time to consider 
        transaction-specific information, including information 
        about the pool assets;

    requiring the filing of a computer program of the 
        contractual cash flow (i.e., the ``waterfall'') 
        provisions along with any prospectus filing; and

    new information requirements for the safe harbors 
        for exempt offerings and resales of asset-backed 
        securities.

    The staff of our Division of Corporation Finance is 
reviewing all of the comments received on the April 2010 ABS 
proposals and is in the process of developing recommendations 
for the Commission. Those recommendations will necessarily take 
into consideration the ABS provisions in Dodd-Frank.

Q.2. Will you commit to having your staff brief this committee 
prior to issuing Regulation AB?

A.2. Yes. I would be happy to have our staff brief the 
committee on the proposal, the comments we receive, and the 
possible approaches to addressing the outstanding issues.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                       FROM GARY GENSLER

Q.1. Recently, some have voiced concerns that the timeframe for 
the rulemakings required by the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank) is too short to allow 
for adequate consideration of the various comments submitted or 
to review how the new rules may impact our financial markets. 
Does the current timeframe established by Dodd-Frank allow each 
rulemaking to be completed in a thoughtful and deliberative 
manner?

A.1. The Dodd-Frank Act has a deadline of 360 days after 
enactment for completion of the bulk of our rulemakings--July 
16, 2011. Both the Dodd-Frank Act and the Commodity Exchange 
Act (CEA) give the CFTC the flexibility and authority to 
address the issues relating to the effective dates of Title 
VII. We have coordinated closely with the SEC on these issues 
and issued a proposed order on June 14 to provide clarity.
    First, a substantial portion of provisions only go into 
effect once we finalize our rules and based on any 
implementation phasing that we set.
    Second, for many provisions that are not dependent upon a 
final rule or are self-executing, we proposed exemptive relief 
until no later than December 31, 2011.
    This will provide relief for most of Title VII. We look 
forward to hearing from the public and finalizing this 
exemptive relief before July 16.

Q.2. In carrying out the required rulemaking under Title VII, 
the SEC and the CFTC are instructed under Dodd-Frank to ``treat 
functionally or economically similar products or entities . . . 
in a similar manner.'' However, some of the rules defining the 
key infrastructure for the new derivatives regime that have 
been proposed by the SEC and CFTC contain some significant and 
important differences, as is demonstrated by the different 
definitions for rules governing Swap Execution Facilities. How 
do your two agencies plan to reconcile these differences before 
the final rules are adopted later this year?

A.2. The CFTC and SEC consult and coordinate extensively to 
harmonize our rules to the greatest extent possible. These 
continuing efforts began with the enactment of the Dodd-Frank 
Act. This close coordination will benefit the rulemaking 
process.
    With regard to the SEF rulemakings, the CFTC's proposed 
rule will provide all market participants with the ability to 
execute or trade with other market participants. It will afford 
market participants with the ability to make firm bids or 
offers to all other market participants. It also will allow 
them to make indications of interest--or what is often referred 
to as ``indicative quotes''--to other participants. 
Furthermore, it will allow participants to request quotes from 
other market participants. These methods will provide hedgers, 
investors, and Main Street businesses the flexibility to trade 
using a number of methods, but also the benefits of 
transparency and more market competition. The proposed rule's 
approach is designed to implement Congress' mandates for a 
competitive and transparent price discovery process.
    The proposal also allows participants to issue requests for 
quotes, with requests distributed to a minimum number of other 
market participants. It also allows that, for block 
transactions, swap transactions involving nonfinancial end-
users, swaps that are not ``made available for trading'' and 
bilateral transactions, market participants can get the 
benefits of the swap execution facilities' greater transparency 
or, if they wish, could be executed by voice or other means of 
trading.
    In the futures world, the law and historical precedent is 
that all transactions are conducted on exchanges, yet in the 
swaps world many contracts are transacted bilaterally. While 
the CFTC will continue to coordinate with the SEC to harmonize 
approaches, the CFTC also will consider matters associated with 
regulatory arbitrage between futures and swaps. The Commission 
has received public comments on its SEF rule and will move 
forward to consider a final rule only after staff has had the 
opportunity to summarize them for consideration and after 
Commissioners are able to discuss them and provide feedback to 
staff.

Q.3. Please identify the key trends in the derivatives market 
that your agencies are currently monitoring to ensure systemic 
stability.

A.3. The Dodd-Frank Act lowers risk in the swaps marketplace by 
directly regulating dealers for their swaps activities and by 
moving standardized swaps into central clearing. The Act also 
brings transparency to the swaps marketplace. The more 
transparent a marketplace is the more liquid it is, the more 
competitive it is and the lower costs will be for hedgers, 
borrowers, and their customers. Increased transparency also 
lowers risk by improving the reliability of the valuations of 
open positions. With more swaps being cleared through 
derivatives clearing organizations regulated by the CFTC, the 
Commission also is working to ensure that clearinghouses have 
robust risk management standards.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                       FROM GARY GENSLER

Q.1. The Dodd-Frank Act requires an unprecedented number of 
rulemakings over a short period of time. As a result, some 
deadlines have already been missed and some agencies expect to 
miss additional deadlines. It appears that many of the 
deadlines in Dodd-Frank are not realistic. Which Dodd-Frank 
deadlines do you anticipate not being able to meet? If Congress 
extended the deadlines, would you object? If your answer is 
yes, will you commit to meeting all of the statutory deadlines? 
If Congress affords additional time for rulemaking under the 
Dodd-Frank Act, will you be able to produce higher-quality, 
better coordinated rules?

A.1. The Dodd-Frank Act has a deadline of 360 days after 
enactment for completion of the bulk of our rulemakings--July 
16, 2011. Both the Dodd-Frank Act and the Commodity Exchange 
Act (CEA) give the CFTC the flexibility and authority to 
address the issues relating to the effective dates of Title 
VII. The CFTC has coordinated closely with the SEC on these 
issues.
    Section 754 of the Dodd-Frank Act states that Subtitle A of 
Title VII--the Subtitle that provides for the regulation of 
swaps--``shall take effect on the later of 360 days after the 
date of the enactment of this subtitle or, to the extent a 
provision of this subtitle requires a rulemaking, not less than 
60 days after publication of the final rule or regulation 
implementing such provisions of this subtitle.''
    Thus, those provisions that require rulemakings will not go 
into effect until the CFTC finalizes the respective rules. This 
is a substantial portion of the derivatives provisions under 
Dodd-Frank. Furthermore, they will only go into effect based on 
the phased implementation dates included in the final rules. 
The CFTC has posted a list of the provisions of the swaps 
subtitle that require rulemakings to the agency's Web site.
    There are other provisions of Title VII that do not require 
rulemaking and will take effect on July 16. On June 14, 2011, 
the CFTC issued a proposed order that would provide relief 
until December 31, 2011, or when the definitional rulemakings 
become effective, whichever is sooner, from certain provisions 
that would otherwise apply to swaps or swap dealers on July 16. 
This includes provisions that do not directly rely on a rule to 
be promulgated, but do refer to terms that must be further 
defined by the CFTC and SEC, such as ``swap'' and ``swap 
dealer.''
    The proposed order also would provide relief through no 
later than December 31, 2011, from certain CEA requirements 
that may result from the repeal, effective on July 16, 2011, of 
some of sections 2(d), 2(e), 2(g), 2(h), and 5d. The proposed 
order was published with a 14-day public comment period.
    The CFTC will begin considering final rules only after 
staff can analyze, summarize and consider public comments, 
after the Commissioners are able to discuss the comments and 
provide direction to staff, and after we consult with fellow 
regulators on the rules.

Q.2. Secretary Geithner recently talked about the difficulty of 
designating nonbank financial institutions as systemic. He 
said, ``it depends too much on the state of the world at the 
time. You won't be able to make a judgment about what's 
systemic and what's not until you know the nature of the 
shock.'' \1\ If it is impossible to know which firms are 
systemic until a crisis occurs, the Financial Stability 
Oversight Council will have a very difficult time objectively 
selecting systemic banks and nonbanks for heightened 
regulation. As a member of the Council, do you believe that 
firms can be designated ex ante as systemic in a manner that is 
not arbitrary? If your answer is yes, please explain how.
---------------------------------------------------------------------------
     \1\ See, Special Inspector General for the Troubled Asset Relief 
Program, ``Extraordinary Assistance Provided to Citigroup, Inc.'' 
(SIGTARP 11-002) (Jan. 13, 2011) (available at: http://www.sigtarp.gov/
reports/audit/2011/
Extraordinary%20Financial%20Assistance%20Provided%20to%20Citigroup,%20In
c.pdf), at 43.

A.2. The FSOC's proposed rulemaking on Authority to Require 
Supervision of Certain Nonbank Financial Companies would 
fulfill Congress' mandate by laying out a set of designation 
criteria that the Council would use to determine whether 
nonbank financial companies are systemically significant. 
Effective regulation of systemically important nonbank 
financial entities is essential to preventing the next AIG from 
threatening the financial system.
    The Dodd-Frank Act includes a specific list of factors to 
consider in the designation process. These include: the extent 
of the leverage of the company; the extent and nature of the 
off balance sheet exposures of the company; transactions and 
relationships of the company with other significant nonbank 
financial companies and significant bank holding companies; the 
extent to which assets are managed rather than owned by the 
company; the extent to which ownership of assets under 
management is diffuse; and other factors. I look forward to 
working with fellow Council members to ensure that designations 
are made according to these criteria and not arbitrarily.

Q.3. Section 112 of the Dodd-Frank Act requires the Financial 
Stability Oversight Council to annually report to Congress on 
the Council's activities and determinations, significant 
financial market and regulatory developments, and emerging 
threats to the financial stability of the United States. Each 
voting member of the Council must submit a signed statement to 
the Congress affirming that such member believes the Council, 
the Government, and the private sector are taking all 
reasonable steps to ensure financial stability and mitigate 
systemic risk. Alternatively, the voting member shall submit a 
dissenting statement. When does the Council expect to supply 
the initial report to Congress?

A.3. The Council is expected to deliver the report sometime 
later this year.

Q.4. Which provisions of Dodd-Frank create the most incentives 
for market participants to conduct business activities outside 
the United States? Have you done any empirical analysis on 
whether Dodd-Frank will impact the competitiveness of U.S. 
financial markets? If so, please provide that analysis.

A.4. As we work to implement the derivatives reforms in the 
Dodd-Frank Act, we are actively coordinating with international 
regulators to promote robust and consistent standards and avoid 
conflicting requirements in swaps oversight. The Commission 
participates in numerous international working groups regarding 
swaps, including the International Organization of Securities 
Commissions Task Force on OTC Derivatives, which the CFTC 
cochairs with the Securities and Exchange Commission (SEC). The 
CFTC, SEC, European Commission, and European Securities Market 
Authority are coordinating through a technical working group.
    The Dodd-Frank Act recognizes that the swaps market is 
global and interconnected. It gives the CFTC the flexibility to 
recognize foreign regulatory frameworks that are comprehensive 
and comparable to U.S. oversight of the swaps markets in 
certain areas. In addition, we have a long history of 
recognition regarding foreign participants that are comparably 
regulated by a home country regulator. The CFTC enters into 
arrangements with international counterparts for access to 
information and cooperative oversight. The Commission has 
signed memoranda of understanding with regulators in Europe, 
North America, and Asia.

Q.5. More than 6 months have passed since the passage of the 
Dodd-Frank Act, and you are deeply involved in implementing the 
Act's approximately 2,400 pages. Which provisions of the Dodd-
Frank Act are proving particularly difficult to implement? Have 
you discovered any technical or substantive errors in the Dodd-
Frank legislation? If so, please describe them.

A.5. The CFTC is working deliberatively, efficiently, and 
transparently to write rules to implement the Dodd-Frank Act. 
At this point, the Commission has substantially completed the 
proposal phase of rule writing. The public has had an 
opportunity to comment on the entire mosaic of proposed rules 
in a supplemental comment period of 30 days, which closed on 
June 3.
    We will begin considering final rules only after staff can 
analyze, summarize, and consider comments, after the 
Commissioners are able to discuss the comments and provide 
feedback to staff, and after the Commission consults with 
fellow regulators on the rules.
    The Commission has scheduled public meetings in July, 
August, and September to begin considering final rules under 
Dodd-Frank. We envision having more meetings into the fall to 
take up final rules.

Q.6. What steps are you taking to understand the impact that 
your agency's rules under Dodd-Frank will have on the U.S. 
economy and its competitiveness? What are the key ways in which 
you anticipate that requirements under the Dodd-Frank Act will 
affect the U.S. economy and its competitiveness? What are your 
estimates of the effect that the Dodd-Frank Act requirements 
will have on the jobless rate in the United States?

A.6. The 2008 financial crisis was very real. Millions more 
Americans are out of work today than if not for the financial 
crisis. Millions of homeowners now have homes worth less than 
their mortgages. Millions of people have had to dig into their 
savings; millions more haven't seen their investments regain 
the value they had before the crisis. There remains significant 
uncertainty in the economy.
    Though there were many causes to the crisis, it is clear 
that swaps played a central role. They added leverage to the 
financial system with more risk being backed up by less 
capital. They contributed, particularly through credit default 
swaps, to the bubble in the housing market and helped to 
accelerate the financial crisis. They contributed to a system 
where large financial institutions were thought to be not only 
too big to fail, but too interconnected to fail. Swaps--
initially developed to help manage and lower risk--actually 
concentrated and heightened risk in the economy and to the 
public.
    The Dodd-Frank Act's derivatives reforms will increase 
transparency, lower risk, and promote integrity in the swaps 
markets. This will benefit derivatives users and the broader 
economy.

Q.7. What steps are you taking to assess the aggregate costs of 
compliance with each Dodd-Frank rulemaking? What steps are you 
taking to assess the aggregate costs of compliance with all 
Dodd-Frank rulemakings, which may be greater than the sum of 
all of the individual rules' compliance costs? Please describe 
all relevant reports or studies you have undertaken to quantify 
compliance costs for each rule you have proposed or adopted. 
Please provide an aggregate estimate of the compliance costs of 
the Dodd-Frank rules that you have proposed or adopted to date.

A.7. The CFTC strives to include well-developed considerations 
of costs and benefits in each of its proposed rulemakings. 
Relevant considerations are presented not only in the cost-
benefit analysis section of the CFTC's rulemaking releases, but 
also throughout the releases.
    In addition, Commissioners and staff have met extensively 
with market participants and other interested members of the 
public to hear, consider and address their concerns regarding 
each rulemaking. CFTC staff hosted a number of public 
roundtables so that rules could be proposed in line with 
industry practices and address compliance costs consistent with 
the Dodd-Frank Act's regulatory requirements. Information about 
each of these meetings, as well as full transcripts of the 
roundtables, is available on the CFTC's Web site and has been 
factored into each applicable rulemaking.
    With each proposed rule, the Commission has sought public 
comment regarding costs and benefits to better inform the 
rulemaking process.

Q.8. Section 115 of the Dodd-Frank Act asks the Financial 
Stability Oversight Council to make recommendations to the 
Federal Reserve on establishing more stringent capital 
standards for large financial institutions. In addition, 
Section 165 requires the Fed to adopt more stringent standards 
for large financial institutions relative to smaller financial 
institutions. Chairman Bernanke's testimony for this hearing 
implied that the Basel III framework satisfies the Fed's 
obligation to impose more stringent capital on large financial 
institutions. As a member of the Financial Stability Oversight 
Council, do you agree with Chairman Bernanke that the Basel III 
standards are sufficient to meet the Dodd-Frank Act requirement 
for more stringent capital standards? Please explain the basis 
for your answer.

A.8. On January 19, 2011, the Council issued a notice of 
proposed rulemaking concerning the criteria that will inform, 
and the processes and procedures established under the Dodd-
Frank Act for, the Council's designation of nonbank financial 
companies that may be subject to more stringent capital 
standards pursuant to Section 165. FSOC staff currently is 
summarizing comments concerning that notice of proposed 
rulemaking, and I look forward to reviewing the comments that 
are submitted.

Q.9. The Fed, the SEC, the FDIC, and the CFTC are all 
structured as boards or commissions. This means that before 
they can implement a rule they must obtain the support of a 
majority of their board members. How has your board or 
commission functioned as you have been tackling the difficult 
job of implementing Dodd-Frank? Have you found that the other 
members of your board or commission have made positive 
contributions to the process?

A.9. Each of the CFTC's commissioners, as well as their staffs, 
has put in a great deal of hard work to implement the Dodd-
Frank Act. I believe that our rules, the markets and the 
American public benefit from the CFTC's collaborative and 
inclusive process of writing rules to oversee the swaps 
markets.

Q.10. The SEC and CFTC are both spending many resources on 
writing rules and initiating the oversight programs for over-
the-counter derivatives. These parallel efforts are in many 
respects redundant, costly, and potentially damaging to the 
market. Would a combined SEC-CFTC unit to deal with swaps and 
security-based swaps reduce implementation costs, eliminate the 
redundancy of having two sets of rules, and provide for a more 
certain and effective regulatory regime?

A.10. The CFTC and the SEC are coordinating closely in writing 
rules to implement the derivatives provisions of the Dodd-Frank 
Act. We have jointly proposed rulemakings and coordinated and 
consulted on each of the other rulemakings. This includes 
sharing many of our memos, term sheets and draft work product. 
This close working relationship has benefited the rulemaking 
process.

Q.11. Title VIII of Dodd-Frank deals with more than 
systemically important financial market utilities. Under Title 
VIII, the SEC and CFTC are authorized to prescribe and enforce 
regulations containing risk management standards for financial 
institutions engaged in payment, clearance, and settlement 
activities designated by the Financial Stability Oversight 
Council as systemically important. Should the Council designate 
any activities under Title VIII? If the Council designates any 
activities as systemically important, what are the limits to 
your authority under Title VIII with respect to your regulated 
entities that engage in designated activities? What specific 
actions are beyond the authority of the CFTC and SEC?

A.11. The CFTC has proposed several rules relating to clearing 
organizations. One proposed rule regarding financial resources 
for derivatives clearing organizations (DCOs) is an important 
first step in fulfilling the requirements of the Dodd-Frank Act 
to have robust oversight and risk management of clearinghouses. 
The proposed rulemaking will reduce the potential for systemic 
risk in the financial markets. The CFTC consulted with the 
Securities and Exchange Commission (SEC) and the Federal 
Reserve Board on this proposed rule. The Commission also has 
worked to ensure that these proposed financial resource rules 
are consistent with international standards in the newest draft 
CPSS-IOSCO standards.
    The Commission also has proposed regulations related to 
compliance with DCO core principles regarding participant and 
product eligibility, risk management, settlement procedures, 
treatment of funds, default rules and procedures, and system 
safeguards.
    For DCOs that are designated by the FSOC as systemically 
important DCOs (SIDCOs), the Commission proposed heightened 
standards in the area of system safeguards supporting business 
continuity and disaster recovery and a provision that would 
implement the Commission's special enforcement authority over 
SIDCOs.

Q.12. One of the purposes of joint rulemaking was to bring the 
best minds of both agencies together to design a uniform 
regulatory approach for OTC derivatives. In one recent joint 
proposal, the SEC and CFTC took two different approaches to 
further defining ``swap dealer'' and ``security-based swap 
dealer.'' Specifically, the release applied the dealertrader 
distinction that has been used to interpret the term ``dealer'' 
under the 1934 Act only to security-based swap dealers, not to 
swap dealers. Does this violate the Dodd-Frank mandate that you 
work together?

A.12. The Dodd-Frank Act provides that in adopting rules, the 
CFTC and SEC shall treat functionally or economically similar 
products or entities in a similar manner, but are not required 
to treat them in an identical manner. In December 2010, the 
CFTC and the SEC jointly issued a proposed rulemaking to 
further define the terms ``swap dealer'' and ``security-based 
swap dealer.'' Under the joint proposal, the CFTC and the SEC 
recognize that the principles relevant to identifying dealing 
activity involving swaps can differ from comparable principles 
associated with security-based swaps. ``These differences are 
due, in part, to differences in how those instruments are used. 
For example, because security-based swaps may be used to hedge 
or gain economic exposure to underlying securities, there is a 
basis to build upon the same principles that are presently used 
to identify dealers for other types of securities.''
    Because security-based swaps are related to securities, the 
CFTC and SEC joint reflects the understanding that the dealer-
trader distinction (which refers to the SEC's interpretation of 
aspects of the Securities Exchange Act of 1934) is ``an 
important analytical tool to assist in determining whether a 
person is a `security-based swap dealer.' '' Swaps, unlike 
security-based swaps, are related to financial and nonfinancial 
commodities such as interest rates, currencies and 
agricultural, energy, and metals commodities.
    The joint proposed rule also reflects the understanding 
that it would not necessarily be appropriate to use principles 
developed to determine if a person is a securities dealer to 
determine if a person is a dealer in commodity swaps. The 
proposal requested comment on this interpretive approach. The 
use of the dealer-trader distinction will be addressed in the 
final rules relating to the swap dealer and security-based swap 
dealer definitions, after taking the comments into account.

Q.13. One of the concerns of foreign regulators and foreign 
market participants is a lack of clarity about the application 
of your derivatives regulation. What are the limits of your 
ability to regulate foreign swap participants and foreign 
transactions in the swap market? Do you think that the CFTC and 
SEC should define the bounds of their regulatory authority in a 
formal rulemaking? If not, why not?

A.13. The derivatives provisions of the Dodd-Frank Act apply to 
activities outside the U.S. if they have a ``direct and 
significant connection with activities, or effect on, 
commerce'' of the U.S. or contravene regulations the Commission 
may promulgate as necessary to prevent evasion of the Act. In 
particular proposed rules, the Commission provided guidance 
with respect to treatment of activities outside of the United 
States and sought public comment.

Q.14. In your written testimony, you noted that you ``are 
working very closely with the SEC, the Federal Reserve, the 
FDIC, the OCC, and other prudential regulators, which includes 
sharing many of our memos, term sheets and draft work 
product.'' Please give a specific example in which the CFTC has 
changed its regulatory approach in response to input from each 
of these agencies.

A.14. The CFTC's 31 Dodd-Frank staff rulemaking teams and the 
Commissioners are all working closely with fellow regulators. 
It is difficult to provide discrete examples of changes in this 
regard because the effort has been so closely integrated on 
each of the more than 50 proposed rules promulgated by the 
Commission. CFTC staff have had more than 600 meetings with 
their counterparts at other agencies and have hosted numerous 
public roundtables with staff from other regulators to benefit 
from the open exchange of ideas. Commission staff will continue 
to engage with their colleagues at the other agencies as we 
proceed to develop and consider final rules.

Q.15. The CFTC's proposals are routinely focused more on 
highlighting anticipated societal benefits than rigorously 
assessing potential compliance costs to market participants. 
For example, in a recent proposal with respect to risk 
management requirements for derivatives clearing organizations, 
the CFTC estimated that it would cost DCOs $500 a year to 
comply with these new requirements. It is hard to understand 
how a DCO could ``maintain records of all activities related to 
its business as a DCO'' for a mere $500 a year, even at the 
bargain $10 hourly rate estimated by the CFTC. The CFTC, 
however, concluded that even the $500 estimate might be too 
high; it opined that ``the actual costs to many DCOs may be far 
less'' than the CFTC's $500 estimate. Please explain how this 
is a credible estimate and describe the basis for the estimate.

A.15. The proposed rule regarding risk management requirements 
for DCOs specifically identified the record-keeping costs 
associated with one discrete, new reporting requirement to be 
$500 annually. This estimate references the same figure 
estimated under Paperwork Reduction Act (PRA) computations. As 
noted in the proposal, the $500 figure was not intended to be 
an estimate of the total costs associated with compliance with 
all the proposed risk management rules. Rather, the PRA costs 
are a subset of overall costs. The Commission noted that the 
estimate may be less because DCOs already may have in place 
certain record-keeping procedures that would meet the proposed 
requirements. In addition, public comment was specifically 
requested with respect to costs and benefits to be considered 
in connection with the proposed rule.

Q.16. The CFTC recently filled its Chief Economist position, 
which had remained vacant for several months. Please describe 
the Chief Economist's experience in conducting cost-benefit 
analyses and the role that experience played in his being 
selected for the position. During the time when the CFTC Chief 
Economist position remained unfilled, how many regulatory 
actions did the CFTC undertake without the benefit of a Chief 
Economist to direct the required cost-benefit analyses? During 
the time when the CFTC Chief Economist position was unfilled, 
how many enforcement actions did the CFTC undertake without the 
benefit of a Chief Economist to direct analytic support, such 
as calculations of ill-gotten gains and investor harm? How has 
the quality of regulatory cost-benefit analysis improved since 
the hiring of a new Chief Economist? Please provide specific 
examples. Given that much of the cost-benefit work is done by 
members of the rulemaking teams, please describe the cost-
benefit analysis qualifications of the relevant staff members 
charged with conducting cost-benefit analyses with respect to 
the Dodd-Frank rulemakings.

A.16. On December 21, 2010, the CFTC announced the appointment 
of Dr. Andrei Kirilenko as the Chief Economist. The Office of 
the Chief Economist (OCE) is responsible for providing expert 
economic advice to the Commission. Its functions include policy 
analysis, economic research, expert testimony, education, and 
training.
    Dr. Kirilenko has been with the CFTC since 2008. Prior to 
his appointment Dr. Kirilenko provided expert economic advice 
to Commission staff working on rulemakings, including with 
regard to cost-benefit analysis.
    Prior to Dr. Kirilenko's appointment as Chief Economist, 
the Acting Chief Economist was Dr. James Moser, the Deputy 
Chief Economist, who ensured the continuing functioning of the 
office. Dr. Moser's career has included work at the Federal 
Reserve Bank of Chicago, the Chicago Mercantile Exchange and in 
academia.
    OCE staff economists play an integral role in the cost and 
benefit considerations as well as other aspects of agency 
rulemakings. OCE staff consists of both Ph.D. and pre-Ph.D. 
economists trained in conducting policy analysis, economic 
research, expert testimony, education, and training.

Q.17. Commissioner O'Malia issued a dissenting statement on the 
President's budget request for the CFTC. Among other things, he 
objected that the ``budget fails to outline a specific strategy 
for implementation of the Dodd-Frank Act that utilizes 
technology as a means to leverage budgetary and staff resources 
in fulfilling the Commission's oversight and surveillance 
responsibilities.'' Please explain how you are using technology 
to reduce the number of full time employees that the CFTC 
needs.

A.17. The CFTC's FY2012 budget request includes $66 million for 
technology and allocates $25 million for Dodd-Frank 
implementation. For pre-Dodd-Frank information technology 
requirements, the Commission's FY2012 information technology 
budget request would allow the Commission to continue its focus 
on enhancing the Commission's technology to keep pace with the 
futures marketplace by implementing:

    Automated surveillance of the futures markets 
        through the development of trade practice and market 
        surveillance alerts,

    The capability to create ownership and control 
        linkages between trading activity and aggregated 
        positions,

    Computer forensics capability in support of 
        enforcement investigations,

    Security controls to ensure continued compliance 
        with National Institute of Standards and Technology 
        (NIST) and Federal Information Security Management Act 
        (FISMA) requirements, and

    Human resources systems to improve upon our 
        antiquated systems that have been unable to effectively 
        support recent FTE growth.

    The Dodd-Frank Act for the first time sets up a new 
registration category for swap data repositories. The bill 
requires registrants--including swap dealers, major swap 
participants, SEFs, and DCMs--to have robust record keeping and 
reporting, including an audit trail, for swaps. The resources 
requested will ensure that the Commission is able to integrate 
its systems with swap repositories that are being established 
in the United States and internationally. The Commission's 
capacity to study and respond to ordinary trading practices or 
technological trading innovations will be greatly enhanced. 
Specific technological objectives include:

    Adapting existing automated surveillance and 
        comprehensive analysis solutions to maximize the 
        utility of the data residing in swap repositories;

    Establishing a robust technology infrastructure for 
        systems that provide reliable intelligence about our 
        markets and that assist the Commission in monitoring 
        voluminous transaction processing;

    Standardizing the collection of order data for 
        disruptive trade practice analysis;

    Advancing computing platforms for high-frequency 
        and algorithmic trading surveillance and enforcement;

    Expanding data transparency through enhancements to 
        the CFTC.gov Web site; and

    Implementing enhanced market and risk surveillance 
        technology to oversee positions across swaps, options, 
        and futures markets.

    The CFTC, for the first time in its history, will need the 
technological capability to aggregate position and trading data 
across swaps and futures markets. The Commission also will need 
to be able to aggregate the position, trading and other 
information stored in SDRs as there may be more than one SDR 
per asset class. The Dodd-Frank Act does not mandate any 
registered repository or data warehouse for such data 
aggregation purposes. However, the CFTC and other regulators 
will need a comprehensive view of the entire derivatives 
market, including combined futures and swaps data, to execute 
their missions. These aggregate capabilities include the 
ability to collect, store, readily access and analyze data for 
market surveillance, risk surveillance, enforcement, and 
position limit purposes.

Q.18. Chairman Gensler, at a recent derivatives conference, Dr. 
Kay Swinburne, a member of the European Parliament's Economic 
and Monetary Affairs Committee, observed ``I've probably seen 
Gary Gensler and his team in the European Parliament more than 
his ministers in the U.S., and it gives an indication of how 
desperate they are that we actually stay in line with what they 
already have as a framework, . . . . I have to say the more 
they pressurize the European Parliament, the more likely it is 
that they will push back and go in a slightly different 
direction.'' \2\ If, in fact, the European Parliament decides 
to go in a different direction, what impact will that have on 
the competitiveness of U.S. financial markets? On which aspects 
of derivatives regulation is it most important for the U.S. and 
E.U. to have consistent regulations?
---------------------------------------------------------------------------
     \2\ Rob McGlinchey, ``U.S., Industry Warned Over Lobbying E.U. 
Over Derivatives'', Derivatives Week (Nov. 30, 2010).

A.18. In the process of implementing the derivatives reforms in 
the Dodd-Frank Act, the Commission is actively coordinating 
with international regulators to promote robust and consistent 
standards and avoid conflicting requirements in swaps 
oversight. As we do with domestic regulators, we are sharing 
many of our memos, term sheets and draft work product with 
international regulators. The Commision has been consulting 
directly and sharing documentation with the European 
Commission, the European Central Bank, the U.K. Financial 
Services Authority, the new European Securities and Markets 
Authority and regulators in Canada, France, Germany, and 
Switzerland. Recently, I met with Michel Barnier, the European 
Commissioner for Internal Market and Services, to discuss 
ensuring consistency in swaps market regulation.
    This close coordination will facilitate robust and 
consistent standards, including with regard to central 
clearing, trading on exchanges or electronic trading platforms, 
reporting and higher capital requirements for noncleared swaps. 
While the European Union should not be expected to adopt 
identical regulations as the U.S., indications are that the 
ultimate outcome of the European legislation will be consistent 
with the objectives of Dodd-Frank in these four key areas.
    Meetings with officials from the European Commission and 
European Parliament at provide continued encouragement with 
regard to U.S. and European Union cooperation.

Q.19. Some disharmonies appear to be arising between the SEC 
and CFTC approaches. What is your plan for eliminating those 
disparities, particularly because the two agencies regulate 
many of the same market participants?

A.19. Section 712(a)(7) of the Dodd-Frank Act recognized the 
differences between CFTC- and SEC-regulated products and 
entities. It provides that, in adopting rules, the CFTC and SEC 
shall treat functionally or economically similar products or 
entities in a similar manner, but are not required to treat 
them in an identical manner. The Commissions work towards 
consistency in the agencies' respective rules to the extent 
possible through consultation and coordination continually 
carried out since the enactment of the Dodd-Frank Act. This 
close coordination has benefited the rulemaking process and 
will strengthen the markets for both swaps and security-based 
swaps.

Q.20. The CFTC's Dodd-Frank rulemaking initiatives to date have 
not been limited to items that are mandated by the Act, but 
have also included some actions that are purely discretionary. 
End-users and market participants are already spending 
substantial amounts of time and money to come into compliance 
with the mandatory provisions of the Dodd-Frank Act. Under your 
approach, they will have to bear the additional costs of 
complying with discretionary rules. Please describe the 
analysis you did to determine whether end-users and market 
participants can bear the compliance costs of so many new rules 
in such a short period of time.

A.20. The CFTC strives to include well-developed considerations 
of costs and benefits in each of its proposed rulemakings. 
Relevant considerations are presented not only in the cost-
benefit analysis section of the CFTC's rulemaking releases, but 
additionally are discussed throughout the release in compliance 
with the Administrative Procedure Act, which requires the CFTC 
to set forth the legal, factual and policy bases for its 
rulemakings.
    In addition, Commissioners and staff have met extensively 
with market participants and other interested members of the 
public to hear, consider and address their concerns in each 
rulemaking. CFTC staff hosted a number of public roundtables so 
that rules could be considered in line with industry practices 
and address compliance costs consistent with the obligations of 
the CFTC to promote market integrity, reduce risk, and increase 
transparency and protect the public interest.
    With each proposed rule, the Commission has sought public 
comment regarding costs and benefits.
    In enacting title VII of the Dodd-Frank Act, Congress gave 
the CFTC latitude with respect to the effective dates of 
particular requirements. In May, the Commission re-opened many 
of its comment periods that had closed and extended some 
existing comment periods so that the public could comment in 
the context of the entire mosaic of proposed rules. This 
opportunity was available with respect to all relevant proposed 
rules, giving the public and market participants the 
opportunity to comment on compliance costs and to make 
recommendations regarding the schedule of implementation. That 
extended comment period closed on June 3, 2011. In addition, on 
May 2 and 3, 2011, CFTC and SEC staff held roundtable sessions 
to obtain views of the public with regard to implementation 
dates of the various rulemakings. Prior to the roundtable, on 
April 29, CFTC staff released a document that set forth 
concepts that the Commission may consider with regard to the 
effective dates of final rules for swaps under the Dodd-Frank 
Act. The Commission is also receiving written comments on that 
subject. Since the beginning of the rulemaking process, the 
Commission has worked closely with other Federal regulators and 
will continue to do so.

Q.21. Chairman Gensler, the approach that the CFTC took with 
respect to swap execution facilities (SEFs) is at odds with the 
SEC's approach, which allows for a meaningful alternative to 
exchange trading. Explain how your approach is consistent with 
the statutory language. You have long called for bringing OTC 
derivatives onto ``regulated exchanges or similar trading 
venues.'' Do you believe that there is a role in the swaps 
markets for a meaningful alternative to an exchange that 
allows, for example, firms seeking to manage their risk to 
choose whether to disseminate their requests for quotes to one 
or more market participants?

A.21. The CFTC and SEC consult and coordinate extensively to 
harmonize our rules to the greatest extent possible. These 
continuing efforts began with the enactment of the Dodd-Frank 
Act. This close coordination will benefit the rulemaking 
process.
    With regard to the SEF rulemakings, the CFTC's proposed 
rule will provide all market participants with the ability to 
execute or trade with other market participants. It will afford 
market participants with the ability to make firm bids or 
offers to all other market participants. It also will allow 
them to make indications of interest--or what is often referred 
to as ``indicative quotes''--to other participants. 
Furthermore, it will allow participants to request quotes from 
other market participants. These methods will provide hedgers, 
investors, and Main Street businesses the flexibility to trade 
using a number of methods, but also the benefits of 
transparency and more market competition. The proposed rule's 
approach is designed to implement Congress' mandates for a 
competitive and transparent price discovery process.
    The proposal also allows participants to issue requests for 
quotes, with requests distributed to a minimum number of other 
market participants. It also allows that, for block 
transactions, swap transactions involving nonfinancial end-
users, swaps that are not ``made available for trading'' and 
bilateral transactions, market participants can get the 
benefits of the swap execution facilities' greater transparency 
or, if they wish, could be executed by voice or other means of 
trading.
    In the futures world, the law and historical precedent is 
that all transactions are conducted on exchanges, yet in the 
swaps world many contracts are transacted bilaterally. While 
the CFTC will continue to coordinate with the SEC to harmonize 
approaches, the CFTC also will consider matters associated with 
regulatory arbitrage between futures and swaps. The Commission 
has received public comments on its SEF rule and will move 
forward to consider a final rule only after staff has had the 
opportunity to summarize them for consideration and after 
Commissioners are able to discuss them and provide feedback to 
staff.

Q.22. In contrast to the SEC's Title VII implementation, the 
CFTC's implementation of Title VII to date has been marked by 
divided votes. Do you believe that consensus is important to 
ensure that the CFTC's regulations are balanced, targeted, and 
effective? Under what circumstances do you believe it is 
appropriate to adopt rules without the unanimous consent of the 
Commission?

A.22. The majority of Commission votes on Dodd-Frank 
rulemakings have been unanimous. The Commission rulemaking 
process benefits greatly from the close consultation between 
all of the Commissioners and their staffs. Commissioners work 
together to achieve a common understanding and to reach 
consensus wherever possible.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                       FROM GARY GENSLER

Q.1. A serious topic of discussion in the financial markets 
these past few days is the announcement of a proposed merger 
between the NYSE-Euronext and the Deutsche Borse.

    If this merger takes place, what will be the 
        potential impact on the implementation of the 
        provisions of the Dodd-Frank Act, particularly in 
        respect to the trading and clearing of derivatives?

    Is there a potential that this merger will enhance 
        the availability of regulatory arbitrage by allowing 
        market participants the ability to circumvent the 
        requirements of Dodd-Frank by providing easier access 
        to foreign trading and clearing venues?

    Should we be concerned with any anticompetitive 
        implications of this further consolidation of trading 
        and clearing platforms?

A.1. The CFTC's implementation of the Dodd-Frank Act would be 
unaffected by the merger.
    The Dodd-Frank Act also broadened the CFTC's oversight to 
include authority to register foreign boards of trade (FBOTs) 
providing direct access to U.S. traders. To become registered, 
FBOTs must be subject to regulatory oversight that is 
comprehensive and comparable to U.S. oversight. This new 
authority enhances the Commission's ability to ensure that U.S. 
traders cannot avoid essential market protections by trading 
contracts traded on FBOTs that are linked with U.S. contracts.
    There are six FBOTs that are implicated by the merger. 
Deutsch Boerse owns all or part of Eurex Deutschland, Eurex 
Zurich and the European Energy Exchange. NYSE-Euronext owns 
Liffe, Euronext Amsterdam and Euronext Paris. All six of these 
FBOTs currently provide for direct access to their trading 
systems from the U.S. pursuant to Commission staff no-action 
letters and will be required to register if proposed rules are 
made final.
    As a general matter the anticompetitive implications of any 
merger is a legitimate consideration and one that the CFTC is 
required to take into account under the Commodity Exchange Act.

Q.2. To what extent is your agency working with your relevant 
domestic and foreign counterparts in respect to the possible 
merger between the New York Stock Exchange and the Deutsche 
Borse? Are you working to ensure that arrangements will be in 
place for cooperation in supervision and enforcement and for 
information sharing, all of which will be required as a result 
of this potential merger? Should we expect formal MOUs on 
supervisory cooperation to precede a cross-border merger?

A.2. The Commission has an ongoing and productive working 
relationship with Germany's Bundesanstalt fur 
Finanzdienstleistungsaufsicht (BAFIN). Our agency is committed 
to using that relationship to ensure adequate information 
sharing and regulatory cooperation.

Q.3. The Securities, Insurance, and Investment Subcommittee 
held a hearing in December that focused, in part, on the 
increasing interconnectedness of today's modern markets and the 
need for effective oversight of trading across products and 
venues. Today's traders buy and sell options, futures, and 
equities interchangeably in dozens of marketplaces around the 
world. Yet, our regulatory oversight mechanism largely relies 
on a model where each marketplace is primarily responsible for 
policing the activities on its platform. Given the recently 
announced potential merger of NYSE Euronext with Deutsche Borse 
Group, it seems as though the trading marketplaces are only 
becoming more interconnected. What are your thoughts regarding 
how to an implement an effective regulatory oversight 
infrastructure to police trading done both by Americans around 
the world and by traders around the world in our increasingly 
interconnected and international marketplaces?

A.3. Under the Commodity Exchange Act, futures exchanges are 
required in the first instance to implement a robust market 
surveillance program. The CFTC addresses these challenges 
through surveillance on a cross-market basis. This allows the 
CFTC to detect cross-market trading abuses.
    The CFTC surveillance staff receives daily transaction and 
position data for all trading that takes place on futures 
exchanges registered with the CFTC. This information comes from 
both the exchanges and brokers. As a result, even trades that 
are initiated from foreign locations will be disclosed to the 
CFTC.
    FBOTs that permit the direct access of U.S. persons to 
their trading of contracts that might have an impact on U.S. 
exchange contracts are subject to surveillance. For example, 
the CFTC has entered into a surveillance arrangement with the 
United Kingdom Financial Services Authority (FSA) to share data 
with respect to trading in energy contracts on ICE Futures U.K. 
that settle off of the price of contracts on NYMEX. The CFTC's 
FBOT proposed rules would require such surveillance 
arrangements.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ
                       FROM GARY GENSLER

Q.1. Exchanges and Clearinghouses. I'm concerned that the 
exchanges or clearinghouses, both for derivatives and 
securities, could themselves become ``too big to fail'' and 
systemically significant. What steps are you taking to ensure 
that their size and risks are properly managed so that they do 
not become ``too big to fail''?

A.1. The Commission has proposed rules to establish regulatory 
standards for CFTC-registered derivative clearing organizations 
(DCOs) to comply with statutory core principles. The proposed 
rule addresses requirements for a DCO's risk management 
framework, chief risk officer, measurement of credit exposure, 
margin requirements and other risk control mechanisms 
(including risk limits, review of large trader reports, stress 
tests, swaps portfolio compression, and reviews of clearing 
members' risk management policies and procedures).
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                       FROM GARY GENSLER

Q.1. For each of the witnesses, though the Office of Financial 
Research does not have a Director, what are each of you doing 
to assist OFR in harmonizing data collection, compatibility, 
and analysis?

A.1. The Commission has been working closely with the OFR to 
help develop a strategy for managing initial data required by 
the OFR to monitor and study systemic risk in the U.S. 
financial markets. The CFTC also has coordinated with the OFR 
in the development of a universal Legal Entity Identification 
standard that is consistent with the Commission's and the SEC's 
rulemakings.
    In addition, to support the FSOC, the CFTC is providing 
both data and expertise relating to a variety of systemic 
risks, how those risks can spread through the financial system 
and the economy and potential ways to mitigate those risks. 
Commission staff also coordinates with Treasury and other 
Council member agencies on each of the studies and proposed 
rules issued by the FSOC.

Q.2. Chairman Shapiro and Chairman Gensler, can each of you 
explain what budget cuts will mean for the ability of your 
agencies to ensure markets are safe, protected from abuse, and 
don't create the types of risks that nearly destroyed our 
economy?

A.2. The CFTC must be adequately resourced to police the 
markets and protect the public. The CFTC is taking on a 
significantly expanded scope and mission. By way of analogy, it 
is as if the agency previously had the role to oversee the 
markets in the state of Louisiana and was just mandated by 
Congress to extend oversight to Alabama, Kentucky, Mississippi, 
Missouri, Oklahoma, South Carolina, and Tennessee.
    With seven times the population to police, far greater 
resources are needed for the public to be protected. The 
President's FY2012 budget request of $308 million would provide 
the CFTC with the personnel and IT resources estimated to be 
needed to begin to undertake its expanded mission. Without 
sufficient funding for the agency, our Nation cannot be assured 
of effective enforcement of new rules in the swaps market to 
promote transparency, lower risk, and protect against another 
crisis. Insufficient funding would hamper our ability to seek 
out fraud, manipulation, and other abuses at a time when 
commodity prices are rising and volatile. Until the CFTC 
completes its rule-writing process and implements and enforces 
those new rules, the public remains unprotected.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                       FROM GARY GENSLER

Q.1. Derivatives Oversight. Counterparty risk and other risks 
associated with derivatives played a central role in the 
financial crisis, especially in fueling the argument that firms 
such as AIG were too big or too interconnected to fail. What 
oversight systems do you plan to have in place to ensure that 
any accommodations made in the course of rulemaking for 
nonfinancial commercial parties do not create holes in the 
regulatory structure that permit the accumulation of hidden or 
outsized risk to the U.S. financial system and economy.

A.1. In the Dodd-Frank Act, Congress recognized the different 
levels of risk posed by transactions between financial entities 
and those that involve nonfinancial entities, as reflected in 
the nonfinancial end-user exception to clearing. The risk of a 
crisis spreading throughout the financial system is greater the 
more interconnected financial companies are to each other. 
Interconnectedness among financial entities allows one entity's 
failure to cause uncertainty and possible runs on the funding 
of other financial entities, which can spread risk and economic 
harm throughout the economy. Consistent with this, the CFTC's 
proposed rules on margin requirements focus only on 
transactions between financial entities rather than those 
transactions that involve nonfinancial end-users.
    The Dodd-Frank Act provides for comprehensive regulation of 
dealers, which ensures that every derivatives transaction--
including those excepted from clearing and trading 
requirements--will be regulated. The CFTC's proposed capital 
rules take commercial end-user transactions into account to 
ensure that swap dealers are adequately capitalized to help 
prevent future failures. Furthermore, improved price 
transparency through electronic trading platforms and real time 
public reporting will help to ensure that positions held by 
counterparties are properly valued and that exposures between 
swap dealers and end-users are transparent to both sides. 
Lastly, the requirement that the details of all transactions be 
reported to swap data repositories will ensure that the 
Commission and self-regulatory organizations have the data 
needed to monitor risks in the derivatives markets.

Q.2. Markets Oversight. As you may know, Korean securities 
regulators recently imposed a 6 month ban on a large European 
bank from engaging in proprietary trading in Korean markets 
after it came to light that the bank manipulated the Seoul 
stock market. With the proposed acquisition of the New York 
Stock Exchange by a European borse, markets are becoming more 
international and interconnected than ever before. Do you feel 
you have the tools you need to monitor trading across multiple 
markets and across multiple products? If not, what steps do you 
need to take and what additional tools do you need from 
Congress to assist you in accomplishing your critical mission 
of ensuring our markets operate with integrity?

A.2. In general, the Commission has ample experience monitoring 
trading on a variety of platforms, across multiple markets and 
across multiple products. The CFTC surveillance staff receives 
daily transaction and position data for all trading that takes 
place on registered futures exchanges. This information comes 
not only from the exchanges but also from brokers. Even trades 
that are initiated from foreign locations are disclosed to the 
CFTC.
    The CFTC also has taken measures to ensure that trading by 
U.S. persons through direct electronic access arrangements on 
foreign boards of trade (FBOT) in contracts that might have an 
impact on U.S. exchange contracts are subject to specified 
requirements. For example, the CFTC has entered into a 
surveillance arrangement with the United Kingdom Financial 
Services Authority (FSA) to share data with respect to trading 
in energy contracts on ICE Futures U.K. that settle off of the 
price of contracts on NYMEX. The CFTC's FBOT proposed rules 
would require such surveillance arrangements.
    The CFTC must be adequately resourced to police the 
markets, including implementing the Dodd-Frank Act's provision 
for registration of foreign boards of trade. The CFTC is taking 
on a significantly expanded scope and mission. By way of 
analogy, it is as if the agency previously had the role to 
oversee the markets in the State of Louisiana and was just 
mandated by Congress to extend oversight to Alabama, Kentucky, 
Mississippi, Missouri, Oklahoma, South Carolina, and Tennessee.
    With seven times the population to police, far greater 
resources are needed for the public to be protected. Without 
sufficient funding for the agency, our Nation cannot be assured 
of effective enforcement of new rules in the swaps market to 
promote transparency, lower risk, and protect against another 
crisis. We need additional funding to seek out fraud, 
manipulation, and other abuses at a time when commodity prices 
are rising and volatile.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM GARY GENSLER

Q.1. CFTC Commissioners Michael Dunn, Scott O'Malia, and Jill 
Sommers, have all commented on the lack of economic data on the 
CFTC proposed rule on commodity speculative position limits. 
Commissioner Michael Dunn stated: ``To date, CFTC staff has 
been unable to find any reliable economic analysis to support 
either the contention that excessive speculation is affecting 
the markets we regulate, or that position limits will prevent 
excessive speculation.'' Do you intend to hold off going 
forward with the rule until you have the kind of economic data 
that Commissioner stated was lacking?

A.1. Position limits have served since the Commodity Exchange 
Act passed in 1936 as a tool to curb or prevent excessive 
speculation that may burden interstate commerce. When the CFTC 
set position limits in the past, the agency sought to ensure 
that the markets were made up of a broad group of market 
participants with a diversity of views. At the core of our 
obligations is promoting market integrity, which the agency has 
historically interpreted to include ensuring that markets do 
not become too concentrated.
    The CFTC's January position limits proposal would 
reestablish position limits in agriculture, energy and metals 
markets. It includes one position limits regime for the spot 
month and another regime for single-month and all-months 
combined limits. It would implement spot-month limits, which 
are currently set in agriculture, energy, and metals markets, 
sooner than the single-month or all-months-combined limits. 
Single-month and all-months-combined limits, which currently 
are only set for certain agricultural contracts, would be 
reestablished in the energy and metals markets and be extended 
to certain swaps. These limits will be set using the formula 
proposed in January based upon data on the total size of the 
swaps and futures market collected through the position 
reporting rule the Commission hopes to finalize early next 
year. It is only with the passage and implementation of the 
Dodd-Frank Act that the Commission will have broad authority to 
collect data in the swaps market.

Q.2. It is my understanding that under Title VII of Dodd-Frank, 
the CFTC has initiated 40 rulemakings. Despite the abbreviated 
comment periods, some commenters have done their own analysis 
and identified flaws in agency cost-benefit analyses. For 
example, a group of energy companies, in response to a proposed 
rulemaking by the CFTC, estimated that the personnel costs for 
swap dealers and major swap participants in connection with 
implementing a comprehensive risk management plan would be at 
least ``63 times greater than the Commission's estimate.'' How 
do you intend to incorporate this feedback and others to adjust 
these proposed rules to provide less costly alternatives and 
not make this just a check the box exercise for a decision that 
has already been made?

A.2. The Administrative Procedure Act (APA) requires the CFTC 
to provide notice and an opportunity to comment before 
finalizing rules that will impose new obligations on any person 
or group of persons. The CFTC considers all of the comments it 
receives to inform its final rulemaking. To ensure that its 
final rulemakings have reasoned bases, the CFTC and its staff 
will review all estimates of costs and benefits that are 
received from commenters and any data supporting them. This 
will enable the Commission to adopt rules as required by the 
Dodd-Frank Act while ensuring that they do not impose 
unnecessary costs on market participants and the public.

Q.3. I understand that you and your staff are working very hard 
and talking to each other during the proposal stage, but from 
the outside it looks like too often the agencies are proposing 
inconsistent approaches to the same rule sets. For instance, on 
the Swap Execution Facility rules, the SEC seems to be taking a 
more flexible approach relative to what you've developed. And 
their approach seems to be more consistent with what the 
Europeans are looking at so it will minimize the risk of 
regulatory arbitrage. Rather than one agency jumping out in 
front of the other agency the point of coordination should be 
to propose consistent approaches to the same rule sets. How do 
you intend to achieve great harmonization, timing, minimize 
inconsistent rules, and avoid regulatory arbitrage--
specifically with respect to the SEF?

A.3. The CFTC and SEC consult and coordinate extensively to 
harmonize our rules to the greatest extent possible. These 
continuing efforts began with the enactment of the Dodd-Frank 
Act. This close coordination will continue and will benefit the 
rulemaking process.
    With regard to the SEF rulemakings, the CFTC's proposed 
rule will provide all market participants with the ability to 
execute or trade with other market participants. It will afford 
market participants with the ability to make firm bids or 
offers to all other market participants. It also will allow 
them to make indications of interest--or what is often referred 
to as ``indicative quotes''--to other participants. 
Furthermore, it will allow participants to request quotes from 
other market participants. These methods will provide hedgers, 
investors, and Main Street businesses the flexibility to trade 
using a number of methods, but also the benefits of 
transparency and more market competition. The proposed rule's 
approach is designed to implement Congress' mandates for a 
competitive and transparent price discovery process.
    The proposal also allows participants to issue requests for 
quotes, with requests distributed to a minimum number of other 
market participants. It also allows that, for block 
transactions, swap transactions involving nonfinancial end-
users, swaps that are not ``made available for trading'' and 
bilateral transactions, market participants can get the 
benefits of the swap execution facilities' greater transparency 
or, if they wish, could be executed by voice or other means of 
trading.
    In the futures world, the law and historical precedent is 
that all transactions are conducted on exchanges, yet in the 
swaps world many contracts are transacted bilaterally. While 
the CFTC will continue to coordinate with the SEC to harmonize 
approaches, the CFTC also will consider matters associated with 
regulatory arbitrage between futures and swaps. The Commission 
has received public comments on its SEF rule and will move 
forward to consider a final rule only after staff has had the 
opportunity to summarize them for consideration and after 
Commissioners are able to discuss them and provide feedback to 
staff.

Q.4. Dodd-Frank requires that risk retention be jointly 
considered by the regulators for each different type of asset 
and includes a specific statutory mandate related to any 
potential reforms of the commercial mortgage-backed securities 
to limit disruptions. Given the importance of rigorous cost-
benefit and economic impact analyses and the need for due 
consideration of public comments, do your agencies need more 
time than is provided by the looming April deadline?

A.4. Section 941 of the Dodd-Frank Act, pertaining to the 
regulation of credit risk retention, is an amendment to the 
Securities Exchange Act of 1934. It applies to the Securities 
and Exchange Commission as well as the Office of the 
Comptroller of the Currency, the Board of Governors of the 
Federal Reserve System and the Federal Deposit Insurance 
Corporation. The Dodd-Frank Act does not involve the CFTC in 
this area.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                       FROM GARY GENSLER

Q.1. Chairman Gensler, during your appearance before the full 
House Agriculture Committee last week, you stated that 
``proposed rules on margin requirements should focus only on 
transactions between financial entities rather than those 
transactions that involve nonfinancial end-users.'' While this 
was good news to end-users, there is still concern that 
regulations could impact end-users if banks or other 
counterparties to these contracts are required to post margin 
and charge a fee to its end-user counterparties. How would you 
address this concern? More generally, how do you believe the 
CFTC can best fulfill Congress' intent to exempt end-users from 
capital and margin requirements?

A.1. The CFTC's proposed margin rule does not require margin to 
be paid or collected on transactions involving nonfinancial 
end-users hedging or mitigating commercial risk.

Q.2. Under the Commodities Exchange Act (CEA), which was 
repealed by Dodd-Frank, physical forwards were excluded from 
the definition of swap. In the recent rule on agricultural 
swaps, the CFTC ruled that a physical contract meets the 
definition of swap. However, in your testimony before the full 
House Agriculture Committee you indicated that the Rural 
Electric Cooperatives were not dealing in swaps, but forwards 
or forwards with embedded options. Would you please explain how 
the definitions of ``swap'' and ``agricultural swap'' can be 
reconciled given your comments? Do you believe that forwards 
with embedded options, such as capacity contracts, reserve 
sharing agreements, and all-requirements contracts will be 
excluded from the draft definition of ``swap'' that you will be 
releasing shortly?

A.2. In response to a Joint Advance Notice of Proposed 
Rulemaking regarding definitions issued by the SEC and the CFTC 
last year, a number of commenters requested that the forward 
exclusion from the swap definition be clarified. Under the 
Commodity Exchange Act, the CFTC does not regulate forward 
contracts. Over the decades, market participants have come to 
rely upon a series of orders, interpretations and cases 
regarding the forward contract exclusion. Consistent with that 
history, the Dodd-Frank Act excluded from the definition of 
swaps ``any sale of a nonfinancial commodity or security for 
deferred shipment or delivery, so long as the transaction is 
intended to be physically settled.'' In its proposed rule on 
product definitions, the Commission expressed the view that the 
principles underlying its 1990 Statutory Interpretation 
Concerning Forward Transactions should apply to the forward 
exclusion from the swap definition with respect to nonfinancial 
commodities as it does to futures contracts. Market 
participants that regularly make or take delivery of the 
referenced commodity in the ordinary course of their business, 
where the book-out transaction is effectuated through a 
subsequent, separately negotiated agreement, should qualify for 
the forward exclusion from the swap definition. Forwards with 
embedded options would likely qualify for the forward exclusion 
so long as the optionality was not as to the obligation to 
deliver.

Q.3. As you know, commercial end-users could be excluded from 
the new clearing requirements under Dodd-Frank if they are 
using the swap to hedge ``commercial risk'' something you 
discussed in last week's House Agriculture Committee hearing. 
Because end-users are merely using swaps to hedge risk, then 
why subject them to CFTC jurisdiction? Could you also provide 
insight to how broadly ``commercial risk'' will be defined 
through CFTC regulation?

A.3. The CFTC's proposed rules do not require transactions 
involving nonfinancial end-users hedging or mitigating 
commercial risk to be cleared or traded on trading platforms. 
Furthermore, the CFTC's proposed margin rule does not require 
margin to be paid or collected on transactions involving 
nonfinancial end-users hedging or mitigating commercial risk.
    The CFTC and SEC issued a joint proposed rule to further 
define the term ``major swap participant.'' The CFTC issued a 
proposed rule related to the nonfinancial end-user exception 
from the clearing requirement. Both proposals include 
discussion meant to illuminate the conditions under which 
positions are to be regarded as held for hedging or mitigating 
commercial risk. Both proposals demonstrate the belief that 
whether a position hedges or mitigates commercial risk should 
be determined by the facts and circumstances at the time the 
swap is entered into and should take into account the person's 
overall hedging and risk mitigation strategies. The Commission 
invited comment on a number of aspects important to this 
consideration and is reviewing submitted comments.

Q.4. I have noticed that your rulemakings have failed to 
account for or document the enormous costs that will be imposed 
on the industry and in many cases fail to even note that the 
agency will need to hire, train, and support a large number of 
professional staff members to perform the work that your 
proposed rule creates for the agency.
    You have claimed, in recent Congressional testimony, that 
section 15(a) of the CEA excuses you from performing a complete 
cost and benefit analysis and allows you to justify your 
rulemaking by speculating about benefits to the market. What is 
your justification for ignoring your obligation to fully 
analyze the costs imposed on third parties and on the agency by 
your rulemaking?

        SEC. 15. (7 U.S.C. 19) CONSIDERATION OF COSTS AND 
        BENEFITS AND ANTITRUST LAWS.
        (a) COSTS AND BENEFITS.--
        (1) IN GENERAL.--Before promulgating a regulation under 
        this Act or issuing an order (except as provided in 
        paragraph (3)), the Commission shall consider the costs 
        and benefits of the action of the Commission.
        (2) CONSIDERATIONS.--The costs and benefits of the 
        proposed Commission action shall be evaluated in light 
        of--
        (A) considerations of protection of market participants 
        and the public;
        (B) considerations of the efficiency, competitiveness, 
        and financial integrity of futures markets;
        (C) considerations of price discovery;
        (D) considerations of sound risk management practices; 
        and
        (E) other public interest considerations.
        (3) APPLICABILITY.--This subsection does not apply to 
        the following actions of the Commission:
        (A) An order that initiates, is part of, or is the 
        result of an adjudicatory or investigative process of 
        the Commission.
        (B) An emergency action.
        (C) A finding of fact regarding compliance with a 
        requirement of the Commission.

A.4. See response after Question 5.

Q.5. Many have raised concerns that the CFTC does not have 
adequate funds to implement many of the rules it is proposing. 
In fact, Commissioner Dunn made the following request at the 
very first CFTC Open Meeting on Dodd-Frank rulemaking:

        I would ask that staff provide an estimate of the cost 
        of each proposed regulation and an analysis detailing 
        whether the CFTC can delegate duties to SROs to fulfill 
        the mandates of Congress. Further, I would ask staff 
        working in concert with the Chairman to provide the 
        Commissioners with a list of prioritizing regulations 
        based on available funding.

    Has the Commission performed or will it be performing a 
cost benefit analysis of each of the various rules it is 
proposing?

A.5. The CFTC strives to include well-developed considerations 
of costs and benefits in each of its proposed rulemakings. 
Relevant considerations are presented not only in the cost-
benefit analysis section of the CFTC's rulemaking releases, but 
additionally are discussed throughout the release in compliance 
with the Administrative Procedure Act, which requires the CFTC 
to set forth the legal, factual, and policy bases for its 
rulemakings.
    In addition, Commissioners and staff have met extensively 
with market participants and other interested members of the 
public to hear, consider and address their concerns in each 
rulemaking. CFTC staff hosted a number of public roundtables so 
that rules could be proposed in line with industry practices 
and address compliance costs consistent with the obligations of 
the CFTC to promote market integrity, reduce risk, and increase 
transparency as directed in Title VII of the Dodd-Frank Act. 
Information from each of these meetings--including full 
transcripts of the roundtables--is available on the CFTC's Web 
site and has been factored into each applicable rulemaking.
    With each proposed rule, the Commission has sought public 
comment regarding costs and benefits.

Q.6. The CFTC's analysis for several of these rules seems 
widely inconsistent with outside cost-benefit analysis for the 
same rules. For instance, your business conduct standards rule 
could increase costs for pension funds and municipalities 
significantly. In performing the cost-benefit analysis for 
proposed business conduct standards, did the CFTC quantify the 
effect these additional regulatory burdens would have on the 
market? Particularly, did the CFTC consider that these burdens 
could compel dealers to choose not to enter into trades with 
municipalities and other ``special entities'' such as pension 
funds?

A.6. The Commission's proposed business conduct standards rules 
track the statutory directive under the provisions of the Dodd-
Frank Act that create a higher standard of care for swap 
dealers dealing with Special Entities, including municipalities 
and pension funds. The Commission's proposed rules were drafted 
following consultations with Special Entities and potential 
swap dealers and were designed to enable swap dealers to comply 
with their new duties in an efficient and effective manner. The 
Commission is reviewing the comments it has received on the 
proposed rules to ensure that the final rules achieve the 
statutory purpose without imposing undue costs on market 
participants. The proposed rulemaking release specifically asks 
that the public provide comment regarding associated costs and 
benefits.

Q.7. I'm concerned about the costs some of these rules are 
going to place on end-users. While the Dodd-Frank Act requires 
the CFTC to consider the special role of ``block trades'' when 
adopting real-time swap reporting requirements, the CFTC's 
real-time reporting proposal includes a very narrow definition 
of ``block trade'' and a very short 15-minute delay for public 
dissemination of block trade information. I'm concerned the 
increased costs of this narrow interpretation could make it 
costly for end-users to enter into the block trades they use to 
hedge their own risks. Has the CFTC considered the impact these 
increased costs have on end-user risk management?

A.7. The CFTC's proposed rules regarding real-time reporting of 
swap transaction and pricing data defined ``large notional 
swap'' and ``block trade'' and specified a delay of 15 minutes 
for the public reporting of swap transaction data only for 
block trades that are executed pursuant to the rules of a swap 
execution facility or designated contract market. The proposed 
rulemaking does not provide specific time delays for large 
notional swaps that are not executed on a swap execution 
facility or a designated contract market, such as those entered 
into by nonfinancial end-users hedging or mitigating commercial 
risk. The proposal seeks comment regarding the appropriate time 
delay for these transactions.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                        FROM JOHN WALSH

Q.1. Recently, some have voiced concerns that the timeframe for 
the rulemakings required by the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Dodd-Frank) is too short to allow 
for adequate consideration of the various comments submitted or 
to review how the new rules may impact our financial markets. 
Does the current timeframe established by Dodd-Frank allow each 
rulemaking to be completed in a thoughtful and deliberative 
manner?

A.1. We recognize that the deadlines established for many of 
the rules required by the Dodd-Frank Act demonstrate Congress' 
concern that the Act's regulatory reforms be promptly 
implemented. This goal is in some tension with the time 
necessary to resolve the novel and complex legal and practical 
issues presented by a many of the statutory provisions and, in 
many instances, the time necessary to comply with Congress' 
direction for joint or coordinated rulemaking conducted by a 
number of different agencies. We are working diligently toward 
all of these goals, but getting the substance of the 
rulemakings right is our primary objective.

Q.2. In defining the exemption for ``qualified residential 
mortgages,'' are the regulators considering various measures of 
a lower risk of default, so that there will not just be one 
``bright line'' factor to qualify a loan as a Q.R.M.?

A.2. Section 941 provides a complete exemption from the credit 
risk retention requirements for ABS collateralized solely by 
qualified residential mortgages. The agencies' proposed rule 
establishes the terms and conditions under which a residential 
mortgage would qualify as a QRM. The proposed rule generally 
would prohibit QRMs from having product features that 
contributed significantly to the high levels of delinquencies 
and foreclosures since 2007--such as failure to document 
income, ``teaser'' rates, or terms permitting negative 
amortization or interest-only payments--and also would 
establish conservative underwriting standards designed to 
ensure that QRMs are of high credit quality. These underwriting 
standards include, among other things, maximum front-end and 
back-end debt-to-income ratios of 28 percent and 36 percent, 
respectively; a maximum loan-to-value (LTV) ratio of 80 percent 
in the case of a purchase transaction; and a 20 percent down 
payment requirement in the case of a purchase transaction.
    If the agencies are persuaded by comments that the QRM 
underwriting criteria are too restrictive on balance, the 
preamble discusses several possible alternatives:

    Permit the use of private mortgage insurance 
        obtained at origination of the mortgage for loans with 
        LTVs higher than the 80 percent level specified in the 
        proposed rule. The guarantee provided by private 
        mortgage insurance, if backed by sufficient capital, 
        lowers the credit risk to investors by covering the 
        unsecured losses attributable to the higher LTV ratio 
        once the borrower defaults and the loan is liquidated. 
        However, to include private mortgage insurance in the 
        QRM criteria, Congress required the agencies to 
        determine that the presence of private mortgage 
        insurance lowers the risk of default--not that it 
        reduces the ultimate amount of the loss. The OCC will 
        be interested in the information provided by Commenters 
        on this topic, and any data they can provide.

    Impose less stringent QRM underwriting criteria, 
        but also impose more stringent risk retention 
        requirements on non-QRM loan ABS to incentivize 
        origination of the QRM loans and reflect the relatively 
        greater risk of the non-QRM loan market.

    Create an additional residential mortgage loan 
        asset class along side the QRM exemption--such as the 
        underwriting asset classes for commercial loans, 
        commercial mortgages, and auto loans under the proposed 
        rule--with less stringent underwriting standards or 
        private mortgage insurance, subject to a risk retention 
        requirement set somewhere between 0 and 5 percent.

Q.3. What data are you using to help determine the definition 
of a Qualified Residential Mortgage?

A.3. Section 941 requires the agencies to define qualified 
residential mortgage ``taking into consideration underwriting 
and product features that historical loan performance data 
indicate result in a lower risk of default.'' Therefore, in 
considering how to determine if a mortgage is of sufficient 
credit quality, the agencies examined data from several 
sources.

    The agencies reviewed data on mortgage performance 
        supplied by the Applied Analytics division (formerly 
        McDash Analytics) of Lender Processing Services (LPS). 
        To minimize performance differences arising from 
        unobservable changes across products, and to focus on 
        loan performance through stressful environments, for 
        the most part, the agencies considered data for prime 
        fixed-rate loans originated from 2005 to 2008. This 
        data set included underwriting and performance 
        information on approximately 8.9 million mortgages.

    The agencies also examined data from the 1992 to 
        2007 waves of the triennial Survey of Consumer Finances 
        (SCF) conducted by the Federal Reserve Board. Because 
        families' financial conditions will change following 
        the origination of a mortgage, the analysis of SCF data 
        focused on respondents who had purchased their homes 
        either in the survey year or the previous year.

    The agencies also examined a combined data set of 
        loans purchased or securitized by the GSEs from 1997 to 
        2009. This data set consisted of more than 75 million 
        mortgages, and included data on loan products and 
        terms, borrower characteristics (e.g., income and 
        credit score), and performance data through the third 
        quarter of 2010.

    Based on these and other data sets, and as supported by a 
body of academic literature, the agencies believe that the 
underwriting criteria for QRMs in the proposed rule have low 
credit risk, even in severe economic conditions.

Q.4. Please discuss the current status and timeframe of 
implementing the Financial Stability Oversight Council's (FSOC) 
rulemaking on designating nonbank financial companies as being 
systemically important. As a voting member of FSOC, to what 
extent is the Council providing clarity and details to the 
financial marketplace regarding the criteria and metrics that 
will be used by FSOC to ensure such designations are 
administered fairly? Is the intent behind designation decisions 
to deter and curtail systemically risky activity in the 
financial marketplace? Are diverse business models, such as the 
business of insurance, being fully and fairly considered as 
compared with other financial business models in this 
rulemaking?

A.4. On January 18, 2011, the Council approved publication of a 
notice of proposed rulemaking (NPRM) that outlines the criteria 
that will inform the Council's designation of such firms and 
the procedures the FSOC will use in the designation process. 
The NPRM closely follows and adheres to the statutory factors 
established by Congress for such designations. The framework 
proposed in the NPRM for assessing systemic importance is 
organized around six broad categories, each of which reflects a 
different dimension of a firm's potential to experience 
material financial distress, as well as the nature, scope, 
size, scale, concentration, interconnectedness, and mix of the 
company's activities. The six categories are: size, 
interconnectedness, substitutability, leverage, liquidity, and 
regulatory oversight.
    The comment period for this NPRM closed on February 25, 
2011, and staffs are in the process of reviewing the comments 
received and making recommendations for upcoming discussions by 
FSOC principals on how to proceed with implementing this 
important provision of the Dodd-Frank Act. With regard to the 
concerns voiced by some commenters and members of Congress, the 
OCC is committed to ensuring that the Council strikes the 
appropriate balance in providing sufficient clarity in our 
rules and transparency in our designation process, while at the 
same time avoiding overly simplistic approaches that fail to 
recognize and consider the facts and circumstances of 
individual firms and specific industries. Ensuring that firms 
have appropriate due process throughout the designation process 
will be critical in achieving this balance.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                        FROM JOHN WALSH

Q.1. The Dodd-Frank Act requires an unprecedented number of 
rulemakings over a short period of time. As a result, some 
deadlines have already been missed and some agencies expect to 
miss additional deadlines. It appears that many of the 
deadlines in Dodd-Frank are not realistic. Which Dodd-Frank 
deadlines do you anticipate not being able to meet? If Congress 
extended the deadlines, would you object? If your answer is 
yes, will you commit to meeting all of the statutory deadlines? 
If Congress affords additional time for rulemaking under the 
Dodd-Frank Act, will you be able to produce higher-quality, 
better coordinated rules?

A.1. We recognize that the deadlines established for many of 
the rules required by the Dodd-Frank Act demonstrate Congress' 
concern that the Act's regulatory reforms be promptly 
implemented. This goal is in some tension with the time 
necessary to resolve the novel and complex legal and practical 
issues presented by a many of the statutory provisions and, in 
many instances, the time necessary to comply with Congress' 
direction for joint or coordinated rulemaking conducted by a 
number of different agencies. We are working diligently toward 
all of these goals, but getting the substance of the 
rulemakings right is our primary objective.

Q.2. Secretary Geithner recently talked about the difficulty of 
designating nonbank financial institutions as systemic. He 
said, ``it depends too much on the state of the world at the 
time. You won't be able to make a judgment about what's 
systemic and what's not until you know the nature of the 
shock.'' \1\ If it is impossible to know which firms are 
systemic until a crisis occurs, the Financial Stability 
Oversight Council will have a very difficult time objectively 
selecting systemic banks and nonbanks for heightened 
regulation. As a member of the Council, do you believe that 
firms can be designated ex ante as systemic in a manner that is 
not arbitrary? If your answer is yes, please explain how.
---------------------------------------------------------------------------
     \1\ See, Special Inspector General for the Troubled Asset Relief 
Program, ``Extraordinary Assistance Provided to Citigroup, Inc.'' 
(SIGTARP 11-002) (Jan. 13, 2011) (available at: http://www.sigtarp.gov/
reports/audit/2011/
Extraordinary%20Financial%20Assistance%20Provided%20to%20Citigroup,%20In
c.pdf), at 43.

A.2. On January 18, 2011, the Council approved publication of a 
notice of proposed rulemaking (NPRM) that outlines the criteria 
that will inform the Council's designation of such firms and 
the procedures the FSOC will use in the designation process. 
The NPRM closely follows and adheres to the statutory factors 
established by Congress for such designations. The framework 
proposed in the NPRM for assessing systemic importance is 
organized around six broad categories, each of which reflects a 
different dimension of a firm's potential to experience 
material financial distress, as well as the nature, scope, 
size, scale, concentration, interconnectedness, and mix of the 
company's activities. The six categories are: size, 
interconnectedness, substitutability, leverage, liquidity, and 
regulatory oversight.
    The comment period for this NPRM closed on February 25, 
2011, and staffs are in the process of reviewing the comments 
received and making recommendations for upcoming discussions by 
FSOC principals on how to proceed with implementing this 
important provision of the Dodd-Frank Act. With regard to the 
concerns voiced by some commenters and members of Congress, the 
OCC is committed to ensuring that the Council strikes the 
appropriate balance in providing sufficient clarity in our 
rules and transparency in our designation process, while at the 
same time avoiding overly simplistic approaches that fail to 
recognize and consider the facts and circumstances of 
individual firms and specific industries. Ensuring that firms 
have appropriate due process throughout the designation process 
will be critical in achieving this balance.

Q.3. Section 112 of the Dodd-Frank Act requires the Financial 
Stability Oversight Council to annually report to Congress on 
the Council's activities and determinations, significant 
financial market and regulatory developments, and emerging 
threats to the financial stability of the United States. Each 
voting member of the Council must submit a signed statement to 
the Congress affirming that such member believes the Council, 
the Government, and the private sector are taking all 
reasonable steps to ensure financial stability and mitigate 
systemic risk. Alternatively, the voting member shall submit a 
dissenting statement. When does the Council expect to supply 
the initial report to Congress?

A.3. Discussions about the format and structure of this report 
are underway by the FSOC members.

Q.4. Which provisions of Dodd-Frank create the most incentives 
for market participants to conduct business activities outside 
the United States? Have you done any empirical analysis on 
whether Dodd-Frank will impact the competitiveness of U.S. 
financial markets? If so, please provide that analysis.

A.4. The OCC has not done any analysis of this type.

Q.5. More than 6 months have passed since the passage of the 
Dodd-Frank Act, and you are deeply involved in implementing the 
Act's approximately 2,400 pages. Which provisions of the Dodd-
Frank Act are proving particularly difficult to implement? Have 
you discovered any technical or substantive errors in the Dodd-
Frank legislation? If so, please describe them.

A.5. The attachment to these Questions and Answers describes 
three areas where, as we have previously testified to the 
Committee, clarifying amendments to the Dodd-Frank Act may be 
appropriate: the requirement in section 939A that agencies 
remove all references to credit ratings from their regulations; 
the ambiguities in the requirement for leverage and risk-based 
capital requirements in section 171; and the overlap in the 
respective roles of the banking agencies and the CFPB with 
respect to fair lending supervision.

Q.6. What steps are you taking to understand the impact that 
your agency's rules under Dodd-Frank will have on the U.S. 
economy and its competitiveness? What are the key ways in which 
you anticipate that requirements under the Dodd-Frank Act will 
affect the U.S. economy and its competitiveness? What are your 
estimates of the effect that the Dodd-Frank Act requirements 
will have on the jobless rate in the United States?

A.6. The OCC has not undertaken an analysis of the overall 
impact that the requirements of the Dodd-Frank Act will have on 
the U.S. economy or on the jobless rate in the United States. 
At this time, we are not aware that such a study has been done 
by any other Government agency.

Q.7. What steps are you taking to assess the aggregate costs of 
compliance with each Dodd-Frank rulemaking? What steps are you 
taking to assess the aggregate costs of compliance with all 
Dodd-Frank rulemakings, which may be greater than the sum of 
all of the individual rules' compliance costs? Please describe 
all relevant reports or studies you have undertaken to quantify 
compliance costs for each rule you have proposed or adopted. 
Please provide an aggregate estimate of the compliance costs of 
the Dodd-Frank rules that you have proposed or adopted to date.

A.7. Thus far, the OCC has published notices of proposed 
rulemakings that would implement provisions of the Dodd-Frank 
Act concerning: Incentive-Based Compensation Arrangements; 
Retail Foreign Exchange Transactions; Credit Risk Retention; 
Capital Floors; and Margin and Capital Requirements for Covered 
Swap Entities. The OCC estimated the costs and burdens of these 
rulemakings pursuant to the Unfunded Mandates Reform Act (UMRA) 
and the Paperwork Reduction Act (PRA): UMRA requires the OCC to 
prepare a budgetary impact statement before promulgating a rule 
that includes a Federal mandate that may result in expenditure 
by State, local, and tribal governments, in the aggregate, or 
by the private sector of $100 million or more, adjusted for 
inflation, in any 1 year. PRA requires the OCC to determine the 
paperwork burden for requirements contained in its rules.
    Please note that it is difficult to estimate these costs 
with precision because these Dodd-Frank requirements are new 
and may interact with other Dodd-Frank requirements in 
unexpected ways. Thus, these estimates may change once we can 
better evaluate these interactions. The UMRA and PRA estimates 
for these rulemakings are set forth below:

    Establishing a Floor for the Capital Requirements 
        Applicable to Large Internationally Active Banks 
        (Interagency NPRM implementing DFA section 171 
        published 12/30/10). The OCC determined under the UMRA 
        that the rulemaking would add no compliance costs for 
        national banks. The OCC also determined that the 
        proposal would change the basis for calculating a data 
        element that must be reported to the agencies under an 
        existing requirement and therefore would have no impact 
        under the PRA.

    Incentive Compensation (Interagency NPRM 
        implementing DFA Section 956 published 4/14/11). 
        Pursuant to UMRA, the OCC determined that the proposed 
        interagency rule will not result in expenditures by 
        State, local, and tribal governments, or the private 
        sector, of $100 million or more in any 1 year. The OCC 
        also estimated that the total PRA burden for national 
        banks would be 17,800 hours (13,040 hours for initial 
        set-up and 4,760 hours for ongoing compliance).

    Retail Foreign Exchange Transactions (NPRM 
        implementing DFA section 742 published 4/22/11). The 
        OCC determined pursuant to UMRA that the proposed rule 
        will not result in expenditures by State, local, and 
        tribal governments, or by the private sector, of $100 
        million or more in any 1 year. OCC also estimated that 
        the total PRA burden for national banks and service 
        providers would be 67,254 hours.

    Credit Risk Retention (Interagency NPRM 
        implementing DFA section 941 published 4/29/11). 
        Pursuant to UMRA, the OCC estimated that national banks 
        would be required to retain approximately $2.8 billion 
        of credit risk, after taking into consideration the 
        proposed exemptions for qualified residential mortgages 
        and other qualified assets. The OCC also estimated the 
        paperwork burden of the various record keeping and 
        reporting requirements associated with the risk 
        retention proposal for national bank securitization 
        sponsors and creditors to be 20,483 hours.

    Margin and Capital Requirements for Covered Swap 
        Entities (Interagency NPRM implementing DFA sections 
        731 and 764 to be published 5/11/11). The OCC estimated 
        that the initial margin cost of the proposed rule is 
        $25.6 billion. Record keeping and administrative costs 
        are estimated to be approximately $10.8 million. The 
        OCC estimated the paperwork burden of complying with 
        the various record keeping and reporting requirements 
        associated with the swap margin and capital proposal to 
        be 5,780 hours.

Q.8. Section 115 of the Dodd-Frank Act asks the Financial 
Stability Oversight Council to make recommendations to the 
Federal Reserve on establishing more stringent capital 
standards for large financial institutions. In addition, 
Section 165 requires the Fed to adopt more stringent standards 
for large financial institutions relative to smaller financial 
institutions. Chairman Bernanke's testimony for this hearing 
implied that the Basel III framework satisfies the Fed's 
obligation to impose more stringent capital on large financial 
institutions. As a member of the Financial Stability Oversight 
Council, do you agree with Chairman Bernanke that the Basel III 
standards are sufficient to meet the Dodd-Frank Act requirement 
for more stringent capital standards? Please explain the basis 
for your answer.

A.8. While the FRB is still working on a proposed rulemaking to 
implement this aspect of the Dodd-Frank Act, I generally concur 
with Chairman Bernanke's assessment that the Basel III 
standards provide a suitable framework for implementing the 
enhanced prudential capital requirements for large institutions 
required by section 165 of Dodd-Frank. As noted in my written 
statement, the Basel III reforms focus on many of the same 
issues and concerns that the Dodd-Frank Act sought to address. 
Like Dodd-Frank, the Basel III reforms tighten the definition 
of what counts as regulatory capital by placing greater 
reliance on higher quality capital instruments; expand the 
types of risk captured within the capital framework; establish 
more stringent capital requirements; provide a more balanced 
consideration of financial stability and systemic risks in bank 
supervision practices and capital rules; and call for a new 
international leverage ratio requirement and global minimum 
liquidity standards. Because the Basel III enhancements can 
take effect in the U.S. only through formal rulemaking by the 
banking agencies, U.S. agencies have the opportunity to 
integrate certain Basel III implementation efforts with the 
heightened prudential standards required by Dodd-Frank. Such 
coordination in rulemaking will ensure consistency in the 
establishment of capital and liquidity standards for similarly 
situated organizations, appropriately differentiate relevant 
standards for less complex organizations, and consider broader 
economic impact assessments in the development of these 
standards.

Q.9. Numerous calls have arisen for a mandatory ``pause'' in 
foreclosure proceedings during the consideration of a mortgage 
modification. Currently, what is the average number of days 
that customers of the institutions that you regulate are 
delinquent at the time of the completed foreclosure? If 
servicers were required to stop foreclosure proceedings while 
they evaluated a customer for mortgage modification, what would 
be the effect on the foreclosure process in terms of time and 
cost. What effect would these costs have on the safety and 
soundness of institutions within your regulatory jurisdiction. 
Please differentiate between judicial and nonjudicial States in 
your answers and describe the data that you used to make these 
estimates.

A.9. OCC Mortgage Metrics data shows that the average 
delinquency status of the 608,000 completed foreclosures in 
2010 was 16.0 months--19.0 months in judicial States and 15.5 
months in nonjudicial States. For the nearly 1.3 million loans 
in process of foreclosure at December 21, 2010, the average 
delinquency was 16.9 months--17.3 months in judicial States and 
16.8 months in nonjudicial States. OCC Mortgage Metrics is a 
monthly, loan-level data collection on nearly 33 million loans 
serviced by nine of the largest U.S. mortgage servicing 
institutions.
    As stated in our testimony, the time to complete a 
foreclosure process in most States can take 15 months or more 
and in many cases can be as long as 2 years. While the OCC 
cannot directly estimate the effects of pausing foreclosure 
proceedings while a customer is being considered for a mortgage 
modification, this has the potential to further extend the time 
to complete foreclosures.
    Servicers are likely to incur additional operational costs 
with elimination of dual track as this will require changes to 
business processes, systems, and staffing. However, the OCC 
cannot directly estimate the cost to servicers associated with 
pausing foreclosure proceedings because cost will be dependent 
on a number of variables such as the amount of time it takes to 
complete a loan modification, duration of the foreclosure 
pause, and whether a modification can be accomplished.
    In addition to increased operational cost, a mandatory 
pause in foreclosure proceedings could, in certain cases, be 
contrary to investor agreements, including requirements of the 
GSEs. These conflicts could expose bank servicers to potential 
damages and penalties. Also, additional costs associated with 
introducing new procedural steps (pauses/resumptions) and time 
delay into the foreclosure process has the potential to lessen 
the net revenue stream from servicing. This may require bank 
servicers to write down the value of the mortgage servicing 
rights (MSR) carried on their balance sheet. As well, this may 
reduce the fair value and liquidity of MSRs.

Q.10. The burden of complying with Dodd-Frank will not affect 
all banks equally. Which new Dodd-Frank Act rules will have the 
most significant adverse impact on small and community banks? 
Which provisions of Dodd-Frank will have a disparate impact on 
small banks as compared to large banks? Do you expect that the 
number of small banks will continue to decline over the next 
decade? If so, is the reason for this decline the Dodd-Frank 
Act? Have you conducted any studies on the costs Dodd-Frank 
will impose on small and community banks? If so, please 
describe the results and provide copies of the studies.

A.10. While much of the focus of the reforms mandated by Dodd-
Frank is on larger financial institutions, the OCC recognizes 
that community banks will also be affected by many provisions 
of the Act. We have not conducted any specific studies on the 
costs that Dodd-Frank will impose on small and community banks. 
However, as we move forward with rulemakings to implement the 
various provisions of Dodd-Frank, we will seek comment on the 
effects of the rules on small entities as defined and provided 
for in the Regulatory Flexibility Act.
    The sheer scope and number of forthcoming regulations that 
bankers will need to be aware of and respond to will be a 
challenge for all banks, but even more so for community banks 
with limited compliance, regulatory, and legal staff.
    In her April 6, 2011, testimony before the Committee's 
Financial Institutions Subcommittee, Senior Deputy Comptroller 
Jennifer Kelly discussed some of the challenges presented for 
community banks by Dodd-Frank. \2\ As she stated in her written 
testimony, the challenges banks face have several dimensions: 
new regulation--both new restrictions and new compliance 
costs--on businesses they conduct, limits on revenues for 
certain products, and additional regulators administering both 
new and existing regulatory requirements. In the context of 
community banks, a particular concern will be whether these 
combine to create a tipping point causing banks to exit lines 
of business that provide important diversification of their 
business, and increase their concentration in other activities 
that raise their overall risk profile.
---------------------------------------------------------------------------
     \2\ Available at: http://www.occ.gov/news-issuances/congressional-
testimony/2011/pub-test-2011-42-written.pdf.
---------------------------------------------------------------------------
    For example, the Dodd-Frank Act imposes a range of new 
requirements on the retail businesses that are ``bread-and-
butter'' for many community banks. The costs associated with 
small business lending will increase when new HMDA-style 
reporting requirements become effective. Longstanding advisory 
and service relationships with municipalities may cause the 
bank to be deemed a ``municipal advisor'' subject to 
registration with the Securities and Exchange Commission (SEC) 
and rules issued by the SEC and the Municipal Securities 
Rulemaking Board. Also, checking account relationships with 
customers are likely to be reshaped to recover the costs 
associated with providing debit cards if debit interchange fees 
are restricted.
    The new Consumer Financial Protection Bureau (CFPB) is 
charged with implementing new requirements that will affect 
banks of all sizes. These include new standards for mortgage 
loan originators; minimum standards for mortgages themselves; 
limits on charges for mortgage prepayments; new disclosure 
requirements required at mortgage origination and in monthly 
statements; a new regime of standards and oversight for 
appraisers; and a significant expansion of the current HMDA 
requirements for mortgage lenders to report and publicly 
disclose detailed information about mortgage loans they 
originate (13 new data elements).
    The CFPB is also authorized to issue new regulations on a 
broad range of topics, including, but not limited to:

    additional disclosure requirements to ``ensure that 
        the features of any consumer financial product or 
        service, both initially and over the life of the 
        product, are fully, accurately, and effectively 
        disclosed to consumers in a manner that permits 
        consumers to understand the costs, benefits, and risks 
        associated with the product or service, in light of the 
        facts and circumstances'';

    new regulations regarding unfair, deceptive, or 
        ``abusive'' practices; and

    standards for providing consumers with electronic 
        access to information (retrievable in the ordinary 
        course of the institution's business) about their 
        accounts and transactions with the institution.

    While clearer, more meaningful, and accessible consumer 
disclosures are clearly desirable, it is important to recognize 
that the fixed costs associated with changing marketing and 
other product-related materials will have a proportionately 
larger impact on community banks due to their smaller revenue 
base. The ultimate cost to community banks will depend on how 
the CFPB implements its new mandate and the extent to which it 
exercises its exemptive authority for community banks.
    Community banks also may be particularly impacted by the 
Dodd-Frank Act's directive that Federal agencies modify their 
regulations to remove references to credit ratings as standards 
for determining creditworthiness. This requirement impacts 
standards in the capital regulations that are applicable to all 
banks. National banks are also affected because ratings are 
used in other places in the OCC's regulations, such as 
standards for permissible investment securities. As a result, 
institutions would be required to do more independent analysis 
in categorizing assets for the purpose of determining 
applicable capital requirements and whether debt securities are 
permissible investments--a requirement that will tax especially 
the more limited resources of community institutions.
    Regardless of how well community banks adopt to Dodd-Frank 
Act reforms in the long-term, in the near- to medium-term these 
new requirements will raise costs and possibly reduce revenue 
for community institutions. The immediate effects will be 
different for different banks, depending on their current mix 
of activities, so it is not possible to quantify those impacts 
with accuracy. In the longer term, we expect to see banks 
adjust their business models in a variety of ways. Some will 
exit businesses where they find that associated regulatory 
costs and risks are simply too high to sustain profitability, 
or they will decide how much of the added costs can, or should, 
be passed along to customers. Others will focus on providing 
products and services to the least risky customers as a way to 
manage their regulatory costs and risks. Some will elect to 
concentrate more heavily in niche businesses that increase 
revenues but also heighten their risk profile. While we know 
there will be a process of adaptation, we cannot predict how 
these choices will affect either individual institutions or the 
future profile of community banking at this stage.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                        FROM JOHN WALSH

Q.1. Can you provide your view on the Basel III framework and 
also the extent, if any, that Basel III may conflict with the 
requirements of the Dodd-Frank Act and how are you responding 
to these conflicts?

A.1. As noted in my written statement, the Basel III reforms 
focus on many of the same issues and concerns that the Dodd-
Frank Act sought to address. These reforms of the Basel 
Committee are designed to strengthen global capital and 
liquidity standards governing large, internationally active 
banks and promote a more resilient banking sector. Like Dodd-
Frank, the Basel III reforms tighten the definition of what 
counts as regulatory capital by placing greater reliance on 
higher quality capital instruments; expands the types of risk 
captured within the capital framework; establishes more 
stringent capital requirements; provides a more balanced 
consideration of financial stability and systemic risks in bank 
supervision practices and capital rules; and calls for a new 
international leverage ratio requirement and global minimum 
liquidity standards. Since the Basel III enhancements can take 
effect in the U.S. only through formal rulemaking by the 
banking agencies, U.S. agencies have the opportunity to 
integrate certain Basel III implementation efforts with the 
heightened prudential standards required by Dodd-Frank. Such 
coordination in rulemaking will ensure consistency in the 
establishment of capital and liquidity standards for similarly 
situated organizations, appropriately differentiate relevant 
standards for less complex organizations, and consider broader 
economic impact assessments in the development of these 
standards.
    My September 30, 2010, testimony before this Committee \1\ 
and my January 19, 2011, speech before the Exchequer Club \2\ 
elaborated on the interplay between Basel III framework and 
capital requirements under Dodd-Frank.
---------------------------------------------------------------------------
     \1\ Available at: http://www.occ.gov/news-issuances/congressional-
testimony/2010/pub-test-2010-119-written.pdf.
     \2\ Available at: http://www.occ.gov/news-issuances/speeches/2011/
pub-speech-2011-5.pdf.
---------------------------------------------------------------------------
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ
                        FROM JOHN WALSH

Q.1. Capital, Leverage, and Liquidity Requirements for 
Systemically Significant Firms. One of the most important 
reforms in Dodd-Frank was requiring systemically significant 
companies to hold more capital and have better liquidity to 
prevent another crisis. The crisis would not have happened had 
we not allowed big banks and some nonbanks to acquire so much 
debt and leverage. What steps are being taken to ensure that 
these capital, leverage, and liquidity requirements are 
implemented robustly?

A.1. As noted in my written testimony, the Dodd-Frank Act 
requires the banking agencies and Financial Stability Oversight 
Council to develop numerous studies and regulations that will 
materially affect the level and composition of capital and 
liquidity for both banks and certain nonbank companies. The 
requirements are similar to and reinforce actions taken by the 
Basel Committee to strengthen global capital and liquidity 
standards for large, internationally active banks (Basel III). 
Together, these reforms tighten the definition of what counts 
as regulatory capital; expand the types of risks captured 
within the regulatory capital framework; increase overall 
capital requirements; establish an international leverage ratio 
applicable to global financial institutions that constrains 
leverage from both on- and off-balance sheet exposures; and 
provide for a more balanced consideration of financial 
stability in bank supervision practices and capital rules. The 
Basel reforms also introduce global minimum liquidity standards 
that set forth explicit ratios that banks must meet to ensure 
that they have adequate short-term liquidity to offset cash 
outflows under acute short-term stresses and maintain a 
sustainable maturity structure of assets and liabilities.
    Because the Basel III enhancements can take effect in the 
U.S. only through formal rulemaking by the banking agencies, 
U.S. agencies have the opportunity to integrate certain Basel 
III implementation efforts with the heightened prudential 
standards required by Dodd-Frank. Such coordination in 
rulemaking will ensure consistency in the establishment of 
capital and liquidity standards for similarly situated 
organizations, appropriately differentiate relevant standards 
for less complex organizations, and consider broader economic 
impact assessments in the development of these standards.
    The Basel Committee is also developing a methodology to 
identify and apply heightened capital standards for globally 
significant financial institutions. As with other aspects of 
the Basel reforms, one of the challenges that the OCC and other 
U.S. banking agencies face is integrating and coordinating 
these proposals with the capital-related requirements of Dodd-
Frank.
    My written testimony also highlighted the other following 
efforts underway to implement key capital related provisions of 
Dodd-Frank:

    Under Sections 115(a) and 115(b) of Dodd-Frank, in 
        order to prevent or mitigate risk to financial 
        stability, the FSOC may make recommendations to the FRB 
        \1\ concerning the establishment of prudential 
        standards applicable to nonbank financial companies 
        supervised by the FRB and certain large bank holding 
        companies. These prudential standards, which are to be 
        more stringent than those applicable to other companies 
        that do not pose similar risk to financial stability, 
        are expected to address risk-based capital 
        requirements, leverage limits, and liquidity 
        requirements, among other provisions.
---------------------------------------------------------------------------
     \1\ Under section 165 of Dodd-Frank, the FRB, on its initiative or 
pursuant to recommendations by FSOC under Sections 115(a) and 115(b), 
shall establish prudential standards applicable to nonbank financial 
companies supervised by the FRB and certain large bank holding 
companies.

    Section 171(b) of Dodd-Frank provides for a floor 
        for capital requirements going forward. On December 30, 
        2010, the banking agencies published a notice of 
        proposed rulemaking addressing the requirements of 
        section 171(b). The public comment period on this 
        proposal closed February 28, 2011, and the Agencies are 
        currently reviewing the comments and working on a final 
---------------------------------------------------------------------------
        rule.

    Section 616(c) of Dodd-Frank amends the 
        International Lending Supervision Act of 1983 by 
        providing that each Federal banking agency shall seek 
        to make capital standards countercyclical, so that the 
        amount of required capital increases in times of 
        economic expansion and decreases in times of economic 
        contraction, consistent with safety and soundness. 
        Consistent with this provision, the agencies are 
        actively considering the establishment of 
        countercyclical capital requirements in proposed 
        regulations implementing the Basel III reforms.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                        FROM JOHN WALSH

Q.1. Safety and Soundness Concerns. In the last 2 years, 
Congress passed the Credit CARD Act reining in unfair credit 
card practices, and the Dodd-Frank Act which included new 
capital rules for banks and interchange fee reform.
    Can you please share the OCC's views of these proposals, 
specifically their effects on capital levels at nationally 
chartered banks?

A.1. As noted in my testimony, the various capital provisions 
of the Dodd-Frank Act, when coupled with the capital reforms 
that have been adopted by the Basel Committee on Banking 
Supervision (referred to as Basel III), will result in higher 
levels, and stronger components of required regulatory capital 
for national banks. For example, Basel III and section 165 of 
Dodd-Frank compel the establishment of more stringent 
prudential standards for certain large companies, including 
standards relating to risk-based capital, leverage, and 
liquidity. In addition, both Basel III and section 171 of Dodd-
Frank limit the extent to which banking organizations may use 
hybrid capital instruments, such as trust preferred securities, 
as a component of their regulatory capital base. As a result, 
both regimes will affect capital levels at nationally chartered 
banks in various ways, including: effectively requiring banks 
to hold more capital in the form of common equity; establishing 
more stringent standards on the types of risks captured within 
the regulatory capital framework; and requiring higher minimum 
regulatory capital ratios. The OCC and other U.S. banking 
agencies will be issuing a notice of proposed rulemaking that 
sets forth a proposal on how these reforms would be applied in 
the United States, and whether or not the reforms should apply 
to all U.S. banking institutions.
    Beyond changes to baseline capital standards, both Dodd-
Frank and Basel III will impose additional capital requirements 
on systemically important financial institutions, with Dodd-
Frank focusing on institutions with total consolidated assets 
of $50 billion and above.
    Two other provisions of Dodd-Frank may also have a direct 
effect on national banks' capital requirements going forward. 
Section 171 provides for a floor for any capital standards 
going forward. And, as noted in my written testimony, the 
provisions of Section 939A regarding the use of credit ratings 
in the agencies' regulations will also affect the agencies' 
current and future risk-based capital standards and may 
constrain our ability to incorporate, in a cost-efficient and 
consistent manner, more granular risk-weights that reflect the 
underlying risks of various types of assets.
    The amount by which these provisions and other provisions 
of the Dodd-Frank Act will require national banks to raise 
their current capital levels will depend in part on adjustments 
banks may make to their balance sheet compositions and business 
activities. In general, we expect that many banks will need to 
increase their capital levels by retaining more earnings and/or 
seeking new capital. In addition, we also believe that these 
and other changes--including the provisions of the Credit CARD 
Act and interchange provisions of Dodd-Frank--are compelling 
banks to revisit and make adjustments to their business models 
to reflect higher capital hurdle rates and/or reduced 
profitability for various business lines. Such adjustments may 
result in a shift to lower risk activities that require less 
capital or reductions in the amount of assets that banks choose 
to hold.

Q.2. In your testimony, you note that ``[mortgage servicing] 
deficiencies have resulted in violations of State and local 
foreclosure laws, regulations, or rules'' but that ``loans were 
seriously delinquent, and that servicers maintained 
documentation of ownership and had a perfected interest in the 
mortgage to support their legal standing to foreclose.'' There 
have been recent news reports about a nationwide foreclosure 
fraud settlement. One Wall Street Journal story stated, ``The 
deal wouldn't create any new Government programs to reduce 
principal. Instead, it would allow banks to devise their own 
modifications or use existing Government programs[.]''
    What specific laws, regulations, or rules were violated?

A.2. The Federal banking regulators conducted horizontal 
examinations of foreclosure processing at 14 federally 
regulated mortgage servicers during the fourth quarter of 2010. 
The primary objective of each review was to evaluate the 
adequacy of controls and governance over servicers' foreclosure 
processes and assess servicers' authority to foreclose. The 
reviews focused on issues related to foreclosure-processing 
functions.
    The reviews found critical weaknesses in servicers' 
foreclosure governance processes, foreclosure document 
preparation processes, and oversight and monitoring of third-
party vendors, including foreclosure attorneys. While findings 
varied across institutions, the weaknesses at each servicer, 
individually and collectively, resulted in unsafe and unsound 
practices that included violations of applicable Federal and 
State law and requirements. Our reviews found significant 
weaknesses in document preparation: improper affidavits were 
submitted and documents were notarized improperly. In many 
cases, these weaknesses constituted violations of State 
attestation and notarization requirements.

Q.3. Did the OCC's review specifically examine issues involving 
misapplication of mortgage payments or lost modification 
documents? These are the most persistent complaints that my 
office receives and the anecdotal evidence suggests that these 
problems may be widespread.

A.3. In connection with the reviews of documentation in 
foreclosure files and assessments of servicers' custodial 
activities, examiners found that borrowers whose files were 
reviewed were seriously delinquent on their mortgage payments 
at the time of foreclosure and that servicers generally had 
sufficient documentation available to demonstrate authority to 
foreclose on those borrowers' mortgages. Further, examiners 
found evidence that servicers generally attempted to contact 
distressed borrowers prior to initiating the foreclosure 
process to pursue loss-mitigation alternatives, including loan 
modifications. Documents in the foreclosure files may not have 
disclosed certain facts that might have led examiners to 
conclude that a foreclosure should not have proceeded however, 
such as misapplication of payments that could have precipitated 
a foreclosure action or oral communications between the 
borrower and servicer staff that were not documented in the 
foreclosure file.
    Examiners did note cases in which foreclosures should not 
have proceeded due to an intervening event or condition, such 
as the borrower (a) was covered by the Servicemembers' Civil 
Relief Act, (b) filed for bankruptcy shortly before the 
foreclosure action, or (c) qualified for or was paying in 
accordance with a trial modification.

Q.4. What will servicers receive in return for a national 
mortgage foreclosure fraud settlement? Will they be provided 
with immunity from any criminal prosecution?

A.4. The OCC's orders are separate from actions that could be 
taken by other agencies and provide no immunity from criminal 
prosecution.
    The OCC based its enforcement actions on the findings of 
examinations conducted as part of the interagency horizontal 
reviews undertaken by the Federal banking regulators in the 
fourth quarter of 2010. These enforcement actions do not 
preclude determinations regarding assessment of civil money 
penalties, which the OCC is holding in abeyance. As we gather 
additional information from continuing exam work and the 
``look-back'' required by our orders about the extent of harm 
from processing failures, this will inform our decision on 
civil money penalties.
    Although the OCC coordinated closely with other Federal 
agencies, the actions by the Federal banking regulators were 
not part of the Federal/State settlement efforts that remain in 
process. Having established the scope of problems in our area 
of jurisdiction, the bank regulators had to move forward. It is 
our mission to ensure both safety and soundness and fair 
treatment of consumers, and meeting those objectives demanded 
action. To delay further would have delayed providing financial 
remediation to borrowers and left safety and soundness issues 
of the banks not fully addressed.

Q.5. Will any mortgage modifications provided for in the 
settlement include principal reduction? If so, according to 
what standards?

A.5. This question relates to potential terms of the Federal/
State settlement involving multiple Federal agencies and State 
Attorneys General. The OCC's order is not part of that 
potential settlement.

Q.6. What is OCC's view of the effects of principal writedowns 
for both banks and borrowers?

A.6. The OCC is sympathetic to the plight of homeowners who may 
be facing financial difficulty in honoring their mortgage 
obligations or who are now ``underwater'' with the current 
value of the home less than what is due on their mortgage. 
However, we have significant concerns about proposals that 
would mandate a shift in mortgage modification efforts from a 
focus on making mortgage payments affordable, based on an 
analysis of the borrower's ability to repay, to one of 
principal forgiveness based on whether they are ``underwater'' 
on their mortgage. To date, mortgage modification programs have 
focused on providing borrowers with the opportunity to stay in 
their homes by making the first mortgage payment 
``affordable.'' This is done whenever the economics show it is 
better to modify than foreclose. These modifications are 
designed to solve for borrower capacity to pay rather than 
willingness to pay, an approach we think is both balanced and 
appropriate. These modifications generally do not provide for 
debt forgiveness but lenders can and have forgiven mortgage 
debts as part of certain modifications and in short sale or 
deed-in-lieu transactions.
    In contrast, Government mandates for servicers to engage in 
principal forgiveness raises a number of fundamental concerns. 
Such programs inevitably raise fairness issues with respect to 
otherwise similarly situated homeowners whose home values have 
declined. Consider the following example: two borrowers buy 
homes in the same neighborhood for $400,000 each in 2006. 
Borrower A financed 100 percent of the purchase; Borrower B put 
50 percent down. Property values in the area have since 
declined 50 percent. Borrower A obtains a loan modification 
which includes principal forgiveness down to 100 percent loan-
to-value (LTV); Borrower B is not eligible for a modification 
because his loan is already 100 percent LTV. Three years from 
now both properties have appreciated and are worth $250,000. 
Borrower A, with no funds at risk, now has equity of $50,000, 
while Borrower B has a net loss of $150,000. As this example 
illustrates; if not properly structured, a principal 
forgiveness program will reward borrowers who speculated or 
assumed excessive risk. Further, such programs could create 
moral hazard by diminishing borrowers' willingness to continue 
to make their mortgage payments should home values further 
decline.
    Proposals that call for mortgage servicers, rather than the 
investors who own the underlying mortgage, to bear the bulk of 
losses associated with any principal forgiveness program 
likewise raise concerns about equitable treatment. It is the 
investor, not the servicer, who assumed the risk when 
purchasing the mortgage. Apart from the fees associated with 
their role as servicer, the servicer does not receive and is 
not entitled to returns (principal and interest) from the 
mortgage, but yet under some proposals, would be forced to 
assume much of the loss associated with principal write downs.
    In summary, the mortgage market developed with all 
established set of readily understood rules and practices which 
are embedded in law and contracts. This includes lien 
preferences, private mortgage insurance, and when borrowers are 
responsible for deficiency balances. In proposing debt 
forgiveness outside of these existing frameworks, one will 
likely enrich some at the expense of others because existing 
contracts/practices could not have envisioned the debt 
forgiveness structure. The unintended consequences may well be 
hard to anticipate or control.
    If pursued, principal forgiveness should be tied to 
borrower need based on verified capacity to repay. Providing 
principal forgiveness in situations where a borrower will still 
be unlikely or unwilling to make the new payments on a 
sustained basis simply delays the recognition of loss and the 
ultimate resolution of the underlying property.
    Finally, it is important to stress that the issue of 
principal forgiveness is distinct and separate from requiring 
banks to recognize losses on mortgages that they hold. While 
the OCC has and continues to encourage bankers to work 
constructively with troubled borrowers by offering sustainable 
mortgage modifications, we have been equally clear that bankers 
must maintain systems to identify problem assets, estimate 
incurred credit losses for those assets, and establish 
appropriate loan loss reserves and/or initiate write-downs 
sufficient to absorb estimated losses consistent with generally 
accepted accounting principles and regulatory policies.

Q.7. Should banks be setting aside capital to cover investors' 
mortgage-backed securities putback claims? What are the current 
regulatory obstacles, if any, to their doing so?

A.7. We are directing national banks to maintain adequate 
reserves for potential losses and other contingencies and to 
make appropriate disclosures, consistent with applicable U.S. 
generally accepted accounting principles and Securities and 
Exchange Commission's disclosure rules. We do not believe there 
are any regulatory obstacles that prevent banks from taking 
such actions.

Q.8. Please describe your agencies' views of the risks related 
the banks' servicing divisions, including:
    The losses stemming from the servicing divisions of the 
banks that you regulate.

A.8. The costs to service loans have increased as a result of 
the dramatic increase in loan defaults and associated loss 
mitigation activities. For example, the average annual cost to 
service a loan with capitalized mortgage servicing rights has 
increased from $81 per loan in 4Q2009 to $105 in 4Q2010, an 
increase of 30 percent. In addition, the cost to service will 
further increase as servicers implement remedial actions to 
address well publicized foreclosure documentation and 
processing deficiencies. These rising costs, when not offset by 
servicing income and fees, may have an adverse effect on 
mortgage banking profitability. In addition, a prolonged 
decline in net servicing income may depress the value and 
marketability of mortgage servicing rights (MSR) assets, a 
significant component of bank Tier 1 capital at banks with 
large mortgage servicing operations.

Q.9. What further losses, if any, do you expect.

A.9. Increased cost to service, particularly on delinquent or 
defaulted loans and loans in foreclosure, is likely a permanent 
change to the mortgage banking business model. In addition, 
reforms effected through uniform national servicing standards 
may further add to servicer costs due to required changes in 
staffing, processes, and systems needed to implement the new 
standards. While some of this higher cost may be variable, 
depending on the volume of mortgage delinquencies and 
foreclosures, much of the additional cost will be fixed. 
Mortgage banking companies likely will attempt to recover the 
additional costs through higher servicing fees to the extent 
permissible by law and investor guidelines, which in turn may 
be passed on to borrowers in the form of higher interest rates 
and loan fees.

Q.10. How have your agencies have changed your examination 
procedures relating to banks' servicing divisions.

A.10. In the coming months, OCC examiners will be assessing 
adequacy of action plans related to the enforcement actions 
taken against the eight largest national bank mortgage 
servicers, and validating implementation of required remedial 
actions, including customer restitution when necessary. This 
supervisory assessment of compliance with formal enforcement 
actions will result in increased regulatory oversight and 
supervision over mortgage servicing operations.

Q.11. Whether there will be uniform standards for servicing 
examination across all Federal banking agencies.

A.11. The OCC, along with the other Federal banking agencies, 
is currently engaged in an effort to establish national 
mortgage servicing standards to promote the safe and sound 
operation of mortgage servicing and foreclosure processing, 
including standards for accountability and responsiveness to 
borrower issues. These national standards will improve the 
transparency, oversight, and regulation of mortgage servicing 
and foreclosure processing, and establish additional thresholds 
for responsible management and operation of mortgage servicing 
activities. Uniform national mortgage servicing and foreclosure 
processing standards that are consistently applied and enforced 
across the industry would reduce the complexity and risk 
associated with the current servicing environment, help promote 
accountability and appropriateness in dealing with consumers, 
and strengthen the housing finance market. This initiative to 
develop and enforce uniform national servicing standards will 
require close coordination among the agencies and will include 
engaging the Government-sponsored enterprises (GSEs), private 
investors, consumer groups, the servicing industry, and other 
regulators.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                        FROM JOHN WALSH

Q.1. For each of the witnesses, though the Office of Financial 
Research does not have a Director, what are each of you doing 
to assist OFR in harmonizing data collection, compatibility, 
and analysis?

A.1. The OCC continues to work closely with staff within the 
Department of Treasury responsible for standing up the Office 
of Financial Research (OFR). Senior OCC officials have 
participated in regular meetings at Treasury, sharing 
information, commenting on proposals, and providing other input 
based on the OCC's experience working with supervisory and 
other banking data.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                        FROM JOHN WALSH

Q.1. Community Banks and Economic Growth. I have heard from 
some of my local community banks that certain capital, 
accounting, and examination rules may be working at cross 
purposes with the ability of community banks to serve the 
economic growth needs of the families and small businesses they 
serve in their communities, especially when compared to 
standards applied to the largest national banks. I wish to 
bring several to your attention and ask that you comment:

    The Financial Accounting Standards Board's proposed 
        exposure draft on ``Troubled Debt Restructurings'' 
        (TDRs) has been pointed out as possibly creating a 
        capital disincentive for banks to engage in work-outs 
        and modifications with their business borrowers because 
        of the effect of immediately having to declare those 
        loans ``impaired.'' In addition, for banks over $10 
        billion in asset size, there may be additional direct 
        costs for FDIC premiums based on a formula that 
        considers TDR activity.

    The disallowance to Risk-Based Capital of the 
        amount of Allowance for Loan Losses (ALLL) in excess of 
        1.25 percent of Risk Weighted Assets has been flagged 
        as a challenge in this environment, where some firms 
        have ALLL that significantly exceeds that threshold. 
        This may serve to understate the risk-based capital 
        strength of the bank, adding to costs and negatively 
        impacting customer and investor perceptions of the 
        bank's strength.

    It has been reported that examiners have rejected 
        appraisals that are less than 9 months old when 
        regulatory guidance calls for accepting appraisals of 
        up to 12 months.

    Community banks are subject to examination in some 
        cases as frequently as every 3 months. In contrast, 
        some suggest that our largest national banks may not 
        ever undergo an examination as thorough, with the 
        challenges surrounding loan documentation, foreclosure, 
        and MERS as a glaring example of the results.

    Are there regulatory or supervisory adjustments in these or 
related areas that need to be made to facilitate community 
banks' abilities to serve their communities?
    In addition, have you considered ways in which capital 
charges, accounting rules, and examination rules for community 
banks in particular can be adapted to be less procyclical, such 
that they do not become stricter into an economic downturn and 
lighter at the top of an upturn?
    Finally, what procedures do you have in place to ensure 
that our community banks and our largest national banks are not 
subject to differing examination standards, even when they are 
examined by different regulators?

A.1. The OCC is mindful of the economic challenges, and the 
regulatory and compliance burdens facing community banks. As we 
develop regulations, supervisory policies, and examination 
standards, we strive to provide sufficient flexibility in the 
application of those standards to reflect the size and 
complexity of the institution. To put it a different way, while 
all national banks are generally held to the same set of 
standards and regulations, the methods and controls they use to 
implement those standards may vary, based on their size and 
complexity. \1\ As the complexity and scope of a bank's 
activities increase, so do our expectations for their internal 
controls and risk management systems.
---------------------------------------------------------------------------
     \1\ There are some instances where we apply different standards. 
For example, under the OCC's risk-based capital rules, the largest 
national banks are subject to the so-called advanced approaches rule 
for computing risk-based capital for credit risk and are also subject 
to an operational risk capital component.
---------------------------------------------------------------------------
    The OCC applies the same risk-based supervisory philosophy 
for community and large bank examinations for evaluating risk, 
identifying material and emerging problems, and ensuring that 
individual banks take corrective action before problems 
compromise their safety and soundness. The OCC's Bank 
Supervision Process examination handbook establishes a common 
examination philosophy and structure that is used at all 
national banks. This structure includes a common risk 
assessment system that evaluates each bank's risk profile 
across eight risk areas--compliance, credit, interest rate, 
liquidity, operational, price, reputation, and strategic--and 
assigns an overall composite and component ratings on a bank's 
capital adequacy, asset quality, management, earnings, 
liquidity, and sensitivity to market risks using the 
interagency Uniform Financial Institution Rating System 
(CAMELS).
    With respect to specific issues you raised for comment:

The Financial Accounting Standards Board (FASB) Proposed Exposure Draft 
        on Troubled Debt Restructurings

    When the FASB first issued the exposure draft on troubled 
debt restructurings, we had concerns about their interpretation 
that potentially created automatic triggers of TDR 
determinations based on credit availability in the market to 
borrowers. We believe the proposal would have caused a 
significant increase in the number of troubled debt 
restructurings reported by our banks. However, after receiving 
comments from the public including our comment letter, the FASB 
changed its position to be consistent with the way our 
examiners currently evaluate modifications. As a result, we 
expect that the final guidance from the FASB will have very 
little impact on our national banks.

Cap on the Amount of Allowance for Loan and Lease Losses (ALLL) Allowed 
        in Risk-Based Capital

    Under the agencies' risk-based capital rules, a bank may 
include as a component of their Tier 2 capital, their ALLL up 
to a maximum of 1.25 percent of risk-weighted assets. Part of 
the rationale for this limitation is that ALLL covers losses 
that a bank expects to incur, whereas the purpose of holding 
capital is to cover unforeseen or unexpected losses. Given 
these relatively distinct functions, the U.S. banking agencies 
have historically limited the amount of ALLL that can be 
counted towards a bank's capital base. Nevertheless, we 
recognize the challenges this limitation has created for many 
banks and will consider this issue as we move forward with 
revising our capital regulations.

Frequency of Appraisals

    The agencies' real estate lending regulations and 
guidelines set forth the requirement that banks should have 
policies and procedures that address the type and frequency of 
collateral valuations. The frequency of such valuations is case 
specific and will depend upon market conditions and the nature 
and status of the collateral being financed. For properties or 
projects that are performing as planned, prudent guidelines 
might specify obtaining periodic updated valuations for 
portfolio risk monitoring. The October 2009 interagency Policy 
Statement on Prudent Commercial Real Estate Loan Workouts 
stated:

        As the primary sources of loan repayment decline, the 
        importance of the collateral's value as a secondary 
        repayment source increases in analyzing credit risk and 
        developing an appropriate workout plan. The institution 
        is responsible for reviewing current collateral 
        valuations (i.e., an appraisal or evaluation) to ensure 
        that their assumptions and conclusions are reasonable. 
        Further, the institution should have policies and 
        procedures that dictate when collateral valuations 
        should be updated as part of its ongoing credit review, 
        as market conditions change, or a borrower's financial 
        condition deteriorates.

    For loans that are experiencing financial difficulty or 
being restructured or worked out, we would expect a bank to 
understand its collateral risk by having or obtaining current 
valuations of the collateral supporting the loan and workout 
plan.
    The OCC has emphasized these concepts in our guidance to 
examiners. In a September 2008 memorandum we explained:

        There are no standard criteria for determining the 
        useful life of an appraisal (may be less than a year; 
        may be more than a year). Considerations for 
        reappraisal should include the age of the original 
        appraisal, the condition of the underlying property, 
        and changes in market conditions. Some factors that may 
        necessitate the ordering of a new or updated appraisal 
        include: measurable deterioration in the performance of 
        the project, marked deterioration in market conditions, 
        material variance between actual conditions and 
        original appraisal assumptions, volatility of the local 
        market, change in project specifications (condo to 
        apartment; single tenant to multitenant; etc.), loss of 
        significant lease or take-down commitment, increase in 
        presales fallout, inventory of competing properties, 
        and changes in zoning or environmental contamination.

Frequency of Examinations

    The frequency of on-site examinations of insured depository 
institutions is prescribed by 12 U.S.C. 1820(d). Under these 
provisions, national banks must receive a full-scope, on-site 
examination at least once during each 12-month period. This 
requirement may be extended to 18 months if all of the 
following criteria are met:

    Bank has total assets of less than $500 million.

    Bank is well capitalized as defined in 12 CFR 6.

    At the most recent examination, the OCC assigned 
        the bank a rating of 1 or 2 for management as part of 
        the bank's rating under UFIRS and assigned the bank a 
        composite UFIRS rating of 1 or 2.

    Bank is not subject to a formal enforcement 
        proceeding or order by the FDIC, OCC, or the Federal 
        Reserve System.

    No person acquired control of the bank during the 
        preceding 12-month period in which a full-scope, on-
        site examination would have been required but for this 
        section.

    The frequency of our on-site examinations for community 
banks follows these statutory provisions, with on-site 
examinations occurring every 12 to 18 months, depending on the 
bank's size and condition. The scope of these examinations is 
set forth in the OCC's Community Bank Supervision handbook and 
requires sufficient examination work to complete the core 
assessment activities in that handbook, and determine the 
bank's Risk Assessment and CAMELS ratings. The depth and 
specific areas of examination focus are determined by the level 
and nature of the bank's risks. More frequent examinations may 
be conducted if the bank is operating under all enforcement 
action, if there have been material changes in the bank's 
condition or activities, or if it is a troubled institution. 
For all community banks, on-site activities are supplemented by 
off-site monitoring and quarterly analyses to determine if 
significant changes have occurred in the bank's condition or 
activities.
    For the largest national banks, the OCC maintains an on-
site resident examination staff that conducts ongoing 
supervisory activities and targeted examinations of specific 
areas of focus. As in our community bank program, examiners 
must also conduct sufficient work to complete the core 
assessment activities set forth in the OCC's Large Bank 
Supervision handbook, and determine the bank's Risk Assessment 
and CAMELS ratings.

Procyclical Accounting and Capital Requirements

    The OCC, both independently and as part of discussions 
within the Basel Committee and other groups, has considered 
ways to make capital charges, accounting rules, and examination 
rules less procyclical for banks, including community banks. 
For example, as part of the Basel III enhancements announced in 
December, the Basel Committee is introducing a number of 
measures to address procyclicality and raise the resilience of 
the banking sector in good times. These measures have the 
following key objectives:

    constrain leverage in the banking system through 
        the introduction of all international leverage ratio;

    dampen any excess cyclicality of the minimum 
        capital requirement;

    promote more forward-looking loan loss provisions; 
        and

    conserve capital to build buffers at individual 
        banks and the banking sector that can be used in 
        stress.

    As it relates to efforts to constrain procyclicality of 
loan loss provisioning, the OCC has been a strong proponent of 
the need to make the ALLL more forward looking so that banks 
can appropriately build their reserves when their credit risk 
is increasing, rather than waiting until such losses have been 
incurred. The OCC has been actively engaged in efforts by the 
FASB and the International Accounting Standards Board (IASB) to 
revise the current impairment model for recognizing loan losses 
to provide for more forward-looking reserves. As part of this 
effort, OCC staff has served as the U.S. banking agencies' 
representative on the IASB's Expert Advisory Panel on 
Impairment.
    In addition, section 616(c) of the Dodd-Frank Act requires 
the Federal banking agencies to seek to make capital standards 
and other provisions of Federal law countercyclical. The 
Agencies will continue efforts to mitigate procyclicality in 
regulations and guidance, consistent with this statutory 
mandate, including those requirements adversely affecting 
community banks.

Q.2. Our largest financial firms today operate across many 
national boundaries. Some firms are aiming to conduct 50 
percent or more of their business internationally. Can you 
update the Committee on the status and any challenges regarding 
the establishment of mechanisms, plans, and other aspects of 
coordination between international regulatory bodies to ensure 
that financial firms operating internationally can be 
effectively placed into the Dodd-Frank resolution regime and 
are not otherwise able to attain ``too big to fail'' status 
through international regulatory arbitrage?

A.2. There are a number of significant efforts, domestically 
and internationally, that have taken place or are in process to 
address the difficult issue of cross-border resolution of 
financial institutions. A major challenge in resolving cross-
border firms is the disparate nature of jurisdictional 
resolution laws and procedures along with the jurisdictional 
nature of costs associated with the resolution of such firms. 
As the issues are quite complex, solutions are being sought on 
multiple fronts, as follows:

    Crisis Management Groups (CMGs) have been 
        established and operational for over a year for the 
        world's largest banks. The CMGs are comprised of the 
        home and major host supervisors of such institutions 
        and are working with the firms to develop recovery and 
        resolution plans (RRPs). RRPs detail contingency plans 
        to address situations of severe distress and failure of 
        these global firms.

    The U.S. regulators (primarily the FDIC) are 
        holding bilateral meetings with foreign jurisdictions 
        to identify solutions to resolution issues (e.g., 
        requirements to recognize a bridge bank) that have been 
        identified at the CMG meetings.

    The Financial Stability Board (FSB) is developing 
        guidance on the essential elements of recovery and 
        resolution plans and criteria for authorities to assess 
        the resolvability of individual institutions. U.S. 
        regulators are also currently engaged in writing 
        regulations for the implementation of Section 165(d) of 
        the Dodd-Frank Act, which requires designated firms to 
        submit resolution plans.

    The Basel Committee on Banking Supervision (BCBS) 
        has developed recommendations for cross-border 
        resolutions, and is currently surveying members on 
        implementation of those recommendations.

    The FSB is also developing guidance on cross-border 
        resolutions that will identify the essential resolution 
        tools and powers, including: sector-specific attributes 
        of resolution regimes that are necessary to protect 
        depositors, policy holders, and investors, as well as 
        restructuring mechanisms, which may include contractual 
        and/or statutory debt-equity conversion and write-down 
        tools; critical framework conditions for effective 
        cross-border cooperation and information sharing in 
        managing and resolving a distressed financial 
        institution; and essential elements of institution-
        specific cross-border cooperation agreements.

    The FSB and BCBS are evaluating the feasibility of 
        contractual and statutory bail-ins to serve as a loss-
        absorption instrument and resolution tool in the 
        national context and in the context of systemic cross-
        border firms.

Q.3. Please also update the Committee on the status of the 
regulation of international payments systems and other internal 
systemic financial market utilities so that the entities that 
manage or participate in them are not able to avoid the 
resolution regime through international regulatory arbitrage.

A.3. Section 804 of the Dodd-Frank Act provides the Financial 
Stability Oversight Council (the Council or FSOC) with the 
authority to identify and designate as systemically important a 
financial market utility (FMU) if the Council determines that 
the failure of the FMU could create or increase the risk of 
significant liquidity or credit problems spreading among 
financial institutions or markets and thereby threaten the 
stability of the U.S. financial system. At its March 18, 2011, 
meeting, the Council approved the publication of a NPRM that 
describes the criteria, analytical framework, and process and 
procedures the Council proposes to use to designate an FMU as 
systemically important. The NPRM includes the statutory factors 
the Council is required to take into consideration and adds 
subcategories under each of the factors to provide examples of 
how those factors will be applied. The NPRM also outlines a 
two-stage process for evaluating and designating an FMU as 
systemically important.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                        FROM JOHN WALSH

Q.1. Dodd-Frank requires that risk retention be jointly 
considered by the regulators for each different type of asset 
and includes a specific statutory mandate related to any 
potential reforms of the commercial mortgage-backed securities 
to limit disruptions. Given the importance of rigorous cost-
benefit and economic impact analyses and the need for due 
consideration of public comments, do your agencies need more 
time than is provided by the looming April deadline?

A.1. The agencies published a proposed rule to implement the 
Dodd-Frank credit risk retention requirements on April 29, 
2011; public comments on the proposal are due on June 10, 2011. 
The fact that the agencies did not issue final rules by the 
April, 2011, statutory deadline reflects the complexity of the 
rulemaking and the care necessary to strike the right balance 
among the various public policy objectives of the statute. The 
OCC and the other agencies intend to proceed promptly to 
consider the comments and prepare a final regulation once the 
comment period has closed.
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