[Senate Hearing 112-25]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 112-25

 
 THE FISCAL YEAR 2012 BUDGET FOR THE SECURITIES AND EXCHANGE COMMISSION

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                 SECURITIES, INSURANCE, AND INVESTMENT

                                 of the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE FISCAL YEAR 2012 BUDGET FOR THE SECURITIES AND EXCHANGE 
                               COMMISSION

                               __________

                             MARCH 10, 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

                       Dawn Ratliff, Chief Clerk

                     William Fields, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

         Subcommittee on Securities, Insurance, and Investment

                   JACK REED, Rhode Island, Chairman

              MIKE CRAPO, Idaho, Ranking Republican Member

CHARLES E. SCHUMER, New York         PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          MARK KIRK, Illinois
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
HERB KOHL, Wisconsin                 JIM DeMINT, South Carolina
MARK R. WARNER, Virginia             DAVID VITTER, Louisiana
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina
TIM JOHNSON, South Dakota

                       Kara Stein, Staff Director

                Gregg Richard, Republican Staff Director

                       Paul Saulski, SEC Detailee

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        THURSDAY, MARCH 10, 2011

                                                                   Page

Opening statement of Chairman Reed...............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     3
        Prepared statement.......................................    24
    Senator Menendez.............................................     5
    Senator Warner...............................................     6

                                WITNESS

Mary L. Schapiro, Chairman, Securities and Exchange Commission...     6
    Prepared statement...........................................    24
    Responses to written questions of:
        Chairman Reed............................................    34
        Senator Schumer..........................................    36
        Senator Crapo............................................    38

              Additional Material Supplied for the Record

Letter submitted by North American Securities Administrators 
  Association, Inc...............................................    42

                                 (iii)


 THE FISCAL YEAR 2012 BUDGET FOR THE SECURITIES AND EXCHANGE COMMISSION

                              ----------                              


                        THURSDAY, MARCH 10, 2011

                                       U.S. Senate,
    Subcommittee on Securities, Insurance, and Investment,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:32 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Jack Reed, Chairman of the 
Subcommittee, presiding.

            OPENING STATEMENT OF CHAIRMAN JACK REED

    Chairman Reed. Let me call the hearing to order. I want to 
first thank Chairwoman Schapiro for joining us today, but also, 
I want to say how much I look forward to working with Senator 
Crapo. We have had the privilege, from my standpoint, of 
working together now for many years on the Committee and I look 
forward to working with you as the Ranking Member of this 
Subcommittee.
    But Chairman Schapiro, welcome. You are here today to 
testify on the fiscal year 2012 budget for the Securities and 
Exchange Commission.
    This morning, we are looking at the funding needs of the 
SEC. We will address the question of funding to determine 
whether the agency has the necessary resources to effectively 
supervise and protect our capital markets. These markets are 
central to our financial system and promote capital formation 
and appropriate capital allocation, drive innovation, create 
jobs, and promote economic growth.
    The SEC is literally the cop that patrols and safeguards 
our markets, and no one would consider withholding resources to 
our Nation's police and stripping them of the personnel and 
equipment they need to keep our homes and communities safe, but 
in some respects, that has happened to the SEC in the past. We 
have to make sure you use the resources wisely, but you have to 
have adequate resources to carry out these important tasks.
    For example, between 2005 and 2007, just as the markets 
were reaching a critical stage, the SEC's budget was frozen or 
cut. As a result of these budget constraints, the SEC lost 10 
percent of its staff, which severely hampered its enforcement 
and its examination programs, effectively taking these cops off 
the street just when they were most needed. Even now, frozen at 
the 2010 funding levels, the number of SEC staff has just only 
returned to where it was prior to 2005.
    Similarly, the SEC's investment in needed technology has 
been significantly circumscribed due to funding constraints, 
and in this world, I think the point was made in the Chairman's 
testimony, some of the companies that you regulate invest more 
money annually in information technology than your entire 
budget, and it is like trying to catch a fast sports car with 
my 1991 Ford Escort. It will not happen unless you get a little 
upgrade.
    These manpower and technology constraints are occurring 
even though the workload of the SEC has increased considerably. 
A significant portion of the increased workload is due to the 
recent financial crisis and the important responsibilities 
placed on the SEC under the Dodd-Frank Act.
    At the same time, the SEC is overseeing an increasingly 
vast and complex market. For example, from 2005 to 2007, during 
the same time that SEC resources were being slashed, the 
trading activities of the equities, options, and securities 
firms markets increased by $3.5 trillion, a remarkable 91 
percent increase in the activity of the institutions you 
supervise.
    Over the past several years, the markets have become 
increasingly globalized and technologically driven. The result 
is that the markets are now larger, more complex, more 
volatile, and more intertwined. Without adequate resources, the 
SEC will be unable to respond to these market changes, and I 
fear will be only setting the stage for the next market crisis 
or crash.
    I think one of the lessons I drew is that if we do not 
properly regulate the markets, then it should come as no 
surprise when they overshoot, when natural energies, as some 
have described, take over rationality and we have economic 
disasters, and unfortunately, we all end up paying for it.
    On the other side, there are some who suggest that we 
cannot afford to fund the SEC in this time of fiscal belt-
tightening. Well, I do not think this argument is accurate on 
the face. First of all, the SEC does not cost the taxpayer a 
dime. Ever since Congress amended the securities laws in 1996, 
100 percent of the SEC's funding comes from Wall Street 
registration and filing fees. As a result, no matter the 
funding level, the SEC budget has no effect on the Federal 
deficit or budget.
    And as for the fees assessed against Wall Street, when 
considering the huge transaction volumes, these fees are 
practically negligible. The vast majority of SEC funding is 
derived from Section 31 securities transaction fees, which are 
currently levied at $19.20 per million dollars in transaction. 
That works out roughly to two cents per $1,000 of 
transactions--two cents per $1,000 of transactions. And this, 
indeed, is a very small price for an industry that relies so 
much on the confidence of investors that you are doing our job, 
that you are forcing them to be fully disclosing their 
information that is relevant to investment decisions.
    Now, others have suggested that defunding the SEC is really 
just a means to repeal Dodd-Frank. I think that would be a 
very, very misguided approach. If there are issues with respect 
to the legislation, they should be addressed legislatively, 
explicitly, up front. I have not participated in a legislative 
activity that cannot be improved by thoughtful, careful 
consideration. But simply to deny funding to the agencies 
involved in implementation is wrong, and I think drastically 
and dreadfully wrong, because it will result, as I have just 
suggested, in market disruptions that we will all pay for much, 
much more.
    The Dodd-Frank Act has gone a long way to addressing, I 
think, some of the issues that caused the financial crisis. 
These reforms, once implemented, will make our capital markets 
fairer, safer, and less prone to systemic collapse. It will 
bring investors and insurers back into the market to benefit 
the entire economy.
    For this to happen, though, and I repeat again and again, 
the SEC needs the resources to do their job effectively, and I 
am afraid if the SEC is denied these resources, if there is no 
cop on the beat with the funding it needs to oversee these 
markets, we will not only endanger economic growth, but we 
could, indeed, sow the seeds for the next financial crisis, 
which we cannot afford and we do not want to impose upon the 
country again.
    But thank you very much, and again, let me recognize the 
Ranking Member, Senator Crapo, for his opening remarks, and 
once again say what a privilege it is to serve with you.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman, and I 
agree and want to reflect the same feelings in terms of my 
appreciation of working with you over the years. I look forward 
to our service together on this Subcommittee on some of the 
issues that are some of the most critical to our Nation as we 
seek to revive and strengthen our economy. So again, I look 
forward to that and appreciate your comments.
    Chairman Schapiro and Mr. Chairman, as I look at the SEC 
budget, I find myself of two minds because, on the one side, I 
completely agree with the comments that the Chairman made about 
how important the functions of the SEC are, and, frankly, I 
recognize that there has been underfunding in the past that has 
not allowed the SEC to aggressively and effectively do its job 
and have been one of those who has been willing to see the 
budget of the SEC supplemented in such a way that it can get 
the task done.
    On the other hand, I am one of those who would like to see 
Dodd-Frank slowed down, and, frankly, think that we made a 
mistake when we passed the Dodd-Frank legislation. And although 
the budget of the SEC comes from fees, not from taxpayer 
dollars, I also view the current debt crisis that we are in as 
one that requires that across all levels of Government, whether 
it is the income tax or whether it is a fee on transactions, 
that we pay very careful attention that we not just drive up 
the cost of Government to the taxpayer or to the consumer 
without paying very, very close attention to the need to become 
much more efficient and much more effective with taxpayer and 
consumer dollars. So I see both sides of this equation.
    It was recently announced that we are yet facing another 
record Federal deficit at $1.6 trillion, and the budget that we 
recently received from the President would result in doubling 
the national debt to more than $26 trillion by the end of the 
decade. As a member of the President's Fiscal Commission on 
Responsibility and Reform who voted to support the report that 
would confront our ever-increasing national deficit and the 
unrestrained spending, I believe all agencies and programs 
should be prepared to engage in this process and that all 
budgets have to be evaluated.
    The Dodd-Frank Act gave the SEC many new oversight 
responsibilities, including writing new rules that would 
ensure--and ensuring that they are reformed and regulating new 
entities. The SEC will need to devote staff to these 
responsibilities, particularly once the rules take effect. The 
new demand for resources presents an opportunity, in my mind, 
to undertake an agency-wide examination of how existing 
resources are being expended and whether any of them can be 
better utilized.
    Some of the questions that need to be answered in my mind 
are, what factors went into determining how many people would 
be needed for each Dodd-Frank area of responsibility and at 
what time period would they be needed? Are there ways to use 
technology both to make existing staff more productive and to 
reduce the number of employees needed for Dodd-Frank 
responsibilities? Has the SEC worked with the CFTC to share 
information technology development costs for the oversight of 
the OTC derivatives market?
    While the Dodd-Frank Act, in my opinion, missed a great 
opportunity to merge the SEC and the CFTC and stop the 
bifurcation of the futures and securities markets, there is no 
reason why we should not push for more coordination, more 
consistent rules, and, frankly, budgetary savings. A recent 
report by GAO shows duplication among the efforts of a number 
of Federal programs which may cost our Government more than 
$100 billion in overlapping efforts.
    We must continue to think strategically about the areas of 
the market that pose the greatest risk and which areas of 
potential improvement hold the greatest benefit to investors. 
The objective should be to apply taxpayer resources in ways 
that provide the biggest investor protection bang for the buck.
    In a short time period, the Dodd-Frank Act requires the SEC 
to promulgate more than 100 new rules, to create five new 
offices, and to conduct more than 20 studies and reports. The 
volumes of this rulemaking and the unrealistic Congressional 
time line that was imposed, I think, poses a significant 
challenge to the SEC.
    Madam Chairman, as you know from our conversations and 
communications, I think that there is a very potential likely 
impact of the Dodd-Frank Act that will be not only enormous, 
but will generate costs of of which we have no idea yet in 
terms of their ultimate scope. Given our prior experience, such 
as the original estimates about the cost of Sarbanes-Oxley in 
2002, these actual costs are going to prove substantially more 
significant than either legislators or regulators contemplated.
    It is more important than ever that the SEC allow for 
meaningful public comment and economic analysis than it is to 
rush through these rules and risk undermining the integrity of 
the process. And regardless of the ultimate outcome of the 
budget issues, I, again, encourage you to make sure that we 
undertake the careful, thoughtful evaluation of the rules that 
are now authorized and required under Dodd-Frank and do so in a 
way that does evaluate the economic impact as well as the other 
policy-oriented impacts that are at risk. The potential harm to 
our already weak economy and the public from ill-conceived 
rules, in my opinion, cannot be understated.
    So with that, Mr. Chairman, I appreciate the opportunity to 
make these comments and look forward to the testimony.
    Chairman Reed. Thank you very much, Senator Crapo.
    Senator Menendez, do you have some opening comments?

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman, just a few brief 
ones. Madam Chair, thanks for joining us.
    Mr. Chairman, what I want to ensure is that we do not 
relive what this country went through in 2008, and in part, 
that is because we did not have the type of robust regulatory 
regime and enforcement that is necessary to ensure that while 
we have a free market--and I am all for a free market, but 
there is a difference between a free market and a free-for-all 
market. Many of us believe that we had a free-for-all market, 
and part of that was the lack of robust regulatory oversight 
and having a cop at the beat instead of asleep at the switch.
    And so I am seriously concerned, and I want to thank you, 
Mr. Chairman, as well as Senator Johnson, the Chairman of the 
full Committee, and 13 other colleagues who have signed a 
letter that we are sending to Senate appropriators requesting 
that they fund the Securities and Exchange Commission and the 
CFTC at the higher levels requested in the President's budget 
for fiscal year 2012.
    I listen to families back in New Jersey all the time who 
always question, well, why is it that this happened, and when I 
make a mistake, I have to pay for my mistake, and when they 
make a mistake, I have to pay for their mistakes. And I 
understand that type of thinking. There are a lot of middle-
class families back in New Jersey who lost a good part or all 
of their life savings because of swindlers on Wall Street.
    So we need to have a strong cop on the beat to police Wall 
Street and I believe it would be a grave mistake to reduce 
funding for the SEC--and I know this is not the subject of 
today's hearing, but for that fact, the CFTC--as, for example, 
House Republicans do under H.R. 1. It is the worst possible 
time to do that, just as these agencies are being asked to 
undertake the Herculean task of implementing the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, and that is a 
task that I believe is absolutely critical to protecting 
middle-class investors. Our regulators have to be given the 
resources to get it done and then we can hold them accountable.
    This proposal also comes after a prolonged period in which 
the markets they are expected to regulate have exploded while 
their funding has remained about the same.
    You know, just by way of examples, and this is only 
examples, Goldman Sachs generated $8.3 billion in profit in 
2010 alone, five times more than the size of President Obama's 
funding request. In 2005, the SEC had provided 19 examiners for 
a trillion dollars in investment under management. Today, that 
figure stands at 12 examiners per trillion dollars. And in 
2010, the SEC returned $2.2 billion to harmed investors, twice 
the agency's budget.
    So I do not think, especially when this funding, in 
essence, comes from fees collected from the industry, that it 
makes a lot of sense to undermine the entity that we want to 
see as the cop on the beat.
    I look forward to today's hearings and I want to thank you, 
Mr. Chairman, for your leadership in this regard.
    Chairman Reed. Senator Warner, do you have comments?

              STATEMENT OF SENATOR MARK R. WARNER

    Senator Warner. I will just make a brief comment. First of 
all, Mr. Chairman, thank you for holding this hearing and I 
think it is great to see Chairman Schapiro.
    I just want to, somewhere between both of my colleagues' 
comments--this is for myself--I concur with the Ranking Member 
and commend his leadership on the Deficit Commission and 
everything has to be on the table and how can we become more 
effective at every dollar we spend, although I would, as 
Senator Menendez has pointed out, the fees, since they are paid 
by people who receive the SEC services, this does not affect 
the deficit in any way.
    But I think as any good investor or business person knows, 
and somebody who spent a career in business before getting in 
this job, even during tight times, you have got to make 
targeted investments, and the amount of money that is involved 
in the financial system, in trying to regulate that and trying 
to at least not so much regulate, I would say, but as to make 
sure--and this is where my questioning will go when I get my 
time--make sure that investors have confidence in our systems 
and the markets, confidence that I would argue was robbed in 
2008 and then re-robbed again with the flash crash in 2010. And 
I think there is an extraordinarily important public purpose 
that the SEC serves about that question of confidence in the 
markets that, in a sense, trumps even some of the regulatory 
responsibilities, and I want to press you when my time is on on 
how we make sure that you do a good job of that.
    But thank you, Mr. Chairman, for this hearing.
    Chairman Reed. Thank you very much, Senator Warner.
    Now it is my privilege to introduce the Chairman of the 
Securities and Exchange Commission, the Honorable Mary 
Schapiro. Prior to becoming SEC Chairman, she was the CEO of 
the Financial Industry Regulatory Authority, FINRA, the largest 
nongovernmental regulator for all securities firms doing 
business with the United States public. Chairman Schapiro 
previously served as the Commissioner of the SEC from December 
1988 to October 1994, and then as Chairman of the Commodities 
Futures Trading Commission from 1994 until 1996.
    Welcome, Chairman Schapiro.

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

    Ms. Schapiro. Thank you. Chairman Reed, Ranking Member 
Crapo, Senator Warner, Senator Menendez, thank you for the 
opportunity to testify in support of the President's fiscal 
year 2012 budget request for the United States Securities and 
Exchange Commission.
    The $1.4 billion that the President is requesting is 
designed to help us adequately staff the agency so we can 
fulfill our core mission of protecting investors, expand our 
information technology system so we can realize operational 
efficiencies and better keep pace with increasingly 
sophisticated financial market participants, and carry out our 
new responsibilities over hedge funds, derivatives, and credit 
rating agencies.
    As you know, over the past 2 years, we have worked 
tirelessly to make the SEC a more vigilant, agile, and 
responsive agency, and we are moving forward on multiple fronts 
to enhance its effectiveness and provide robust oversight of 
the financial markets. In addition, we have embarked on a 
vigorous rulemaking agenda, addressing critical issues, 
including equity market structure, money market fund 
resiliency, asset-backed securities, consolidated audit trail, 
and municipal securities disclosure.
    I believe we have made a number of necessary changes and 
accomplished a great deal. But this year, we find ourselves at 
a critical juncture. This is because Congress has challenged us 
not only to continue our reform efforts and carry out our core 
responsibilities, but also to fulfill the significant new 
responsibilities under the Dodd-Frank Act.
    As you know, separate and apart from that legislation, the 
SEC is responsible for essential activities, such as pursuing 
securities fraud, reviewing public company disclosures, 
inspecting the activities of investment advisors and broker-
dealers, and ensuring fair and efficient markets. And because 
of the new legislation, we are taking on considerable new 
responsibilities for oversight of the over-the-counter 
derivatives market and hedge fund advisors, registration of 
municipal advisors and security-based swap market participants, 
enhanced supervision of credit rating agencies, heightened 
regulation of asset-backed securities, and the creation of a 
new whistleblower program.
    In recent years, the SEC faced significant challenges in 
maintaining staffing levels sufficient to carry out its 
existing mission. For instance, from 2005 to 2007, the SEC 
experienced 3 years of flat or reduced budgets, forcing a 10-
percent reduction of our staff. Similarly, the agency's 
investment in new or enhanced IT systems declined approximately 
50 percent from 2005 to 2009. And at the same time, the size 
and complexity of the securities markets were growing at a 
rapid pace. Indeed, during the past decade, trading volume more 
than doubled, the number of investment advisors grew by 50 
percent, and the assets they manage increased to $38 trillion.
    Today, the SEC has responsibility for approximately 35,000 
entities, including direct oversight of more than 11,000 
investment advisors, 7,000 mutual funds where the vast majority 
of Americans hold their securities investments, and 5,000 
broker-dealers with more than 160,000 branch offices. We also 
review the disclosures and financial statements of 
approximately 10,000 reporting companies, and we oversee 
transfer agents, national securities exchanges, clearing 
agencies, and credit rating agencies. Indeed, we oversee some 
financial firms that, as was pointed out, regularly spend many 
times more just on their technology operations than the SEC's 
entire budget.
    A budget of $1.4 billion will allow us to hire the experts 
and acquire the technology we need if we are to effectively 
carry out our core responsibilities and begin to implement the 
Dodd-Frank Act. Of the 2012 requested amount, we estimate that 
$123 million will be allocated to begin implementing the 
provisions of the new law this year.
    And it will support information technology investments of 
$78 million. This level of funding would support vital new 
technology initiatives from data management and integration to 
internal accounting and financial reporting.
    The funding also will permit the agency to develop risk 
analysis tools to help us triage and analyze tips, complaints, 
and referrals, and it will permit us to complete a digital 
forensic lab that enforcement staff can use to recreate data 
from computer hard drives and cell phones to capture evidence 
of sophisticated frauds.
    Finally, it is important to note that the SEC's fiscal year 
2012 funding request would be fully offset by matching 
collections of fees on securities transactions. Beginning with 
fiscal year 2012, the SEC is required to adjust its fee rates 
so that the amount collected will match the total amount 
appropriated for the agency by Congress. Under this mechanism, 
the SEC will be deficit neutral.
    I thank the Committee for your support and I look forward 
to working with you to improve the agency's performance of its 
core mission, to implement our new responsibilities, and to 
continue protecting investors, and I am happy to answer your 
questions. Thank you.
    Chairman Reed. Thank you very much, Chairman, for your not 
only testimony today, but for your leadership.
    Just as an initial point, once again, and sort of taking up 
a point that Senator Crapo made about the CFTC and the SEC, 
there was a brief moment there where that merger was 
considered, but for many reasons, that is not the law. But 
still, the need to cooperate, and I commend you because you and 
Chairman Gensler are doing a remarkable job of trying to issue 
joint rulemakings in very critical areas. But as we talk about, 
and I feel as if I am sort of arguing out of my lane here 
because it is the Agriculture Committee, et cetera, but as we 
talk about the SEC budget, the CFTC budget is equally 
constrained, and so I will just, in a spirit of camaraderie, 
put in a plug, also, that a lot of what we say here applies to 
CFTC.
    One point I want to begin is to just ask you to reflect 
upon the huge increase in demands because of the changing 
marketplace. As you pointed out in your testimony, not too long 
ago, the New York Stock Exchange was performing the majority of 
trades. Now, it is about 20 percent of trading volume, I think, 
and that is a rough estimate. You have got dark pools, three 
different electronic networks, you have a host of other ways to 
trade securities today. And then you have high-frequency 
trading, and Senator Warner alluded to it, the near collapse of 
the markets recently because of high-frequency trading 
activity.
    Can you just talk about these challenges? And again, these 
are challenges--putting Dodd-Frank aside, these are challenges 
just of an absolutely remarkable and dynamic marketplace.
    And just a final point is, we were all sitting here, as I 
look around, last year considering Dodd-Frank. I do not think 
any of us had in the forefront of our mind the idea that the 
New York Stock Exchange and the German Deutsche Borse would be 
combining. So this is a really different world. Can you comment 
on how you are reacting to it, Madam Chairman?
    Ms. Schapiro. Sure. I would be very happy to. And I think 
May 6 and the extraordinary volatility we saw that day is 
actually a good lens through which to view the evolution in our 
markets and the changes, because it brought together in a very 
painful way but a very crisp and concise way what has really 
happened with the U.S. equity markets over the last decade.
    As you point out, we have so many trading venues--more than 
50 trading venues, and if you add in the number of broker-
dealers, which exceeds 200, which actually internalize orders 
and they never see the public tape pretrade, we have a highly 
fragmented and highly complex equity market structure today in 
the United States.
    And what we saw on May 6 that created particular challenges 
for the Securities and Exchange Commission and, to a lesser 
extent, for the CFTC, because they have a much more monolithic 
market structure, is that the need to surveil these markets has 
not diminished. In fact, it has increased as a result of the 
fragmentation. Yet our capacity to do so is greatly diminished 
because every market has its own audit trail, and we needed to 
bring in massive amounts of data and try to collate it and 
coordinate it. And it was massive amounts of data because high-
frequency traders enter thousands and thousands of orders in a 
second, canceling many of those but creating very 
fundamentally, the amount of data that has to be analyzed to 
understand what happened. What went wrong in the market that 
day.
    Our capability to do that was really severely limited by 
our lack of technology, and to a lesser extent by our lack of 
enough people with expertise in understanding how algorithms 
work, how algorithms can go wrong in the marketplace, how all 
these different market structures are connected or 
disconnected, and how the equity markets and the futures 
markets and the options markets all interact together.
    Our budget really recognizes the shortcomings that we felt 
existed after May 6. We were able, and we testified several 
times before this Committee, we were able to reconstruct the 
trading. It took about 5 months. It took heroic efforts on the 
part of our staff. We put together an advisory Committee, 
including two Nobel laureates, to help advise us. We have a 
game plan going forward. We accomplished a lot with single 
stock circuit breakers and new rules for the exchanges to deal 
with the immediate after effects of May 6.
    But it argues for a much deeper, much more thoughtful 
review of all of these aspects of our markets so that we can 
ensure that they are not fragile, that they are not subject to 
unnatural volatility, and so that investors can continue to 
have confidence in them.
    One of the most acute lessons for me from May 6, and I 
still ask every broker-dealer I meet with, how did your 
customers fare on May 6? What was their reaction to 
participating in our markets after May 6? And there has been a 
lasting impact. People understand they lose money when they buy 
or sell a stock because the value of the company goes up or 
down, but they do not understand when the market does not work, 
and we have to be there and ensure that the market is working.
    Chairman Reed. Thank you very much.
    Let me ask a final question and then I will recognize the 
Ranking Member, and we will do two rounds. I think we can do 
several rounds if your time allows, but I want to give my 
colleagues a chance to ask questions, also. I have several 
more.
    You have made the point that these increases in your budget 
would be fully offset by adjusted fees for the financial 
industry, so there would be no deficit impact. My sense is, my 
hope is, that your colleagues, our colleagues, if you will, on 
Wall Street understand that the value of an effective SEC adds 
value to their operations. If you want to look at the first 
casualties of the financial crisis, it was the thousands of 
people that were laid off of firms. It was historic firms that 
collapsed. It was a market that was in shock for months. Not 
all of that can be laid at the feet of inadequate funding, but 
part of it can.
    And the question I have is, are you sensing sort of 
opposition from the industry to an adequately funded SEC? It 
might be a popular political stance, but do they not get it, 
that if you are--they might enjoy two or 3 weeks of sort of a 
wild weekend, but somebody has got to clean up the debris and 
usually they are the first casualties?
    Ms. Schapiro. Well, I think it is safe to say that the 
industry does not love everything we do----
    Chairman Reed. Right.
    Ms. Schapiro. ----and I understand that, and we would not 
be doing our job if they did.
    Chairman Reed. If they did, we would be wondering----
    Ms. Schapiro. You would be wondering what we were doing.
    Chairman Reed. Right.
    Ms. Schapiro. But I do think that the industry, by and 
large, believes having a strong regulator provides them 
credibility and provides confidence to investors, and if 
investors are not confident, they will not be in these markets. 
We saw that after May 6. We have seen it in other periods in 
history. I think that the responsible members of the industry 
absolutely believe that a strong, effective SEC is in their 
absolute best interest, and a knowledgeable SEC. The burden on 
them is less when we know what we are doing. When we can 
interact with them using technology, maybe, instead of people 
all the time. When our examiners come in and they understand 
the right questions to ask and what they are looking for. That 
actually lessens the burden on the industry, as well.
    So I am highly confident that responsible members of the 
industry, and I think that is most of the industry, believe 
that having a strong regulator is absolutely a positive.
    Chairman Reed. Thank you very much, Madam Chairman.
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman, and 
again, Chairman Schapiro, thank you for the work you do and for 
being here with us today to evaluate these budget issues.
    As I said in my introductory remarks, I am of both minds on 
this. I understand the need that the agency has, and, in fact, 
I see the benefit of making sure that the agency has the 
resources to do its job and to do its job effectively, 
efficiently, and well. Perhaps my concern focuses more on the 
process itself in terms of how these agency funds will be 
utilized.
    To return to the issue relating to the implementation of 
Dodd-Frank, not in an effort to try to relitigate Dodd-Frank, 
although I would love the opportunity to get engaged again on 
that if we would have that opportunity, we now, as I indicated, 
have a set of over 100 rulemakings that the agency is tasked 
with, the creation of new entities, and so forth.
    And on February 15, the Republican Members of the Banking 
Committee sent you and the other financial regulators a letter 
basically explaining concerns that we have at this time with 
the speed at which the rulemaking, the phenomenal amount of 
rulemaking that Dodd-Frank contemplates, is being implemented, 
and concern that that speed is causing us to lose effectiveness 
and, frankly, in some cases, to cause very significant 
unintended consequences. The letter indicates that, as we have 
seen it, the public comment periods are a little over 40 days, 
which is substantially less--on the average--which is 
substantially less than the 60-day public minimum period that 
is generally required by OMB, and that some of those rules that 
have already been made in such a rushed fashion have, upon 
further evaluation, been found to have very significant 
unintended consequences. And I will not go into some of the 
details. Some of the Commissioners of both the CFTC and the SEC 
have commented about this problem and suggested that we need a 
way to have more rigorous analysis.
    My question to you is, what do you feel about the request 
of our letter that asked that we have at least a 60-day public 
comment period for the rules as they are being implemented?
    Ms. Schapiro. Senator, I think we did not start out, as a 
general rule, on most rules with 60-day comment periods because 
the statutory deadlines were very tight. I will say, though, 
that I think, effectively, that is largely where we have ended 
up. We have done precomment periods before proposals went out 
to gather views from the industry. Of course, we have had 
hundreds of meetings with industry and market participants. We 
always accept comment letters, even after the comment period is 
closed, right up until the day before, practically, the 
Commission will make a decision.
    So, effectively, the periods have been longer, and, of 
course, for a major set of rules, we just reopened the comment 
period. This relates to the conflicts of interest that may 
exist in the governance and ownership structure of clearing 
agencies, swap execution facilities, and exchanges. And because 
we did subsequent rulemaking that implicated what we called our 
Reg MC proposed last October, we reopened that just a week or 
so ago to say, please think about conflicts of interest, 
governance, in light of these other things we have done: open 
and fair access to the markets, the opportunity for the SEC to 
review rules, governance requirements, the presence of risk 
committees, and so forth. So we have tried to be very sensitive 
to that.
    I recognize there has been a burden on the industry to try 
to get thoughtful comments in, but I can also say that I think 
we have gotten extraordinarily high-quality comments on every 
rule we have put out and we will continue to be as flexible as 
we possibly can.
    All of that said, we are going to miss some deadlines, 
without a doubt, and part of that will be because we are taking 
the time we think we really need to try to get these right. We 
are not rushing to judgment.
    Senator Crapo. Thank you, and I appreciate your thoughtful 
response to this difficult issue. You have indicated that the 
statutory deadlines that you face are causing some of the 
pressure that is there, and I guess my question would be, do 
you think it would be helpful if Congress were to provide a 
little bit of relief by extending the deadlines or removing 
this rush to rulemaking that is included in the Act?
    Ms. Schapiro. Well, I think there is another way for us to 
deal with it if Congress chose not to reopen the deadlines and 
that would be through our phased implementation of any of the 
requirements, so that even if we have rules, even if we were to 
have all the derivatives rules in place on July 21--and we will 
not--we are going to seek broad industry input on how to 
sequence the implementation of those rules from their 
perspective because they are going to have to build some 
technologies, linkages, data repositories. There is lots of 
work to do before these rules actually become effective. So we 
want to sequence them appropriately for implementation and give 
enough time so that this is done well and done right. And so I 
think that gives us a fair cushion of time, I think, before we 
would have unintended consequences arise.
    Senator Crapo. Well, thank you. I see my time is up and I 
will just make my last comment on this round, and maybe this 
comment is to my colleagues more than to the Chairman.
    It seems to me that we are causing the agencies to rush and 
then try to create these processes of phased implementation 
that I think maybe can make sort of a--cause ripples and 
impacts in the economy that are unnecessary, and that perhaps 
we ought to consider looking at whether the time lines in the 
Act were realistic in terms of this rulemaking. But I will 
leave that for discussion among ourselves, and thank you, Mr. 
Chairman.
    Chairman Reed. Thank you very much, Senator Crapo.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Madam Chair, if you ended up receiving what in essence is 
the House budget proposition for the Securities and Exchange 
Commission, what would be the practical effect of that? How 
would the agency's mission, if at all, be compromised? What 
would you have to forego in terms of both your enforcement 
examination and overseeing corporate disclosure 
responsibilities?
    Ms. Schapiro. Senator, the proposal to take such a dramatic 
cut, I believe to go back to 2008 levels--is that the right----
    Mr. Spitler. Forty-one million.
    Ms. Schapiro. ----a $41 million reduction would have a very 
significant impact on the SEC. We have not determined, although 
we are doing all of the background work to be prepared, how 
many people versus how much technology would be impacted by 
that. But we would certainly be in a position of laying off a 
significant number of employees and we would be in a position 
of halting, really, any technology development, including 
anything related to the market structure issues we are so 
concerned about. We would not be able to operationalize the 
Dodd-Frank rules that are in place, whether it is on the 
corporate disclosure side or the derivatives or hedge fund 
registration, municipal advisors. All of those areas would be 
profoundly impacted.
    And we would have to make some extremely difficult choices, 
and not just difficult for us, but I think difficult for the 
American people, because they need to believe and understand 
that there is a watchdog who is watching out for their 
interests, and our ability to examine mutual funds where 
American investors have their resources, or broker-dealers who 
are interacting through 160,000 branch offices around the 
country with retail investors, or investment advisors of which 
we are responsible for 11,000, our ability to oversee them in 
anything but the most cursory way would be, I think, deeply 
impacted.
    Senator Menendez. So would it be fair to say, then, that if 
you had to live with H.R. 1's budget, that, in fact, investors 
would be less protected, that there would be potentially less 
integrity in the market, because you would not be able to 
police it, and you would not really be the vigorous cop on the 
beat that I think many of us want you to be?
    Ms. Schapiro. I think that is fair to say, and we would be 
less efficient, because one of my goals since I arrived 2 years 
ago was to try to utilize technology more efficiently so that 
we can free up human resources for higher-value work and have 
technology take care of many more routine things than it does 
right now at the agency. So I think all three of those things.
    Senator Menendez. You have often, not only at this hearing 
but in the past, talked about--I have often talked about 
examiners and those human capital. You have often referred to 
technology. So give us an insight as to what you are dealing 
with in terms of your needs and what your challenge is compared 
to the technology that the industry has. I often think that the 
street is way beyond the SEC in the context of its ability to 
move forward, to have complex financial instruments, and that 
very often the SEC is in a position of catching up. So maybe 
that is the wrong perception, maybe it is right. Why do you not 
tell me what your challenges in this are.
    Ms. Schapiro. I do not think it is a wrong perception. I 
think that there are large firms that, between telecom and 
computer operations, spend $2 or $3 billion a year, whereas we 
spent a billion dollars on our entire budget altogether.
    The interesting thing to me, and almost the sad thing here, 
is that right now, we are able to recruit enormous talent. We 
have changed the entire senior leadership of the SEC in the 
last 2 years and we have brought in people who are really quite 
extraordinary and quite expert. We can get people from hedge 
funds to come to the SEC, from trading desks, financial 
analysts, credit rating agencies, exactly the kind of talent we 
need right now. There is a desire to come and work at the SEC.
    But because of hiring restrictions, even just operating 
under the CR, we cannot bring those people on board. I am 
confident if we could also not only bring them on board but 
offer them a modest amount of money to spend on technology to 
make their jobs easier and to make them more effective, to give 
them the tools to analyze data, to give them the tools to take 
the more risk-based approach we hope to take to everything we 
do, that there would be genuine enthusiasm for joining our 
ranks and serving the public in that way.
    Senator Menendez. So let me ask you this final question. As 
someone who is an advocate for the robust budget that I think 
that you need to do the job that we want you to do on behalf of 
American investors, and ultimately about everyone in this 
economy so we do not relive some of the challenges of the past, 
are you, in the context of your present budget and resources, 
operating in the most efficient and effective manner possible?
    Ms. Schapiro. There is no doubt that while we have worked 
hard to try to drive inefficiencies out, there is more to do. I 
am confident of that. And we actually have a new Chief 
Operating Officer for the first time in the SEC's history who 
joined us last year and he is leading what we call a Tiger 
Team, looking for ways to cut excess costs out of the budget so 
that we can redeploy that money to higher and better uses. So 
we are not, by the longest shot, perfect. We have a lot of work 
to do, but we are very focused on getting the most for every 
dollar that we have.
    Senator Menendez. Thank you, Mr. Chairman. Thank you.
    Chairman Reed. Thank you very much, Senator Menendez.
    Chairman Schapiro, the Inspector General has done a series 
of reviews and made recommendations, I think about 69 specific 
recommendations, regarding the Division of Enforcement, the 
Office of Compliance Inspections and Examinations. Can you 
indicate how you have been able to utilize his advice to make 
improvements within the operations and any other comments you 
might have?
    Ms. Schapiro. Yes. I am happy to do that, because I value 
the advice and recommendations that we get from the Inspector 
General as well as from the Government Accountability Office.
    I can say that in the last 2 years, in the time that I 
became Chairman, we have successfully closed out 350 Inspector 
General recommendations and implemented them, compared with 
about 190 for the 2 years prior to my becoming Chairman. So we 
hold senior managers accountable for fulfilling the obligations 
that they have under IG recommendations. We actually require 
within 45 days of an Inspector General report that the staff 
develop a corrective action plan to fulfill those 
recommendations, review that with the Inspector General, and 
get those recommendations closed out. And then we have a senior 
manager who is responsible for making sure all of that happens. 
So we value his recommendations, and a high percentage of the 
time, we agree with them and fully implement them.
    Chairman Reed. Well, thank you very much. In fact, I would 
note that Inspector General Kotz, in his testimony February 10, 
2011, before the House, indicated that he was pleased to report 
that the overwhelming majority of our recommendations have been 
implemented, and accordingly, we are confident that the 
situation we identified had been ameliorated and will not 
reoccur. So that is--IGs play valuable roles, and when they are 
satisfied, that is a good sign----
    Ms. Schapiro. Mr. Chairman, could I correct one thing I 
said----
    Chairman Reed. Yes, ma'am.
    Ms. Schapiro. ----in response to Senator Menendez. At a $41 
million cut, we are looking at furloughs of staff--I do not 
know for how long a period--rather than layoffs.
    Chairman Reed. Thank you.
    Ms. Schapiro. I just wanted that to be clear. Thank you.
    Chairman Reed. That is an important point.
    There is another aspect to your testimony, too, is that as 
you alluded to, the GAO has made comments about the, basically 
the administration of the Commission, et cetera, and you have 
now taken steps to move some of your functions under the 
supervision of, and correct me if I am wrong, an agency in the 
Department of Transportation who has great expertise. Can you--
this, to me, is not only indicative of trying to improve the 
performance of your Department, but also trying to recognize 
the skill sets in other governmental departments and 
essentially maximize the taxpayers' investment in these skills, 
not simply going out, as is typical in the past, and signing a 
big contract with a big company to provide services, hopefully 
good services, but can you comment?
    Ms. Schapiro. I would be happy to. GAO found that the SEC 
had material weaknesses in our internal controls over financial 
reporting. They were basically--fall into two categories, gaps 
in our security and then functionality of our financial 
systems, frankly, as a result of years of under-investment and 
care paid there. Rather than spend a lot of money to try to 
remediate those systems and plug all the holes, our new Chief 
Financial Officer, our new Chief Information Officer, our new 
Chief Operating Officer and I determined that we would be much 
better off to outsource to a Federal shared service provider 
who could provide those services to us and we would not have to 
bring in people to do that on the SEC's payroll, because as you 
point out, it is not really a core competency for us to run 
those kinds of systems.
    So we selected the Department of Transportation. We have 
signed the agreement with them. And the cutover is expected to 
happen in April of next year. We are working very closely with 
them on a daily basis to make sure that we are in a position 
for that to happen. But I really believe outsourcing this 
function from the agency is the right decision for taxpayers 
and it is the right decision for the SEC. It allows us to focus 
on what we do best, and DOT actually provides this service for 
the General Accountability Office [sic], so I have a high level 
of comfort that they will do a good job for us.
    Chairman Reed. A final point before I turn it back over to 
Senator Crapo is that your comments also reveal something that 
I do not think is understood as much as it can be. For the 
first time in, if I am correct, in the history of the agency, 
you have a Chief Financial Officer?
    Ms. Schapiro. We have had a Chief Financial Officer before. 
We have never had a Chief Operating Officer.
    Chairman Reed. So----
    Ms. Schapiro. Although we have a new Chief Financial 
Officer and we have a first-class Chief Operating Officer.
    Chairman Reed. And in terms of Chief Information Officer, 
is that a relatively new position?
    Ms. Schapiro. No. We had one--we have had one historically. 
We have a brand new one who has done, I think, an extraordinary 
job in the very short time he has been on board.
    Chairman Reed. But with your Chief Operating Officer now, 
you are beginning to employ some of the techniques that have 
been routine in private industry?
    Ms. Schapiro. Exactly. We now have dashboards. We now 
understand where we have systems issues. We see where money is 
going with much more granularity. We have accountability and 
metrics that are allowing us to run the SEC much more like a 
business. We are not there yet, but with their leadership, I am 
highly confident we will be.
    Chairman Reed. Thank you very much.
    Senator Crapo? And just for the record, Senator Hagan was 
here first and she will be recognized, then Senator Warner, 
just to keep everybody's schedules running.
    Senator Crapo. Thank you, Mr. Chairman.
    Chairman Schapiro, I want to go back to the regulatory 
issue. As I am sure you are aware, on January 18, the President 
issued an Executive Order with regard to the goal of improving 
regulations and regulatory review and reducing the burden of 
regulations on our economy. It is my understanding, though, 
that that Executive Order does not apply to the SEC or the 
other financial regulators. Is that your understanding?
    Ms. Schapiro. That is correct. I guess as a matter of law, 
it does not apply to the SEC. But as a matter of practice, it 
is our view that we should subscribe to the goals that are set 
out in the Executive Order. So, for example, many things that 
are required by it, we already do--notice and comment 
rulemaking, cost-benefit analysis, burden on competitiveness 
analysis, and so forth. But also with respect to impacts on 
small business, trying to delay implementation and give small 
businesses easier ways to comply with regulations is something 
we are very focused on trying to do, as well as going back, 
when we can catch our breath, and look at the rules that are on 
our books right now that perhaps do not make sense anymore in 
that this day and age.
    Senator Crapo. Well, that is good, because you actually 
contemplated my next question, which was would it not be a good 
idea, even though it is not binding, for the agency to, or the 
Commission to pursue the objectives, one of which is to achieve 
the least burden on society consistent with the regulatory 
objective, which I think is a little different than just doing 
a cost-benefit analysis.
    So maybe what I would like to ask you to do is my 
understanding is that you do do cost-benefit analysis. You also 
do an analysis, do you not, with regard to the impact on 
capital formation?
    Ms. Schapiro. Yes. The goal is for us to seek the least 
burden on competition in our approach to rulemaking.
    Senator Crapo. And how does that process work? It seems to 
me that that would be incredibly important to make sure, first 
of all, that a cost-benefit analysis is done, and that you seek 
the objective of having the least burdensome solution that you 
can find in terms of competition. But what happens in the cost-
benefit analysis process in terms of how that plays out and if 
you determine that there are costs to competition or to capital 
formation or to the economy in general?
    Ms. Schapiro. Well, one of the real benefits of the cost-
benefit analysis is it is performed by our economists and rule 
writers. We have about 30 economists on the staff and we are 
currently recruiting for a new Chief Economist. They prepare 
cost-benefit analysis based on the rule proposals. Those go out 
for comment, and from my perspective, that is much of the 
value, is what the rest of the world thinks about our economic 
analysis. Are our numbers crazy? Are the costs way off? Are 
there burdens that we did not anticipate when we did our 
analysis? And so we get that comment in, which is extremely 
helpful to us, and then factor that into any final rulemaking 
decisions.
    Senator Crapo. And do you feel that, ultimately, the 
objective is consistent with the statutory mandate, achieving 
the least costly alternative?
    Ms. Schapiro. That is certainly the goal, and we also, I 
should say, routinely request economic data from commenters to 
help supplement our internal comment.
    I will tell you, though, sometimes it is very hard to 
quantify what the benefit is of a particular rule, and that can 
be very difficult. But the goal is certainly to try to take the 
least costly, least burdensome approach. I will not tell you we 
always get there, but that is the goal.
    Senator Crapo. And to get back to my first question, do you 
think that the timeframe that we are operating under, which 
is--I understand the flexibility you described that you use to 
try to get beyond the 40 days average that we are seeing. Do 
you think the timeframe that we are seeing here gives the 
opportunity--the adequate opportunity for evaluation by those 
who are looking at these cost-benefit analyses and the capital 
formation analyses?
    Ms. Schapiro. You know, it is probably a better question 
for them. I am sure if there were more time that they would use 
more time and they would be grateful to have it in order to do 
more full analyses. But as I said, the quality of comments we 
are getting, I think, are quite high and have been very, very 
helpful to us, and I think as you see final rules come out--we 
have done very few final rules--you will see, I think, them 
very much influenced by the comments.
    Senator Crapo. And does the staged implementation process 
that you described allow for further input on the cost-benefit 
analysis and capital formation analysis?
    Ms. Schapiro. Not formally, but we would be happy to have 
that kind of information, and if during an implementation 
period we learn something new that suggests that a rule that we 
have proposed and finalized is going to have an unintended or 
severe consequence, we have the flexibility, I think, to say we 
are going to not go ahead and implement until we understand 
better what the implications of that are.
    Senator Crapo. Thank you.
    Chairman Reed. Thank you.
    Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairwoman Schapiro, thank you for being here. I know you 
spent a lot of time testifying before Congress recently, and I 
know that in your last testimony before this Committee, you 
testified about the more than 100 rulemaking provisions and 20 
studies and five new offices that the SEC is currently working 
on. And I know that these activities range from the swap 
execution facilities and the Volcker Rule to risk retention and 
fiduciary standards of conduct, and those are at the very core 
of the Dodd-Frank Act that we passed last year and are 
obviously crucial to restoring stability to our financial area.
    I know you have got a difficult job and a very important 
job, so I thank you for your hard work. At this point, I think 
it is incumbent upon Congress to get you the resources that you 
need in order to do this important work in an effective and 
timely manner, and so I am pleased that you are here.
    One question that is of particular interest to me is how 
the short-term continuing resolutions that we have been doing 
in Congress lately have impacted your ability to operate, your 
ability to invest in people, and importantly, your ability to 
invest in technology, and then how would a string of short-term 
continuing resolutions further impact your agency?
    Ms. Schapiro. Well, I think, to me, the biggest impact has 
been in our inability to hire more than very few selected 
positions, because as I was saying earlier, we have the 
opportunity to bring on board tremendous talent to the SEC 
right now. There are lots of people with deep industry 
experience and expertise that we need to do our jobs well who 
are willing and actually anxious to come to the agency and we 
are not able to make offers to those people. So I think that is 
one of the greatest consequences and, unfortunately, one that 
will have some lasting effect, because it takes time to bring 
people on board, get them up to speed, and fully integrated 
into our programs.
    I would say the other--and so we have smaller effects. We 
have had a reduction in travel across the board. So our 
examiners cannot travel extensively to conduct their 
examinations. We send fewer people on enforcement 
investigations, for example, than we might otherwise have.
    But the other effect I am most concerned about is on our 
technology development. We have had, for example, a very major 
project going on for the last year to try to bring all the tips 
and complaints and referrals that come into the agency, tens 
and tens of thousands of them in every different part of the 
agency, bring them into a central data repository--we got that 
part done--with a single intake system. But now we want to 
build the analytics that allow us to look at all those tips and 
complaints and link them together, where appropriate, 
understand what they are telling us about trends in the 
marketplace with respect to products or firms or strategies, 
and we have had to delay for some significant period of time 
our ability to launch and develop some of those analytics and 
things that would be very useful to us.
    So, you know, we have taken all the usual things that one 
does under a CR. We are used to CRs. We have been under a CR a 
third of the time over the last 10 years.
    Senator Hagan. Wow.
    Ms. Schapiro. But I think it is really impacting our 
ability to bring on the great people we need and to get the 
technology developed.
    Senator Hagan. So it is definitely affecting your 
enforcement capabilities?
    Ms. Schapiro. It is in the sense that we are very leanly 
staffing our enforcement matters. We have always done it fairly 
leanly, but even more so, and we are not traveling to pursue 
our cases as quickly as we would like to. A lot of our cases 
have overseas components. We are not doing much of that because 
the travel is just too expensive. We are supposed to be 
examining credit rating agencies on an annual basis. Some of 
those are located in Japan. We are trying to figure out, how do 
we afford to send somebody to Japan for a week or 2 weeks, 
translators, and so forth to examine credit rating agencies 
when we just do not have the travel budget to do that. So it is 
having an impact on us, for sure.
    Senator Hagan. Some opponents of the SEC's budget will 
point to your growth since 2001 as a sign that it is too large, 
but as I understand it, your mandate and the markets under your 
purview have evolved dramatically over these last 10 years. Can 
you speak briefly about the evolution of the markets under the 
SEC's jurisdiction over this past decade, and in addition, what 
about your new ongoing regulatory responsibilities under Dodd-
Frank?
    Ms. Schapiro. I would be happy to. You know, the markets 
have grown extraordinarily and we can all see that in the fact 
that just in the listed equities markets, 8.5 billion shares of 
stock trade every day worth $220 billion. So Americans are 
actively engaged in the stock market right now and the market 
size is growing. Its complexity has grown enormously with 
international linkages and more of those to come, I expect, as 
well as the highly fragmented nature of our equity market 
structure now, with a dozen exchanges and ten clearing agencies 
and electronic communications networks and ATSs and dark pools 
and options markets, so we have very complex markets, as well.
    We have also seen tremendous growth in the number of market 
participants. Investment advisors have grown 50 percent in 
number since 2003. Mutual funds, the number of mutual funds, 
the number of broker-dealers, transfer agents, all of these 
numbers have gotten bigger, but they have also gotten far more 
complex. Broker-dealers may actually be about flat, but the 
others have gotten larger and far more complex.
    And so our job has gotten much bigger and much more 
prominent, and because the equity markets are the engines of 
capital formation in this country, debt less so, equity markets 
are really critical to our country's success. We think having 
an effective cop on the beat is important to our economy 
overall. Our new responsibilities, obviously, add dramatically 
with hedge funds, over-the-counter derivatives, and additional 
responsibilities for credit rating agencies, and a whole new 
category of registrant called municipal advisor.
    Senator Hagan. Thank you. Thank you, Mr. Chairman.
    Chairman Reed. Thank you, Senator Hagan.
    Senator Warner, and thank you for your patience, 
Senator,and also for your extraordinary contribution to the 
Dodd-Frank bill. He was one of the key figures in every aspect, 
particularly resolution, so thank you, Senator.
    Senator Warner. Thank you, Mr. Chairman, and the very 
kind--without an indication that actually I was here before 
Senator Hagan, you were just trying----
    [Laughter.]
    Senator Warner. Let me again welcome Chairman Schapiro, as 
well, and thank you for your work.
    I want to, first of all, echo what Senator Hagan has said 
about the nature of these 2-week CRs. We hear oftentimes from 
folks that we need predictability. We think about what is less 
predictable than running an enterprise the size of the Federal 
Government and an agency as important as yours with a 2-week 
predictability cycle. It just makes no sense at all, and again, 
I hope that we can reach some longer-term consensus, not just 
on this year's balance of the fiscal year but on a broader 
deficit reduction and investment plan for our country.
    I want to follow up on a line of questioning that Senator 
Crapo raised about trying to get the balance right on 
regulatory oversight. Obviously, we have, and no one was more 
active in this particular area than the Chairman in trying to 
give you the ability to consolidate and bring more transparency 
in the securities markets. He did great, great work on that in 
Dodd-Frank and we have given you a big, big task.
    One of the things I am concerned about in terms of the 
overall regulatory burden, though, you mentioned that you have 
got economists trying to sort through that. I think our record, 
not just in your agency but across the board, has been kind of 
spotty on that, that the nature of agencies are to always--
power, prestige, and sometimes money is directly related to the 
volume of regulations put out and there does not seem to be an 
appropriate incentive in place to ever look back, and even 
though you have got that statutory requirement in terms of 
effectiveness in the market, but ever to look back and 
eliminate regulations that technology may have moved past or 
just the market conditions have moved past.
    One of the things I would commend, I have been working on 
something that has got some challenges on it, but a regulatory 
pay-go approach that would say, independent of when Congress 
gives you a direction on kind of the normal course of 
regulatory oversight, when you add a regulation of a certain 
size and shape, you have to look at how you could perhaps 
remove one of similar size and shape. Now, again, it has to 
have appropriate checks on it. But when we have seen some on 
the House side actually talk about regulatory moratoriums or 
interjecting Congress into every regulation, I would commend 
you to look at this idea, this regulatory pay-go idea, before 
people say, oh my gosh, that would be impossible to do.
    I would commend--and there is a question here--to look at 
the U.K., which has adopted a similar procedure called one in, 
one out, and Mr. Chairman, one of the most remarkable things is 
that the U.K. now has passed America in terms of international 
competitiveness rankings, and at least when I grew up, and I 
know the Chairman is much younger than me, that you always kind 
of thought of the U.K. as the epitome of bureaucracy run amok. 
Just as you look at your regulatory oversight responsibilities 
and how you get hat cost-benefit analysis right, have you 
looked at your colleagues and what the U.K. has done in terms 
of some of their regulatory reforms, and if you have not, would 
you be willing to take a look at that?
    Ms. Schapiro. We would absolutely be willing to take a 
look. You know, it is interesting. Sort of as we go, rule by 
rule, we do look at what other jurisdictions are doing, 
particularly with a number of our Dodd-Frank responsibilities 
where we want to try to be as synched up internationally as 
possible so we do not create either opportunities for 
regulatory arbitrage or an incentive for somebody to move their 
business out of the United States.
    So we are very focused on it on a rule-by-rule basis, but I 
think the idea is intriguing and I would be very interested in 
seeing if we could find the resources to do kind of a look back 
as we do new rules to see what is the impact of already 
existing rules, do they need to stay on the books. And we are 
going to do that in a small business context. I am ready to ask 
our Commission to actually approve a Small Business Advisory 
Committee that will help us try to take some of those, the 
ideas that have been out for a long time, to facilitate the 
small business capital formation and see if we can turn those 
into hard proposals.
    Senator Warner. I would just say that I think this is not 
just a challenge with your agency, but just the nature of the 
beast is that you always are additive. There really is no 
incentive, unless we mandate, to actually go back and take 
away, and what we try to do is--and what the U.K., I think, has 
done--is try to get that balance right.
    My time is about up, but I would ask you to come back--this 
will be my last question----
    Chairman Reed. We have had two rounds.
    Senator Warner. OK. Well, let me just make one quick 
comment, and that is--and I think the Chairman pointed this out 
as he kind of looked at the size of the market. You have come 
back, and you answered Senator Hagan, as well, about the growth 
in size. You know, there really is a challenge here around 
investor confidence, and we have got the challenges from the 
crisis in 2008. We have got the challenges from the flash 
crash. Your comments about broker-dealers, trying to make sure 
that we get that right, the important role that investors in 
this country, and abroad, if we do not have that cop on the 
beat. If you would just like to make a comment on that, I would 
appreciate it.
    Ms. Schapiro. Well, it is interesting. After the flash 
crash, I had many foreign regulators call me just horrified. 
What happened? What are you going to do? How are you going to 
prevent this? I mean, there was more international interest in 
that event directed into my office than I have seen in my 2 
years at the SEC, with the possible exception of international 
accounting standards. It suggests to me that there is deep 
concern everywhere--and other markets are starting to see the 
kind of market structure we have developed with the prevalence 
of dark pools and more fractured and fragmented trading.
    Senator Warner. I might just add on this point that I 
remember a conversation we had about the fact that you were 
concerned whether we had the technological capabilities to sort 
through this.
    Ms. Schapiro. Exactly right, and so investor confidence is 
profoundly affected by an event like May 6, and that is why we 
moved so quickly to put in place the circuit breakers and to 
bar naked access into the markets by customers and to clarify 
clearly when trades would be broken and to prohibit stub 
quotes. For the SEC, we moved at lightning speed to get all of 
those things in place very quickly because it was a matter of 
investor confidence, and that has got to be where we keep our 
focus going forward, and clearly, it is where international 
regulators also have concern, as their markets are increasingly 
of interest to retail and smaller institutional investors.
    Senator Warner. And you have got to have the resources to 
do that and the technology to keep them.
    Ms. Schapiro. Exactly right.
    Senator Warner. Thank you, Mr. Chairman. Thank you for 
holding this hearing.
    Chairman Reed. Thank you very much, Senator Warner.
    Thank you, Madam Chairman, for your, again, your testimony. 
I must say, the thoughtful comments of my colleagues and your 
responses, I think, have added immensely to our understanding, 
hopefully to the public understanding, of the issues you face.
    We have all talked about investor confidence. We have also 
talked about cost-benefit analysis, et cetera. But one of the 
descriptions of what has taken place, particularly in 2008, was 
a system of privatized profits and socialized losses, that when 
the markets are great, they can take care of themselves until 
they go off the rails, and then--and it is not just investors, 
it is taxpayers, it is everybody, directly or indirectly, 
losing their jobs, et cetera, that pays. And my sense is the 
SEC and CFTC and other agencies are those critical agents that 
ensure private profits, but also ensure that when things go 
bad, it is not going to be the citizen or the taxpayer that 
picks up the losses, either--a vital, vital role.
    And just a final point, too, is that--and I think this is 
worth stating again--both you and the CFTC are one of the few 
if only financial regulatory agencies that are not funded by 
the industry, that you are funded through the appropriations 
process. We tried in the course of the deliberation of Dodd-
Frank--I know Senator Schumer is going to try again--to create 
a system in which you are not subject to the appropriations 
process.
    As you indicated, you explained the way it is set up is 
that you can adjust your fees so it does not affect the 
deficit, but there is a check on your ability to be the 
independent, vigorous, far-sighted regulator that does not 
affect other agencies. And frankly, I think until we get all of 
our financial regulators so they have that same kind of 
operational scope, we might encounter problems. That is just an 
aside. But again, I want to thank you.
    And then just in terms of administrative issues, if any of 
my colleagues have additional questions in writing, I would ask 
them to just submit these questions no later than next 
Thursday, March 17, prior to the St. Patrick's Day celebration 
to ensure the quality of the questions.
    [Laughter.]
    Chairman Reed. And also, I would like to submit for the 
record letters in support of your budget from Americans for 
Financial Reform, CalPERs, the Federal Bar Association 
Executive, Law Committee Executive Council, the Financial 
Planning Coalition, and the North American Security 
Administrators Association.
    In addition, the NASAA has sent a letter to the full 
Committee Chairman and Ranking Member supporting adequate 
supporting for SEC's full implementation of Dodd-Frank, and 
Chairman Johnson asked that I make that a part of the record 
today, also.
    Chairman Reed. I would also indicate that your written 
testimony, Madam Chairman, will be made part of the record in 
toto.
    Senator Warner, you have a comment?
    Senator Warner. Just to again thank you for this important 
hearing, Mr. Chairman. But I think your very appropriate 
closing comments about private profit and socialized loss is 
critically important, and in the same spirit that you--and I 
fully endorse your comments of making sure that we give these 
cops the ability to have the resources to do their job.
    I would simply again, one new tool to try to hopefully get 
in front of that before we see the next crisis is another 
outgrowth that the Chairman and I worked on together, the FSOC, 
and I would hope that you will continue to be diligent in 
making sure that becomes an important tool and kind of an early 
warning system for future crises. And if you feel that entity 
is not getting its appropriate attention, juice, recognition, 
and ability to do its job, I hope you will let the Chairman or 
I or others know.
    Ms. Schapiro. Absolutely.
    Senator Warner. Thank you, Mr. Chairman.
    Chairman Reed. Thank you, Senator Warner.
    I cannot resist, but having a head of the Office of 
Financial Research would be very useful to FSOC----
    Senator Warner. Amen.
    Chairman Reed. So you can whisper that in someone's ear, 
Madam Chairman.
    Ms. Schapiro. I will mention that at our next meeting.
    Chairman Reed. Thank you very much.
    Ms. Schapiro. Thank you.
    Chairman Reed. If there are no further questions or 
comments, thank you very much, Madam Chairman.
    The hearing is adjourned.
    [Whereupon, at 10:46 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

                PREPARED STATEMENT OF SENATOR MIKE CRAPO

    It was recently announced that we are now facing yet another record 
Federal deficit at $1.6 trillion, and the budget we recently received 
from the President would double the national debt, to more than $26 
trillion, by the end of the decade.
    As a member of the President's National Commission on Fiscal 
Responsibility and Reform who voted in support of the report to 
confront our ever-increasing national debt, deficit, and unrestrained 
Federal spending I believe all agencies and programs should be prepared 
to sacrifice. All budgets have to be on the table.
    The Dodd-Frank Act gave the SEC many new oversight 
responsibilities, including writing new rules, ensuring that they are 
enforced, and regulating new entities. The SEC will need to devote 
staff to these new responsibilities, particularly once the rules take 
effect.
    The new demand for resources presents an opportunity to undertake 
an agency-wide examination of how existing resources are being expended 
and whether any of them can be better utilized. Some of the questions 
that need to be answered include:
    What factors went into determining how many new people would be 
needed for each Dodd-Frank area and at what time period would they be 
needed?
    Are there ways to use technology both to make existing staff more 
productive and to reduce the number of employees needed for Dodd-Frank 
responsibilities?
    Has the SEC worked with the CFTC to share information technology 
developments costs for the oversight of the OTC derivatives market?
    While the Dodd-Frank Act missed a great opportunity to merge the 
SEC and CFTC and stop the bifurcation of the futures and securities 
markets there is no reason why we shouldn't push for more coordination, 
consistent rules, and budgetary savings. A recent report by GAO shows 
duplication among the efforts of a number of Federal programs which may 
cost more than $100 billion in overlapping efforts.
    We must continue to think strategically about which areas of the 
market pose the greatest risk, and which areas of potential improvement 
hold the greatest benefit for investors. The objective should be to 
apply the taxpayer resources in ways that provide the biggest investor 
protection bang for the buck.
    In a short time period, the Dodd-Frank Act requires the SEC to 
promulgate more than 100 new rules, create five new offices, and 
conduct more than 20 studies and reports. The volume of this rulemaking 
and an unrealistic Congressional timeline poses significant challenges 
to the SEC.
    The likely impact of the Dodd-Frank Act will be enormous, and we 
will have no idea of the actual costs for years to come. Given prior 
experience, such as the original estimates about the cost of the 
Sarbanes-Oxley Act of 2002, these actual costs will prove substantially 
more significant than legislators and regulators have predicted.
    It is more important that the SEC allows for meaningful public 
comment and economic analysis than it is to rush through these rules 
and risk undermining the integrity of the process. The potential harm 
to our already weak economy and the public from ill-conceived rules 
cannot be underestimated.

                                 ______
                                 
                 PREPARED STATEMENT OF MARY L. SCHAPIRO
              Chairman, Securities and Exchange Commission
                             March 1, 2011

    Chairman Reed, Ranking Member Crapo, Members of the Subcommittee: 
Thank you for the opportunity to testify in support of the President's 
FY2012 budget request for the U.S. Securities and Exchange Commission 
(SEC). \1\ I welcome this opportunity to answer your questions and 
provide you with additional information on how the SEC would make 
effective use of the $1.407 billion that is requested for the coming 
fiscal year. \2\
---------------------------------------------------------------------------
     \1\ A copy of the SEC's FY2012 Budget Congressional Justification 
can be found on our Web site at http://www.sec.gov/about/
secfy12congbudgjust.pdf.
     \2\ The views expressed in this testimony are those of the 
Chairman of the Securities and Exchange Commission and do not 
necessarily represent the views of the President or the full 
Commission.
---------------------------------------------------------------------------
    Over the past 2 years, we have worked tirelessly to make the SEC 
more vigilant, agile, and responsive, and are moving on multiple fronts 
to enhance the agency's effectiveness and provide robust oversight of 
the financial markets. We have new senior leadership in all key 
positions and have embarked on a vigorous rulemaking agenda, addressing 
areas such as equity market structure, investment adviser custody 
controls, money market fund resiliency, asset-backed securities, large 
trader reporting, pay-to-play, and municipal securities disclosure.
    In addition to carrying out our longstanding core responsibilities, 
last year's enactment of the Dodd-Frank Act has added significantly to 
the SEC's workload. In the short term, it requires the agency to 
promulgate more than 100 new rules, create five new offices, and 
produce more than 20 studies and reports. The law assigns the SEC 
considerable new responsibilities that will have a significant long-
term impact on the agency's workload, including oversight of the over-
the-counter (OTC) derivatives market and hedge fund advisers; 
registration of municipal advisors and security-based swap market 
participants; enhanced supervision of nationally recognized statistical 
rating organizations (NRSROs) and clearing agencies; heightened 
regulation of asset-backed securities (ABS); and creation of a new 
whistleblower program.
    My testimony will provide an overview of the agency's actions and 
initiatives over the past year. I will then discuss the FY2012 budget 
request and the activities that these resources would make possible.
New Leadership, Organizational Reform, and Expertise
    Without a doubt, the most critical element to our success in 
improving the Commission's operations is the agency's talented staff. 
Over the past 2 years, we have installed new management across the 
major divisions and offices of the Commission. These new senior 
managers are playing a vital role in our efforts to transform the 
agency.
    During my first year, we brought in new leadership to run the four 
largest operating units--the Division of Enforcement, the Office of 
Compliance Inspections and Examinations (OCIE), the Division of 
Corporation Finance, and the Division of Trading and Markets. We also 
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.
    This past year, we brought on board a new director to oversee the 
Division of Investment Management, and hired deputy directors in the 
Divisions of Trading and Markets and Corporation Finance. We also 
brought on board key leaders to help improve internal operations. This 
includes the creation of a new Chief Operating Officer position; the 
hiring of a new Chief Financial Officer to oversee the agency's budget, 
accounting, and financial reporting; the hiring of a new Chief 
Information Officer to oversee the agency's information technology 
program; and the hiring of the agency's first Chief Compliance Officer. 
At all levels we have focused on hiring individuals with key skill sets 
that reflect the rapidly changing markets under our supervision.
    We're continuing to make significant progress in reforming how the 
SEC operates. Since 2009, the agency has carried out a comprehensive 
review and restructuring of its two largest programs--enforcement and 
examinations--to ensure effective performance. The Enforcement Division 
has streamlined its procedures to bring cases more swiftly, removed a 
layer of management, created national specialized units, and added new 
staff with new skills to pursue complex fraud and market abuses. More 
recently, the SEC's examinations unit restructured its exam program 
after a top-to-bottom review, becoming more risk-based in its approach, 
enhancing staff training, and installing better systems to support 
examiners.
    In addition, the Division of Corporation Finance recently made 
targeted changes to its operations to help us: address complexities and 
changes in the asset-backed securities market; determine if our rules, 
regulations, and review approach are adequately addressing trends in 
securities offerings and in our capital markets; and enhance our focus 
on the largest financial institutions.
    Also during the past year, to the extent permitted by available 
resources, we worked to improve training and education of agency staff, 
to establish a deeper reservoir of experts throughout the agency, and 
to modernize information technology, including a centralized system for 
tips and complaints, enforcement and examination management systems, 
risk analysis tools, and financial management systems.

Enforcing the Law
    Enforcement of the securities laws is the foundation of the SEC's 
mission. Swift and vigorous proceedings directed at those who have 
broken the law are at the heart of the agency's efforts to protect 
investors.
    In the past year, the SEC has continued our structural reforms of 
the enforcement program. We have created five national specialized 
investigative groups dedicated to high-priority areas of enforcement; 
adopted a flatter organizational structure to permit more staff to be 
allocated to front-line investigations; and created a new Office of 
Market Intelligence to serve as the hub for the effective handling of 
tips, complaints, and referrals.
    The Dodd-Frank Act substantially expands the agency's authority to 
compensate whistleblowers who provide the SEC with high-quality 
information about violations of the Federal securities laws. Last 
November, the Commission proposed rules mapping out the procedure for 
would-be whistleblowers to provide information to the agency. The 
proposed rules describe how eligible whistleblowers can qualify for an 
award through a transparent process that provides them an opportunity 
to assert their claim to an award. Recently, we announced the selection 
of a Whistleblower Coordinator to oversee the whistleblower program. 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.
    We also have added a series of additional measures to encourage 
corporate insiders and others to come forward with evidence of 
wrongdoing. These new cooperation initiatives establish incentives for 
individuals and companies to fully and truthfully cooperate and assist 
with SEC investigations and enforcement actions. This program will 
encourage ``insiders'' with knowledge of wrongdoing to come forward 
early, thus allowing us to shut down fraudulent schemes earlier than 
would otherwise be possible.
    These reforms, which were intended to maximize our use of resources 
and permit the agency to move more swiftly and strategically, are 
already showing improvements. Over the past calendar year, court-
ordered disgorgements are up 20 percent, while the amount of monetary 
penalties has almost tripled. Of course, numbers alone don't fully 
capture the complexity, range, or importance of our enforcement 
accomplishments. During the past year, the Commission:

    brought significant actions involving issues arising from 
        the financial crisis, including actions against the former 
        Chief Executive Officer (CEO) and other executives of 
        Countrywide Financial, Citigroup and its former Chief Financial 
        Officer (CFO) and Head of Investor Relations, Morgan Keegan, 
        Goldman Sachs, State Street Bank, former executives of New 
        Century Financial and IndyMac Bancorp, Brookstreet Securities, 
        and ICP Asset Management and its President;

    obtained multimillion dollar settlements with Tyson Foods, 
        Alcatel-Lucent, Technip, and General Electric for violations of 
        the Foreign Corrupt Practices Act (FCPA).

    filed our first case against a State involving municipal 
        securities;

    brought accounting fraud cases against Dell, Diebold, and 
        DHB Industries;

    brought a significant case alleging inappropriate use of 
        confidential customer information by a proprietary trading desk 
        at Merrill Lynch and an action against AXA Rosenberg in the 
        challenging and rapidly evolving area of computer-based 
        quantitative investment management;

    filed a variety of cases to halt Ponzi scheme operators and 
        perpetrators of offering frauds, including those brought in 
        conjunction with the Financial Fraud Enforcement Task Force's 
        Operation Broken Trust sweep--indeed, in each of the past two 
        fiscal years we've filed more than twice as many Ponzi cases as 
        we filed in fiscal 2008;

    brought actions alleging illegal trading on confidential 
        information obtained from technology company employees 
        moonlighting as expert network consultants and illegal trading 
        by major hedge funds based on illegal tips; and

    brought an action alleging a $1.5 billion mortgage 
        securities fraud scheme to defraud the U.S. Treasury's Troubled 
        Asset Relief Program (TARP).

Strengthening Oversight
    Strong regulation is essential to the fair, orderly, and efficient 
operation of markets. A vigorous examination program not only reduces 
the opportunities for wrongdoing and fraud, but also provides early 
warning about emerging trends and potential weaknesses in compliance 
programs.
    This past year, the SEC 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 
agency strengthened the national exam program to provide greater 
consistency and efficiencies across our eleven regions and to focus 
more sharply on identifying the higher risk firms that it targets for 
examination. We also implemented new policies requiring examiners to 
routinely verify the existence of client assets with third party 
custodians, counterparties, and customers. Additionally, the exam unit 
now assembles individual specialists with the appropriate skill-sets 
for the firm they are examining or the issues on which they are 
focusing. Finally, the SEC has also worked to enhance the training of 
examiners and bring on board specialists in risk management, trading, 
and complex structured products.
    These reforms are helping to deliver results in the exam program's 
work to evaluate risks, inform policy, and identify potential 
wrongdoing. In fact, in January 2011 alone, the Enforcement Division 
brought three significant cases stemming directly from exams. And going 
forward, the national exam program will continue to conduct sweeps in 
critical areas from trading practices to market manipulation to 
structured products.

Improving Market Structure
    No discussion of the SEC's actions over the past year would be 
complete without a discussion of May 6, 2010--the day our markets 
dropped more than 500 points in a matter of minutes, only to bounce 
back minutes later. That event reinforced the importance of our ongoing 
review of market structure, which we had launched months earlier with a 
concept release inviting comment on regulation of the changing 
financial markets.
    The U.S. equity market structure has changed dramatically in recent 
years. A decade ago, most of the volume in stocks was executed 
manually, whether on the floor of an exchange or over the telephone 
between traders. Now nearly all orders are executed by fully automated 
systems at great speed. The fastest exchanges and trading venues are 
now able to accept, execute, and send a response to orders in less than 
one thousandth of a second.
    Speed is not the only thing that has changed. As little as 5 years 
ago, the great majority of U.S. equities capitalization was traded on a 
listing market--the New York Stock Exchange (NYSE)--that executed 
nearly 80 percent or more of volume in those stocks. Today, the NYSE 
executes approximately 22 percent of the volume in its listed stocks. 
The remaining volume is split among 15 public exchanges, more than 30 
dark pools, 3 electronic communication networks (ECNs), and more than 
200 internalizing broker-dealers. Currently, more than 30 percent of 
the volume in U.S.-listed equities is executed in venues that do not 
display their liquidity or make it generally available to the public, 
reflecting an increase over the last year.
    The evolution of trading technologies has dramatically increased 
the speed, capacity, and sophistication of the trading functions that 
are available to market participants. The new electronic market 
structure has opened the door for entirely new types of professional 
market participants. Today, proprietary trading firms play a dominant 
role by providing liquidity through the use of highly sophisticated 
trading systems capable of submitting many thousands of orders in a 
single second. These high-frequency trading firms can generate more 
than a million trades in a single day and now account for more than 50 
percent of equity market volume.
    Public feedback from a wide variety of market participants has been 
that today's market structure clearly offers many advantages, including 
reduced trading costs, when compared to the markets of ten, and even 
just 5 years ago. Nevertheless, as highlighted by the events of May 6, 
the current structure has many potential issues that should be studied 
and addressed where appropriate. High-speed, algorithm-driven 
electronic trading has increased the risk of sudden liquidity 
imbalances that can lead to disorderly market conditions and unexpected 
volatility. The continuing growth of trading in dark pools and other 
types of dark venues can challenge the quality of the market's price-
discovery function. And the complexity of the market structure 
sometimes makes it difficult for even sophisticated investors to pursue 
their own best interests.
    Over the past year, the SEC has engaged in a dedicated effort to 
study and learn from the experiences of May 6, with the aim of taking 
action to preserve the benefits of the current structure while 
minimizing its downsides. The agency worked with FINRA and the 
exchanges to develop rules that trigger circuit breakers for certain 
individual stocks, clarify up front how and when erroneous trades would 
be broken, and effectively prohibit ``stub quotes'' in the U.S. equity 
markets. We adopted a rule that prohibits broker-dealers from providing 
their clients with unfiltered access to exchanges, and proposed the 
creation of a large trader reporting system that would enhance our 
ability to identify large market participants, collect information on 
their trades, and analyze their trading activity.
    We also proposed a new rule that would require the creation of a 
consolidated audit trail that would enable regulators to track 
information about trading orders received and executed across the 
securities markets. Today, there is no standardized, automated system 
to collect data across the various trading venues, products, and market 
participants. Each market has its own individual and often incomplete 
data collection system, and as a result, regulators tracking suspicious 
activity or reconstructing an unusual event must obtain and merge an 
immense volume of disparate data from a number of different markets. 
And even then, the data does not always reveal who traded which 
security, and when. To obtain individual trader information, the SEC 
must make a series of manual requests that can take days or even weeks 
to fulfill. In brief, the Commission's tools for collecting data and 
surveilling our markets are wholly inadequate to the task of overseeing 
the largest equity markets in the world.
    The proposed consolidated audit trail rule would require the 
exchanges and FINRA to jointly develop a national market system (NMS) 
plan to create, implement, and maintain a consolidated audit trail in 
the form of a newly created central repository. The information would 
capture each step in the life of the order, from receipt or origination 
of an order, through the modification, cancellation, routing and 
execution of an order. Notably, this would include information 
identifying the ``ultimate customer'' who generated the order. And, it 
would require members to ``tag'' each order with a unique order 
identifier that would stay with that order throughout its life.
    If implemented effectively, the consolidated audit trail would, for 
the first time, allow self-regulatory organizations (SROs) and the 
Commission to track trade data across multiple markets, products and 
participants simultaneously. It would allow us to rapidly reconstruct 
trading activity and to more quickly analyze both suspicious trading 
behavior and unusual market events. It is important to recognize, 
however, that the consolidated audit trail is a major change in the 
technology infrastructure for our equity markets, and thus will require 
some time to fully implement. In addition, in order to fully use this 
new infrastructure, the Commission's own technology and human resources 
will need to be expanded well beyond their current levels.

Key Rulemaking
    Over the past year, the Commission has pursued an active rulemaking 
agenda aimed at making our financial markets more secure, providing 
investors with more and better information, finding ways to make 
securities markets less volatile and more transparent, and promoting 
effective corporate governance. Even before passage of the Dodd-Frank 
Act, the SEC was in the midst of a productive period of rulemaking on 
diverse topics. Among the key ongoing and recently completed 
rulemakings are the following:

    Municipal securities: The Commission adopted rules that 
        provide market participants with more meaningful and timely 
        information regarding the health of municipal securities. In 
        addition, as discussed below, we adopted rules to curtail pay 
        to play practices by investment advisers seeking to manage 
        public pensions.

    Proxy enhancements: The Commission adopted rules to 
        facilitate exercise of shareholders' traditional State law 
        right to nominate directors to corporate boards. We also 
        improved disclosure relating to risk and compensation and 
        revised the e-proxy rules so that additional materials could be 
        provided to shareholders with the company's notice. And, we 
        issued a concept release requesting public input on the 
        mechanics of proxy voting and shareholder communications.

    Investment adviser disclosure: In order to ensure that 
        investors receive clear and accurate information from their 
        advisers, the Commission adopted rules requiring advisers to 
        provide clients with brochures that plainly disclose their 
        business practices, fees, conflicts of interests, and 
        disciplinary information.

    Mutual funds fees and marketing: The Commission proposed 
        rules to create a more equitable framework for mutual fund 
        marketing fees, known as 12b-1 fees. We proposed rules to help 
        clarify the meaning of a date in a target date fund's name, as 
        well as enhance information in fund advertising and marketing 
        materials.

    Target date funds: The Commission proposed rules that are 
        intended to provide enhanced information to investors 
        concerning target date retirement funds and reduce the 
        potential for investors to be confused or misled regarding 
        these funds.

    Money market funds: The Commission took action to permit 
        investors, for the first time, to access detailed information 
        that money market funds now file with the agency, including 
        their ``shadow NAV'' (net asset value). While the SEC uses this 
        information in its real-time oversight of money market funds, 
        public disclosure can provide investors and market analysts 
        with useful insight for their evaluation of funds. We also 
        tightened the quality standards that apply to the funds' 
        investments and are working with our regulatory colleagues to 
        assess the various options for making sure these funds are as 
        safe and resilient in the face of market stresses as investors 
        are led to believe.

    Asset-backed securities: The Commission proposed rules that 
        would revise the disclosure, reporting and offering process for 
        ABS to better protect investors in the securitization market.

    Market access: The Commission took an important step to 
        promote market stability by adopting a new market access rule. 
        Broker-dealers that access the markets themselves or offer 
        market access to customers will be required to put in place 
        appropriate pretrade risk management controls and supervisory 
        procedures. The rule effectively prohibits broker-dealers from 
        providing customers with "unfiltered" access to an exchange or 
        alternative trading system. By helping ensure that broker-
        dealers appropriately control the risks of market access, the 
        rule should prevent broker-dealers from engaging in practices 
        that threaten the financial condition of other market 
        participants and clearing organizations, as well as the 
        integrity of trading on the securities markets.

    Pay to Play: The Commission adopted in June of last year a 
        new rule to address so-called ``pay to play'' practices in 
        which investment advisers make campaign contributions to 
        elected officials in order to influence the award of contracts 
        to manage public pension plan assets and other Government 
        investment accounts. The rule, adopted in response to a growing 
        number of reports of such activities across the country, is 
        intended to combat pay to play arrangements at the State and 
        local Government level in which advisers are chosen based on 
        their campaign contributions to political officials rather than 
        on merit.
    In addition to these items, enactment of the Dodd-Frank Act added 
significant new work to the Commission's agenda, including more than 
100 rulemaking provisions applicable to the SEC. To date, the 
Commission has issued twenty-eight proposed rule releases, seven final 
rule releases, and two interim final rule releases in connection with 
the Dodd-Frank Act. We have received thousands of public comments, held 
hundreds of meetings with market participants, completed five studies, 
and hosted five roundtables. Among the areas of current focus:

    OTC derivatives:  We are working with the Commodity Futures 
        Trading Commission (CFTC) to implement the new regulatory 
        regime for OTC derivatives--defining terms, developing 
        requirements for new trading and clearing platforms, crafting 
        registration and reporting regulations, carving out end-user 
        exemptions, and undertaking dozens of other tasks.

    Private fund advisers: We are working to finalize rules to 
        implement the requirement that advisers to large hedge funds 
        and private equity funds register with the Commission. 
        Additionally, we're working with members of the Financial 
        Stability Oversight Council and the CFTC to implement the Act's 
        mandate that advisers to hedge funds and other private funds 
        report information for use in monitoring for systemic risk to 
        the U.S. financial system.

    Asset-backed securities: Along with the banking regulators, 
        we are working to propose risk-retention (or ``skin in the 
        game'') requirements for asset-backed securities transactions. 
        And under recently adopted rules, ABS issuers, for the first 
        time, will be performing reviews of the bundled assets and 
        disclosing the nature, findings, and conclusions of these 
        reviews. The Commission also adopted rules regarding 
        representations and warranties in ABS. In addition, we are 
        working to sync up our earlier ABS proposed rules with those 
        adopted under the Dodd-Frank Act.

    Credit rating agencies: The Commission is working on about 
        a dozen rulemakings related to NRSROs, including with respect 
        to internal controls, conflicts of interest, credit rating 
        methodologies, transparency, ratings performance, analyst 
        training, credit rating symbology, and disclosures accompanying 
        the publication of credit ratings.

    Corporate governance: The Commission is working on rules to 
        implement the Act's various provisions relating to public 
        company governance, including recently adopted rules on 
        shareholder advisory votes on executive compensation, as well 
        as rules with respect to the independence of compensation 
        committees, retention of compensation consultants, incentive-
        based compensation regulations or guidelines for certain large 
        financial institutions, clawbacks of executive compensation, 
        pay for performance, pay ratios, and broker voting of 
        uninstructed shares.

    Studies related to investment advisers and broker-dealers: 
        To date, the Commission has published three staff studies on 
        enhancing investment adviser examinations, the obligations of 
        investment advisers and broker-dealers, and investor access to 
        information about investment professionals. We will begin to 
        consider rules stemming from these recent studies, including 
        consideration of the recommendation that financial 
        professionals who provide personalized investment advice to 
        retail customers about securities adhere to a fiduciary 
        standard of conduct ``no less stringent'' than that currently 
        imposed on investment advisers.

    Rewards for whistleblowers: The Commission will be 
        finalizing rules that will allow us to benefit more effectively 
        from input by whistleblowers, the individuals who are often 
        closest to fraud and can be an invaluable source of information 
        for our enforcement and inspection efforts.

    Specialized Disclosures: Title XV of the Dodd-Frank 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 
        Commission published the rule proposals relating to these three 
        provisions in December 2010. The comment periods were scheduled 
        to close on January 31, 2011, but the Commission extended the 
        comment periods for all three rule proposals for 30 days, to 
        March 2, 2011 after receiving several requests for an extension 
        of the time for public comment.

SEC Resources
    This year finds the SEC 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 must 
also continue to carry out its longstanding core responsibilities. 
These responsibilities--pursuing securities fraud, reviewing public 
company disclosures and financial statements, inspecting the activities 
of investment advisers and broker-dealers, and ensuring fair and 
efficient markets--remain essential to investor confidence and trust in 
financial institutions and markets.
    Over the past decade, the SEC has faced significant challenges in 
maintaining a staffing level and budget sufficient to carry out its 
core mission. The SEC experienced 3 years of frozen or reduced budgets 
from FY2005 to 2007 that forced a reduction of 10 percent of the 
agency's staff. Similarly, the agency's investments in new or enhanced 
information technology (IT) systems declined about 50 percent from 
FY2005 to 2009.
    As a result of increased funding levels in FY2009 and FY2010, 
current SEC staffing levels are just now returning to the level of 
FY2005, despite the enormous growth in the size and complexity of the 
securities markets since then. During the past decade, for example, 
trading volume has more than doubled, the number of investment advisers 
has grown by 50 percent, and the assets they manage have increased to 
$38 trillion. Six years ago, the SEC's funding was sufficient to 
provide nineteen examiners for each trillion dollars in investment 
adviser assets under management. Today, that figure stands at twelve 
examiners per trillion dollars. A number of financial firms spend many 
times more each year on their technology budgets alone than the SEC 
spends on all of its operations.
    Today, the SEC has responsibility for approximately 35,000 
entities, including direct oversight of 11,800 investment advisers, 
7,500 mutual funds, and more than 5,000 broker-dealers with more than 
160,000 branch offices. We also review the disclosures and financial 
statements of approximately 10,000 reporting companies. The SEC also 
oversees approximately 500 transfer agents, 15 national securities 
exchanges, 9 clearing agencies, 10 nationally recognized statistical 
ratings organizations (NRSROs), as well as the Public Company 
Accounting Oversight Board (PCAOB), Financial Industry Regulatory 
Authority (FINRA), Municipal Securities Rulemaking Board (MSRB), and 
the Securities Investor Protection Corporation (SIPC).
    In addition to our traditional market oversight and investor 
protection responsibilities, the enactment of the Dodd-Frank Act has 
added significant new responsibilities to the SEC's workload. These new 
responsibilities include a parallel set of responsibilities to oversee 
the over-the-counter derivatives market, including direct regulation of 
participants such as security-based swaps dealers, venues such as swap 
execution facilities, warehouses such as swap data repositories, and 
clearing agencies set up as long-term central counterparties. In a 
similar fashion, under the Dodd-Frank Act the SEC has been given 
responsibilities for hedge fund advisers that are similar to those that 
the agency has long overseen with respect to traditional asset 
managers. These hedge fund advisors include those that trade with 
highly complex instruments and strategies. Additionally, the Commission 
has new responsibility for registration of municipal advisors, enhanced 
supervision of NRSROs, heightened regulation of asset-backed 
securities, and the creation of a new whistleblower program.

FY2011 Continuing Resolution
    The SEC has not yet received any additional funds in FY2011 for its 
new responsibilities under the Dodd-Frank Act. For FY2011, the 
President's budget request for the SEC was $1.258 billion, which would 
have constituted an increase over the SEC's FY2010 appropriation of 
$1.111 billion. However, the SEC did not receive this request, and 
since the start of FY2011 has been operating under continuing 
resolutions that provide funding at last year's levels, despite the 
fact that the agency must sustain a larger workforce than it did last 
year. This restricted funding has required the SEC to severely restrain 
any new hiring this year, even to replace staff who leave the agency; 
to postpone most technology initiatives; and to limit its base mission 
operations until the final funding level for FY2011 is resolved.
    As discussed above, the enactment of the Dodd-Frank Act has added 
significantly to the SEC's workload. So far, the SEC has proceeded with 
the first stages of implementation of the Dodd-Frank Act without 
additional funding. This has largely involved performing studies, 
conducting analyses, and writing rules. These tasks have taken staff 
time from other responsibilities, and have been done almost entirely 
with existing staff. Over the long-term, fulfilling the Act's new 
oversight responsibilities--for instance, with respect to the OTC 
derivatives market, hedge fund advisers, municipal advisors, security-
based swap participants, NRSROs, clearinghouses, asset-backed 
securities, and whistleblowers--will require significant additional 
resources or a substantial reduction in the performance of our core 
duties. In acknowledgement of this new workload, the Act authorized an 
increase in the agency's budget to $1.5 billion in FY2012, and $2.25 
billion by FY2015.

FY2012 Request
    The SEC is requesting $1.407 billion for FY2012, an increase of 
$264 million over the continuing resolution level under which we are 
currently operating. If enacted, this request would permit us to hire 
an additional 780 positions (612 FTE) over projected FY2011 levels.
    It is important to note that the SEC's FY2012 funding request would 
be fully offset by matching collections of fees on securities 
transactions. Currently, the transaction fees collected by the SEC are 
approximately two 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.
    The FY2012 request is designed to provide the SEC with the 
resources required to achieve several high-priority goals: to 
adequately staff the agency to fulfill its core mission; to continue to 
implement the requirements of the Dodd-Frank Act; and to expand the 
agency's IT systems and management infrastructure to serve the needs of 
a more modern and complex organization. For purposes of my testimony 
today, I would like to summarize the request in each of these priority 
areas:

    Reinvigorating Core SEC Programs: 40 percent (312) of the 
        new positions requested for FY2012 would be used to strengthen 
        and support core SEC operations, including protecting 
        investors, maintaining orderly and efficient markets, and 
        facilitating capital formation. As mentioned before, SEC 
        staffing levels are just now returning to FY2005 levels, even 
        as the agency's responsibilities have grown along with the size 
        and complexity of the securities markets. To help restore core 
        capabilities, this budget request would permit us to add forty-
        nine positions to the enforcement program that would grow the 
        five new specialized investigative units, bolster the agency's 
        litigation program, and expand the new Office of Market 
        Intelligence which conducts risk assessment and handles 
        thousands of tips, complaints, and referrals. In our 
        examination program, this request would allow us to add fifty-
        five personnel to augment risk assessment, monitoring, and 
        surveillance functions and to conduct additional adviser and 
        fund inspections. The request would also permit thirty-seven 
        staff to be added to the Division of Corporation Finance 
        primarily to conduct more frequent disclosure reviews of the 
        largest companies, fifteen additional staff to the Division of 
        Investment Management primarily to enhance oversight of money 
        market funds and specialized products, and eleven new positions 
        to be added to the Division of Risk, Strategy, and Financial 
        Innovation to better equip the agency to identify and address 
        emerging risks and long-term issues of critical importance.

    Implementing the Dodd-Frank Act: 60 percent (468 positions) 
        of the new positions requested for FY2012 would be used to 
        implement the Dodd-Frank Act. Many of these new positions would 
        be used to hire experts in derivatives, hedge funds, data 
        analytics, credit ratings, and other new or expanded 
        responsibility areas, so that the agency may acquire the deeper 
        expertise and knowledge needed to perform effective oversight. 
        These new positions would support 157 new positions focused on 
        the derivatives markets; 102 focused on hedge fund advisers; 43 
        to expand investigations of tips received from whistleblowers; 
        35 focused on municipal securities and examinations of newly 
        registered municipal advisors; 33 focused on clearing agencies, 
        including annual reviews of those determined to be systemically 
        important; and 26 focused on NSRSOs principally to perform the 
        annual examinations required by the Act. The agency also would 
        invest in technology to facilitate the registration of 
        additional entities and capture and analyze data on the new 
        markets.
    The total FY2012 costs to implement the Dodd-Frank Act through 
these new positions and technology investments will be approximately 
$123 million. In addition to the new positions requested in FY2012, we 
also anticipate that an additional 296 positions and additional 
technology investments will be required in FY2013 for full 
implementation of the Dodd-Frank Act.

    Investing in Information Technology: The SEC's budget 
        request for FY2012 will support information technology 
        investments of $78 million, an increase of $23 million over 
        FY2011. This level of funding would support vital new 
        technology initiatives including data management and 
        integration, document management, EDGAR modernization, market 
        data, internal accounting and financial reporting, 
        infrastructure functions, and improved project management. This 
        funding will permit the agency to develop risk analysis tools 
        to assist with triage and analysis of tips, complaints, and 
        referrals and to complete a digital forensics lab that 
        enforcement staff can use to recreate data from computer hard 
        drives and cell phones to capture evidence of sophisticated 
        frauds. The budget request would also permit the hiring of 
        additional staff in the Office of Information Technology, 
        including experienced business analysts and certified project 
        managers to oversee IT projects and staff to address financial 
        statement and information technology deficiencies identified by 
        the Government Accountability Office (GAO).

    Improving the Agency's Management Infrastructure: The SEC's 
        FY2012 request would permit the SEC to make further 
        improvements to the agency's basic internal operations and to 
        bring administrative and support services capabilities into 
        alignment with the requirements of today's SEC, and ensure that 
        the agency manages its resources wisely and efficiently. The 
        budget request would permit the strengthening of the newly 
        established Office of the Chief Operating Officer, including 
        the development of a more robust operational risk management 
        program and the build-out of a data management program. The 
        budget request also contemplates an appropriate expansion of 
        the agency's administrative support functions, including the 
        Offices of Financial Management, Human Resources, 
        Administrative Services, and FOIA and Records Management. The 
        request also includes the necessary space rent and other 
        noncompensation expenses necessary to support the level of 
        staffing requested for FY2012. Additionally, the SEC is 
        devoting significant management attention to improving program 
        and management controls, including in response to audits and 
        assessments by the Office of the Inspector General (OIG), GAO, 
        and management's own internal assessments.

    Addressing Material Weaknesses in Internal Controls: In 
        November 2010, the SEC completed its Performance and 
        Accountability Report, the equivalent of a company's annual 
        report. A GAO audit found that the financial statements and 
        notes included in the report were presented fairly and in 
        conformity with U.S. Generally Accepted Accounting Principles 
        (GAAP), but also identified two material weaknesses in internal 
        controls over financial reporting: one in information systems, 
        and a second in financial reporting and accounting processes.

    I find these material weaknesses unacceptable. The root causes of 
these weaknesses are gaps in the security and functionality of the 
agency's financial system, resulting from years of underinvestment in 
financial systems technology. Rather than incur the development risks 
of creating new technology and systems, we made the decision to 
outsource this function by migrating to one of the Office of Management 
and Budget's designated Federal Shared Service Providers (FSSP), under 
the Financial Management Line of Business (FMLoB) model.
    After detailed analysis and careful consideration, the Commission 
selected as its FSSP the Department of Transportation's (DOT) 
Enterprise Service Center (ESC). Through the implementation of the new 
financial system, the Commission will reap the benefits of expanded 
functional capability; business process reengineering, where 
appropriate; and better integration of program, financial, and 
budgetary information to support more efficient and effective 
operations.
    In November 2010, the SEC began the planning phase of the financial 
management improvement project, which focused on the development of a 
detailed project plan for the full implementation of the ESC solution 
and the identification of unique Commission requirements. The SEC and 
the ESC just completed the planning phase, and on February 25 signed an 
interagency agreement to commence the implementation phase. We will 
work together over the next thirteen months to migrate the SEC's 
financial system and data, with a planned cutover in April 2012.

Conclusion
    Thank you, again, for your support for the agency's mission, and 
for allowing me to be here today to present the President's budget 
request. I am happy to answer any questions that you might have.

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

Q.1. How has market transaction activity changed from 2001 to 
the present?

A.1. Market transaction activity has changed dramatically over 
the last 10 years. For example, in the equity markets, the 
average daily share volume in U.S.-listed stocks increased from 
3.4 billion shares in 2001 to 8.5 billion shares in 2010. As 
discussed in the Commission's January 2010 concept release on 
equity market structure, \1\ the changes have been particularly 
profound for stocks listed on the NYSE. NYSE-listed stocks 
represent approximately 80 percent of U.S. market 
capitalization and traditionally were traded in a largely 
centralized fashion on a physical trading floor. In January 
2005, for example, the NYSE executed 79.1 percent of the 2.1 
billion shares in average daily volume in its listed stocks. By 
October 2009, it executed only 25.1 percent of the 5.9 billion 
shares of average daily volume. The remaining 74.9 percent of 
volume in NYSE-listed stocks was executed by approximately 15 
exchanges and electronic communications networks, approximately 
32 dark pool alternative trading systems, and more than 200 
internalizing broker-dealers.
---------------------------------------------------------------------------
     \1\ See, http://sec.gov/rules/concept/2010/34-61358fr.pdf.
---------------------------------------------------------------------------
    The nature of trading in NYSE-listed stocks also changed 
dramatically during the period from 2005 to 2009 as the NYSE 
adopted a more automated trading model and many market 
participants began to use automated trading tools and 
strategies. The average speed of execution on the NYSE, for 
example, declined from 10.1 seconds to 0.7 seconds for small, 
immediately executable orders. The number of average daily 
trades increased from 2.9 million to 22.1 million, even as the 
average trade size declined from 724 to 268 shares.

Q.2. What has the SEC done to enact Section 939G of the Dodd-
Frank Act?

A.2. Section 939G was effective upon enactment of the Dodd-
Frank Act and immediately repealed SEC Rule 436(g). As you 
know, Rule 436(g) exempted nationally recognized statistical 
rating organizations (NRSROs) from having to be named as 
experts and consenting to being named when their ratings are 
included in a registration statement. Before the repeal, Rule 
436(g) had the effect of exempting NRSROs from expert liability 
under Section 11 of the Securities Act of 1933. The repeal of 
this rule meant that issuers would be required to file the 
consent of an NRSRO named in a registration statement, when 
that registration statement includes the credit rating of the 
security being offered and sold.
    The immediate impact of the repeal of Rule 436(g) was in 
the area of public offerings of asset-backed securities (ABS). 
As discussed in detail below in the response to your Question 
3, the staff of the Division of Corporation Finance has issued 
two no-action letters in order to facilitate the registered ABS 
market.

Q.3. What enforcement or other tools has the SEC deployed to 
ensure orderly, efficient markets and facilitate capital 
formation in light of the events in the asset-backed 
securitization market on July 22, 2010?

A.3. Under the current rules for ABS offerings, ABS 
registration statements are required to include information 
regarding the rating if the sale is conditioned on the issuance 
of a rating. Therefore, any registered offering of ABS that is 
conditioned on receiving a rating would be required to include 
consent by the rating agency that issued the rating for the 
securities, to be named as an expert in the registration 
statement. The staff was advised by NRSROs at the time of 
enactment of the Dodd-Frank Act that they would not be willing 
to provide such consent, which, in turn, would have caused 
issuers to be unable to register ABS offerings and move ABS 
offerings to the unregistered private markets.
    Therefore, on July 22, 2010, the staff of the Division of 
Corporation Finance issued a no action letter to Ford Motor 
Credit Company LLC as a temporary measure to enable ABS issuers 
to continue to conduct registered offerings while the SEC and 
market participants determine an appropriate long-term solution 
to the issue. The letter stated that the Division will not 
recommend enforcement action to the Commission if an asset-
backed issuer as defined in Item 1101 of Regulation AB omits 
the ratings disclosure required by Regulation AB from a 
prospectus that is part of a registration statement relating to 
an offering of asset-backed securities. This no-action position 
was set to expire on January 24, 2011.
    The staff met with the major NRSROs, who continue to 
indicate they will not provide their consent. This means that 
without some action, all ABS offerings would be conducted in 
the unregistered private markets. Given the current state of 
uncertainty in the ABS market and the benefits to investor 
protection afforded by Securities Act registration, the staff 
believed the best balance at this time was to extend the no-
action position. The staff extended the relief until further 
notice in a second letter to Ford Motor Credit issued on 
November 23, 2010.
    The Commission has been focused on rating agency issues 
generally and had outstanding proposals and requests for 
comment in this area when the Dodd-Frank Act was enacted. We 
currently are working on extensive changes to our regulations 
that would improve several aspects of asset-backed securities 
regulation and securities ratings, including changes to the 
oversight of NRSROs and the removal of ratings' reliance from 
the Commission's regulations. We also understand that some of 
the newer rating agencies may consider agreeing to the required 
consent for ratings that are disclosed in a prospectus. We 
continue to monitor the issue and we will carefully consider 
your comments as we move forward in our efforts.
    Because ratings are not required to be disclosed in non-ABS 
offerings, ratings relating to the securities being offered and 
sold are not typically included in corporate registration 
statements. However, other rating information is sometimes 
included in registration statements, such as in Management's 
Discussion and Analysis. Therefore staff of the Division of 
Corporation Finance also issued guidance to corporate 
registrants regarding disclosure of ratings in other contexts 
to facilitate continued compliance with disclosure rules 
without prompting a need for rating agency consent.
                                ------                                


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

Q.1. Coordination With the CFTC. Chairman Schapiro, the Dodd-
Frank Act requires that the SEC and CFTC coordinate their rule 
makings. Moreover, it would seem to be common sense that 
similar products (credit derivatives and indexes of credit 
derivatives, for example) should be subject to the same set of 
rules, especially with respect to such fundamental issues as 
market structure.
    Yet, the SEC and CFTC have proposed different sets of rules 
pertaining to ``securities-based swap execution facilities'' 
and ``swap execution facilities'', respectively. I am concerned 
that conflicting or inconsistent rules on such fundamental 
areas as market structure could drive business to overseas 
markets, where market structure will be consistent across 
similar product classes. What steps is the SEC taking to ensure 
that U.S. markets are not put at a disadvantage to non-U.S. 
markets as a result of a lack of consistency between the SEC's 
and CFTC's rules?

A.1. Commission staff has consulted and coordinated extensively 
with the CFTC staff in the development of the proposed rules. 
Our objective has been to establish consistent and comparable 
requirements, to the extent possible, given the differences in 
the swaps and security-based swap markets, and we will continue 
to strive for increased coordination and harmonization where 
appropriate as we move toward adoption of final rules.
    For example, Commission staff worked closely with the CFTC 
staff in crafting the swap and security-based swap execution 
facility proposals, and overall there are substantial 
similarities between the proposals. There are, however, 
differences in certain areas, such as the treatment of requests 
for quotes, block trades, and voice brokerage. Our proposal 
reflects the SEC's preliminary view as to how the Dodd-Frank 
Act would best be applied to the trading of security-based 
swaps. We look forward to input from the public as to whether 
these differences are supported by distinctions in the trading 
and liquidity characteristics of swaps and security-based 
swaps, or whether the agencies' rules may be further 
harmonized--and if so, how. Based on the feedback we receive, 
we plan to work with the CFTC to achieve greater harmonization 
of the rules for SEFs and security-based SEFs. In addition, we 
have been reviewing the CFTC's proposals in conjunction with 
our own to identify areas where it makes sense to further 
harmonize our proposed rules.
    As the Commission engages in the Title VII rulemaking 
process, we recognize the need to establish regulation that is 
in accordance with the requirements under Title VII and that 
also takes into account the global nature of the derivatives 
marketplace. We are mindful of the potential for regulatory 
arbitrage, which could impact the competitiveness of U.S. 
derivatives markets and U.S. entities in the global derivatives 
markets, as well as undermine the goals of Title VII.
    In addition to our consultation and coordination with the 
CFTC and other U.S. regulators, we have been engaged in ongoing 
bilateral and multilateral discussions with foreign regulators 
and have been speaking with many foreign and domestic market 
participants in order to better understand which areas of 
derivatives regulation pose such arbitrage opportunities. We 
have solicited and welcome comments on our proposed rulemakings 
regarding the potential impact they may have on the position of 
the U.S. derivatives markets, especially comments that offer 
suggestions for mitigating regulatory arbitrage opportunities 
while achieving the goals of Title VII. However, given the 
complicated, interwoven nature of these matters, we have sought 
to avoid a piecemeal approach through the rules we have 
proposed thus far.

Q.2. Timing. Chairman Schapiro, it appears to be a fact that, 
despite the best efforts of the Commission and its staff, and 
despite the best efforts of the CFTC and its staff, not every 
deadline prescribed by Dodd-Frank will be met. As part of your 
efforts to coordinate with the CFTC, has there been any 
discussion about which rules to prioritize in the event it is 
not possible to issue all the rules by their stated deadlines?
    Also, has the SEC developed a plan for appropriate staging 
of the various rules in the event all deadlines are not met? 
For example, some commentators have suggested that rules 
regarding transparency and trade reporting should be 
prioritized, to ensure that the SEC and CFTC have as much 
relevant data as possible when implementing other rules, such 
as position limits. Is that an approach the SEC is considering?

A.2. We continue to work towards completing the rulemaking 
proposal and adoption process under Dodd-Frank within Congress' 
deadlines for implementation. However, given the complex issues 
raised by OTC derivatives, this is a very challenging task. We 
are progressing at a deliberate pace, taking the time necessary 
to thoughtfully consider the issues before proposing specific 
rules, and will continue to do so as we move toward adoption. 
We believe that this approach will help ensure that, when 
finally adopted, these rulemakings serve the broader objective 
of providing a workable framework that allows the OTC 
derivatives market to continue to develop in a more 
transparent, efficient, accessible, and competitive manner.
    As we consider final rules, we are focused on how to 
sequence the compliance dates of the various rules under Title 
VII to allow market participants sufficient time to develop the 
policies, operations and technology that they need in order to 
comply. We are carefully reviewing comments that we have 
received on appropriate approaches to implementation, and hope 
to receive more input on these issues. Jointly with the CFTC, 
in May we hosted a 2-day public roundtable to hear from market 
participants on implementation issues and supplement the 
comments received to date. In developing a sequencing plan, we 
are also considering practical issues, such as the need to get 
security-based swap data repositories registered and the 
reporting rules in place. Access to comprehensive security-
based swap data would help the Commission address certain 
implementation issues. We have discussed these sequencing 
issues with the CFTC and will continue to do so going forward.

Q.3. SEFs. Chairman Schapiro, the SEC's proposed rules 
governing Security-Based SEFs are somewhat different that the 
CFTC's rules governing SEFs. The CFTC's rule proposals appear 
to be more prescriptive than required under Dodd-Frank, while 
the SEC's proposed rules appear to be more consistent with 
Congressional intent. For example, the definition of SEFs 
refers to ``a trading system or platform in which multiple 
participants have the ability to execute or trade . . . swaps 
by accepting bids and offers made by multiple participants'' 
(emphasis added). This would appear to require only that the 
SEF platform provide the capability for bids and offers to be 
exposed to multiple participants. Please explain your 
understanding of the statutory requirements of the SEF 
definition, and how they informed the SEC's rulemaking.

A.3. The Dodd-Frank Act defines, in part, a security-based SEF 
as ``a trading system or platform in which multiple 
participants have the ability to execute or trade security-
based swaps by accepting bids and offers made by multiple 
participants in the facility or system, through any means of 
interstate commerce . . . .'' The Commission proposed to 
interpret this statutory language to mean that a security-based 
SEF must provide its participants with the ability to interact 
with the trading interest of more than one other participant on 
the system or platform. The Commission, however, did not 
propose to interpret this statutory language to require that 
the security-based SEF's participants actually interact with 
multiple bids and offers. Therefore, the Commission's proposed 
interpretation of the definition of ``security-based swap 
execution facility'' would enable a participant to send a 
request for quote to all participants on the system or 
platform, but also would allow a participant the option to 
disseminate a request for quote to fewer than all participants. 
We preliminarily believe that this proposal is consistent with 
the statutory language, and look forward to reviewing the 
comments from the public on the proposed interpretation.
                                ------                                


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

Q.1. Are there ways to use technology both to make existing 
staff more productive and to reduce the number of employees 
needed for Dodd-Frank responsibilities?

A.1. Under the new leadership team in our technology group and 
our new chief operating officer, we are working on a number of 
ways to leverage technology rather than necessarily bringing on 
additional human resources to perform functions that technology 
does very well.
    For example, we are working to deploy knowledge management 
systems that will allow the sharing of expertise, processes and 
experience. We are also investing in e-discovery tools that 
will free up skilled Enforcement staff from intensive paper 
document review and allow them more time for conducting 
investigations. We will also continue making investments in 
systems and technologies needed to facilitate reporting of 
information required by the Dodd-Frank Act.
    In FY2011 we also will be making key investments in general 
IT infrastructure modernization, including refreshing old 
technology and system hardware and software to avoid loss of 
productivity, facilitating the migration of the agency's 
financial systems to a shared service provider, increasing 
system capacities to accommodate data growth, and increasing 
operational efficiencies through better monitoring of system 
performance.

Q.2. Has the SEC worked with the CFTC to share information 
technology developments costs for the oversight of the OTC 
derivatives market?

A.2. The Commission staff has discussed in general terms OTC 
derivatives market oversight and related systems needs with 
CFTC staff in the course of our consultation and coordination 
regarding derivatives rulemaking under Title VII of the Dodd-
Frank Act, although these discussions have not addressed the 
specific costs regarding those systems. The Commission intends 
to leverage its existing systems, such as the EDGAR filing 
system, to the extent feasible for its Title VII oversight 
functions in order to reduce the additional costs imposed by 
the Commission's new regulatory responsibilities. I note, 
however, that our budget situation may impact our ability to 
invest in technology resources for Title VII oversight.

Q.3. Your agency and the CFTC have differed quite a bit on 
several rules with respect to derivatives. Not the least of 
which is your respective rules for swap execution facilities. I 
find yours to be much more flexible and appropriate given the 
uncertainty facing the marketplace. Can you give us an idea as 
to why you've chosen the route you're taking rather than what 
the CFTC has proposed?

A.3. 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.

Q.4. Given the Commission's competing priorities, wouldn't it 
make sense to draft the SEC's proposal for municipal advisors 
rule to exclude entities that are already regulated?

A.4. As you know, on December 20, 2010, the Commission proposed 
for public comment rules that would govern the registration of 
municipal advisors and, among other things, proposed guidance 
and solicited comment on the appropriate treatment of certain 
entities that are already regulated, such as brokers, dealers, 
municipal securities dealers, and investment advisers, in 
addition to certain professional groups, such as attorneys and 
engineers.
    It is important to note that the statutory framework of the 
Dodd-Frank Act already excludes many regulated entities from 
the definition of ``municipal advisor'' for purposes of their 
already-regulated activities. The Dodd-Frank Act provides that 
the term ``municipal advisor'' includes a person (who is not a 
municipal entity or an employee of a municipal entity) that 
``provides advice to or on behalf of a municipal entity or 
obligated person with respect to a municipal financial product 
or the issuance of municipal securities, including advice with 
respect to the structure, timing, terms, and other similar 
matters concerning such financial products or issues or that 
undertakes a solicitation of a municipal entity'' (emphasis 
added). In addition, the definition of ``municipal advisor'' 
explicitly excludes:

    a ``broker, dealer, or municipal securities dealer 
        serving as an underwriter'';

    ``any investment adviser registered under the 
        Investment Adviser Act of 1940, or persons associated 
        with such investment advisers who are providing 
        investment advice'';

    ``any commodity trading advisor registered under 
        the Commodity Exchange Act or persons associated with a 
        commodity trading advisor who are providing advice 
        related to swaps'';

    ``attorneys offering legal advice or providing 
        services that are of a traditional legal nature''; and

    ``engineers providing engineering advice''.

    Consistent with the statutory requirements, the 
Commission's proposed rules would require these regulated 
entities to register with the Commission only if providing 
advice or soliciting business that is within the definition of 
``municipal advisor'' and outside of the scope of their 
regulated activities already excluded by the Dodd-Frank Act.
    As part of the proposal, we have also solicited comment on 
the provision of traditional banking activities within the 
context of the definition of ``investment strategies'' and to 
what extent banks should be excluded from the proposed 
municipal advisor registration requirements. The staffs of the 
Commission and the Federal banking regulators are consulting 
with respect to the appropriate scope of any such exclusion. 
This consultation should help promote a more effective and 
efficient implementation of the requirements of the Dodd-Frank 
Act.
    We have received more than 1,000 comment letters on the 
proposal and we are reviewing them carefully. Public input is 
critically important in crafting a final rule, and I can assure 
you that the status of regulated entities will receive very 
careful consideration before a final rule is adopted.

Q.5. I am concerned about the recent SEC proposal on 
compensation regulation, especially for private fund investment 
advisers. What will the SEC do to limit the impact of this 
rule?

A.5. The SEC proposal arose out of the requirement in the Dodd-
Frank Act that financial regulators jointly develop rules or 
guidelines governing incentive-based compensation practices at 
certain financial institutions, including investment advisers 
as defined in the Investment Advisers Act and registered 
broker-dealers, with assets of $1 billion or more. 
Specifically, the Dodd-Frank Act requires the SEC, the Federal 
Reserve, OCC, FDIC, OTS, FHFA, and the NCUA, to jointly write 
rules or guidelines that: (1) require these ``covered financial 
institutions'' to disclose to their appropriate Federal 
regulator the structure of their incentive-based compensation 
arrangements so the regulator can determine whether such 
compensation is excessive or could lead to material financial 
loss to the firm; and (2) prohibit any type of incentive-based 
compensation that the regulators determine encourages 
inappropriate risks by providing excessive compensation or that 
could lead to material financial loss to the covered firm.
    The SEC proposal, as it relates to investment advisers, is 
limited to investment advisers that have $1 billion or more in 
balance sheet assets. The part of the SEC proposal that would 
require executive officers and certain other designated 
individuals to defer the receipt of their incentive-based 
compensation is further limited to investment advisers with $50 
billion or more in balance sheet assets. The proposed rule is 
the result of SEC staff working closely with other Federal 
regulators. As with any such undertaking, there is a challenge 
involved in finding common means to appropriately address 
Congress' mandate.
    The SEC plans to review carefully the comments that it 
receives to determine the appropriate method for calculating 
asset size for private fund investment advisers. More 
generally, the SEC looks forward to receiving public comment on 
the proposed rule and specifically on how the practices 
contemplated by the proposed rule compare to existing 
conventions. Of particular interest would be commenters' views 
on how assets would be calculated for purposes of determining 
whether institutions meet the $1 billion and the proposed $50 
billion thresholds, and the proposal's potential impact on 
broker dealer and investment adviser business models. As with 
all of our rulemaking, we will take the comments we receive 
very seriously and work hard to avoid unintended consequences.

              Additional Material Supplied for the Record





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