[Senate Hearing 112-206]
[From the U.S. Government Publishing Office]
S. Hrg. 112-206
NOMINATIONS OF: LUIS A. AGUILAR, DANIEL M. GALLAGHER, JR., ANTHONY
FRANK D'AGOSTINO, AND GREGORY S. KARAWAN
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
ON
NOMINATIONS OF:
Luis A. Aguilar, of Georgia, to be a Member, Securities and Exchange
Commission
__________
Daniel M. Gallagher, Jr., of Maryland, to be a Member, Securities and
Exchange Commission
__________
Anthony Frank D'Agostino, of Maryland, to be a Director, Securities
Investor Protection Corporation
__________
Gregory S. Karawan, of Virginia, to be a Director, Securities Investor
Protection Corporation
__________
JUNE 14, 2011
__________
Printed for the use of the Committee on Banking, Housing, and Urban
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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
Charles Yi, Chief Counsel and Deputy Staff Director
Dean Shahinian, Senior Counsel
Andrew Olmem, Republican Chief Counsel
Hester Peirce, Republican Senior Counsel
Michael Piwowar, Republican Chief Economist
Dawn Ratliff, Chief Clerk
Brett Hewitt, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
?
C O N T E N T S
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TUESDAY, JUNE 14, 2011
Page
Opening statement of Chairman Johnson............................ 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 2
WITNESSES
Luis A. Aguilar, of Georgia, nominee to be a Member, Securities
and Exchange Commission........................................ 4
Prepared statement........................................... 22
Responses to written questions of:
Chairman Johnson......................................... 26
Senator Reed............................................. 29
Senator Hagan............................................ 30
Daniel M. Gallagher, Jr., of Maryland, nominee to be a Member,
Securities and Exchange Commission............................. 5
Prepared statement........................................... 22
Responses to written questions of:
Chairman Johnson......................................... 33
Senator Reed............................................. 34
Senator Hagan............................................ 39
Anthony Frank D'Agostino, of Maryland, nominee to be a Director,
Securities Investor Protection Corporation..................... 6
Prepared Statement........................................... 23
Responses to written questions of:
Chairman Johnson......................................... 39
Senator Reed............................................. 40
Gregory S. Karawan, of Virginia, nominee to be a Director,
Securities Investor Protection Corporation..................... 7
Prepared Statement........................................... 24
Responses to written questions of:
Chairman Johnson......................................... 41
Senator Shelby........................................... 42
Senator Reed............................................. 42
Additional Material Supplied for the Record
Letter from California Public Employee's Retirement System
(CalPERS) supporting Luis A. Aguilar's nomination.............. 44
(iii)
NOMINATIONS OF:
LUIS A. AGUILAR, OF GEORGIA,
TO BE A MEMBER,
SECURITIES AND EXCHANGE COMMISSION;
DANIEL M. GALLAGHER, JR., OF MARYLAND,
TO BE A MEMBER,
SECURITIES AND EXCHANGE COMMISSION;
ANTHONY FRANK D'AGOSTINO, OF MARYLAND,
TO BE A DIRECTOR,
SECURITIES INVESTOR PROTECTION CORPORATION;
GREGORY S. KARAWAN, OF VIRGINIA,
TO BE A DIRECTOR,
SECURITIES INVESTOR PROTECTION CORPORATION
----------
TUESDAY, JUNE 14, 2011
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:05 a.m. in room SD-538, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson. Good morning. I will call this hearing to
order. Thanks to all of you for joining us here today and
special thanks to our witnesses and their families and friends
who are with us.
Today we consider four individuals nominated to serve in
positions on the Securities and Exchange Commission and the
Securities Investor Protection Corporation. Both of these
agencies play key roles in our securities markets.
Trillions of dollars of stocks, options, bonds, and other
securities trade hands in our markets. About half of American
families invest in these markets as they save for retirement,
college tuition, and other important purposes. And companies of
all sizes rely on these markets to raise capital to help them
grow and create jobs.
The SEC maintains order in the securities markets, roots
out fraud and abuse, and protects investors. The SIPC also
protects securities investors whose brokerages have failed.
Since its inception in 1970 it has helped recover over $100
billion for investors.
The securities markets are emerging from a difficult
period. They have suffered economic loss and an erosion in
public confidence, brought on by a wide range of problems
including failed mortgage-backed securities, unreliable credit
ratings, fraudulent investment schemes, and more.
In response to the financial crisis, Congress passed the
Dodd-Frank Wall Street Reform and Consumer Protection Act. The
SEC is now implementing Dodd-Frank through roughly 100
rulemakings and 20 studies. These deal with many areas, from
securitization to credit ratings, municipal securities,
corporate governance, investor protection, enforcement,
whistleblowers, executive pay, and regulatory management. And
at the same time, the SEC is dealing with a strained budget.
The SIPC is busy as well, managing claims from investors
defrauded by the likes of Bernie Madoff and Allen Stanford.
We need strong leadership at all our financial regulators,
and I am glad the President has sent us four well-qualified
individuals to fill these openings. I hope the Senate can
consider their nominations in a timely manner.
The Honorable Luis A. Aguilar is currently serving as a
Democratic Commissioner at the SEC. He is renominated for a
term expiring June 5, 2015. Prior to his appointment to the
SEC, Commissioner Aguilar was a partner with the international
law firm of McKenna Long & Aldridge, specializing in securities
law.
Daniel M. Gallagher, Jr., is a Republican nominee to be a
Commissioner for a term expiring June 5, 2016. He is a partner
in the Securities Department of the law firm Wilmer Hale. Prior
to joining the firm, Mr. Gallagher was at the SEC, where he
served as Co-Acting Director of the Division of Trading and
Markets and as Counsel to Chairman Christopher Cox and to
Commissioner Paul Atkins.
Tony D'Agostino is a managing director and chief operating
officer of the Global Quantitative Analytics group at the UBS
Investment Bank. From 2000 to 2009, Mr. D'Agostino worked at
Wachovia Securities, and prior to 2000, Mr. D'Agostino was an
officer in the U.S. Navy where he served on active duty for 24
years.
Mr. Gregory Karawan is senior vice president and general
counsel of retirement and protection at Genworth Financial.
Prior to joining Genworth, Mr. Karawan was a partner at the law
firm of Sonnenschein Nath and Rosenthal.
I look forward to hearing all of their testimony.
I now turn to Senator Shelby for any opening remarks he may
have. Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
Today, as you pointed out, the Committee will consider four
nominations--two for the Securities and Exchange Commission and
two for the Securities Investor Protection Corporation. Both
organizations have played an important role in the aftermath of
the financial crisis and will continue to do so.
The Dodd-Frank Act gave the Securities and Exchange
Commission a long list of rules to promulgate. In addition, the
SEC is contemplating other major rulemakings. The SEC also
recently restructured its enforcement and compliance programs
to address some of the systemic problems that enabled Bernie
Madoff and Allen Stanford to defraud thousands of investors for
years without being caught.
These initiatives, along with the important day-to-day
business of the SEC, will continue to have significant effect
on our economy for years to come. Therefore, I think it is
important that the Commission use economic analysis to
understand not only the cost of particular regulations but also
the cumulative effect that all of the rulemaking is having on
the markets and the economy.
At this critical time, the SEC, I believe, should do
everything it can to ease the regulatory burden it imposes on
American businesses, while at the same time remaining a
credible deterrent to misconduct in the markets.
With respect to the Securities Investor Protection
Corporation, or SIPC, the Madoff and Stanford frauds have put a
spotlight on its responsibility for assisting customers of
failed brokerage firms. The Madoff liquidation has been at the
heart of their work over the past several years and is much
bigger than anything that they have dealt with in its four-
decade history. As for the Stanford case, they have taken the
position that coverage under the Securities Investor Protection
Act is not appropriate. That is troubling to a lot of us. The
defrauded Stanford victims have asked the SEC to consider the
propriety of that decision, and several Senators have met with
the Chairman on that very issue.
The SEC's delay in making a decision is harming investors,
who already were harmed by the SEC's failures to prevent the
Stanford case in the first place. It is my hope that the SEC
will stop delaying and make a final decision as quickly as
possible in that area.
Thank you, Mr. Chairman, for holding this hearing. I look
forward to hearing from the nominees and hope that we can
expedite their confirmation.
Chairman Johnson. Will the nominees please rise and raise
your right hand? Do you swear or affirm that the testimony that
you are about to give is the truth, the whole truth, and
nothing but the truth, so help you God?
Mr. Aguilar. I do.
Mr. Gallagher. I do.
Mr. D'Agostino. I do.
Mr. Karawan. I do.
Chairman Johnson. Do you agree to appear and testify before
any duly constituted Committee of the Senate?
Mr. Aguilar. I do.
Mr. Gallagher. I do.
Mr. D'Agostino. I do.
Mr. Karawan. I do.
Chairman Johnson. Please be seated.
Please be assured that your written statement will be part
of the record, so if you could confine your remarks to 5
minutes, that would be greatly appreciated. Please also note
that Members of this Committee may submit written questions to
you for the record, and you should respond to those questions
promptly in order that the Committee may proceed on your
nominations.
I invite all the witnesses to introduce your families and
friends in attendance before the beginning of your statement.
Mr. Aguilar.
STATEMENT OF LUIS A. AGUILAR, OF GEORGIA, TO BE A MEMBER,
SECURITIES AND EXCHANGE COMMISSION
Mr. Aguilar. Chairman Johnson, Ranking Member Shelby, and
Members of this Committee, good morning. It is a great honor to
be here with you today. I do want to acknowledge my wife,
Denise, who was not able to accompany me today. She has been a
constant source of support and enabled me to serve as a member
of the United States Securities and Exchange Commission. I also
want to acknowledge my parents, Juan and Gladys Aguilar, who
sent their two small sons to the United States as Cuban
refugees, to escape the Castro revolution, and would be
bursting with pride to see one of them serving this great
country in such a manner.
Three years ago, I had the honor to come before this
Committee for confirmation hearings to be a member of the SEC,
and it has been my tremendous privilege to serve as a
Commissioner of the SEC. I was, and remain, humbled to be asked
to serve the American people at the agency where I started my
career as a staff attorney over 30 years ago. My deep respect
and admiration for the importance of the institution and its
mission has only grown during my tenure. I recognize the
significant responsibilities of the SEC to fulfill its
statutory mandate to protect investors, maintain fair and
orderly markets, and facilitate capital formation.
I have remained focused on these responsibilities during
these recent challenging times. The collapse of Lehman Brothers
and the ensuing market turmoil--of a kind not seen since the
Great Depression--began just weeks after I was sworn in as a
member of the Commission. In these extraordinary times I have
dedicated all of my skills, knowledge, and energy to the work
of the SEC. My professional career spans over 30 years, and I
have been a practitioner in corporate, securities, and
international law. I have seen the securities industry from
many vantage points. I have worked in Government, private
practice, and in corporate America. I have been an SEC staff
attorney, a law firm partner, and a general counsel and head of
compliance, and I have spent time as a domestic and
international business person. This breadth of experiences has
served me well as the SEC has taken up, or been confronted
with, a multitude of issues stretching across the securities
and corporate spectrum.
And so I was deeply honored to be nominated by President
Obama to serve another term as a Commissioner. It has been a
privilege to work with Chairman Mary Schapiro and my other
colleagues on the Commission: Kathleen Casey, Elisse Walter,
and Troy Paredes. If confirmed, I look forward to continuing
this work, along with Commissioner-Designate Dan Gallagher. I
believe a great deal of unfinished business remains before the
SEC--work that is vital toward improving our markets as well as
the agency itself.
I am committed to answering these challenges. When I
arrived in the United States as a refugee from Cuba, I was 6
years old and had little more than the clothes I was wearing.
The generosity and opportunities of this country provided me
the foundation to become the person who now has the honor of
appearing before you today. Serving as a Commissioner of the
SEC and being able to apply my securities expertise on behalf
of the American people is a tremendous honor and truly my
privilege.
If the U.S. Senate determines to confirm my nomination to a
second term as a member of the SEC, I promise to work
faithfully to serve the American people at this critical time.
I thank you. I will be happy to answer any questions the
Committee might have.
Chairman Johnson. Mr. Gallagher.
STATEMENT OF DANIEL M. GALLAGHER, JR., OF MARYLAND, TO BE A
MEMBER, SECURITIES AND EXCHANGE COMMISSION
Mr. Gallagher. Chairman Johnson, Senator Shelby,
distinguished Members of this Committee, it is a very great
honor for me to appear before you today. I am grateful and
humbled by the President's nomination to serve on the
Securities and Exchange Commission, and I am also honored to be
sitting here next to Commissioner Aguilar today.
I would first like to introduce you to members of my family
that are here with me today. My wife, Stephanie Gallagher, who
is sitting behind me, was recently named to be a Federal
magistrate judge in Maryland; her investiture is this Friday so
it is a big week for us. She is an incredible wife and mother,
and she has always been a tremendous source of support for me,
as she has been throughout the process that brings me before
you today. With her are my two sons, Danny and Charlie, and I
am incredibly proud of both of them.
My parents, Barbara and Daniel Gallagher, who have come
down from Philadelphia for this hearing, have been small
business owners for most of my life. Their work ethic,
integrity, and devotion to family have been a continuous
inspiration to me.
Since its creation, the SEC has been one of the most
important agencies in the Federal Government. Investor
protection and oversight of the capital markets are essential
to American investors as well as the overall economy. The SEC
must accomplish its mission in the context of complex, dynamic,
and globally connected markets.
This is a time of great importance for the SEC. It is
rebuilding after some setbacks, dealing with a loss of faith in
the financial markets, and facing broad new oversight and
regulatory responsibilities over complex financial instruments
and markets. The SEC staff, which is the engine of the agency,
is cognizant of the critical role they play, and I know from
personal experience that the staff is intensely dedicated to
the protection of investors and the health of the capital
markets.
Despite the financial crisis, the U.S. capital markets are
the strongest in the world. To maintain that status, the
markets need the SEC to be a strong and respected regulator.
Investors will only commit capital if they have faith in the
fairness of our markets, and the SEC is charged with instilling
and maintaining this confidence. By requiring transparency and
rigorously and fairly enforcing the law as directed by
Congress, the SEC plays a major role in maintaining the
preeminence of the U.S. capital markets. If confirmed, I will
strive every day to ensure that the agency satisfies this
mission.
On a personal note, I want to point out that I have been
nominated to fill the seat being vacated by Commissioner
Kathleen Casey, who is someone very well known to this
Committee. Commissioner Casey has been an outstanding
Commissioner and has served the country and investors with
integrity and dedication through an incredibly difficult time.
Should I be confirmed, I hope to serve as ably as she has.
Thank you, Mr. Chairman, Senator Shelby, and Members of the
Committee, for this opportunity to be before you today. I would
be pleased to take any questions you may have.
Chairman Johnson. Thank you.
Mr. D'Agostino.
STATEMENT OF ANTHONY FRANK D'AGOSTINO, OF MARYLAND, TO BE A
DIRECTOR, SECURITIES INVESTOR PROTECTION CORPORATION
Mr. D'Agostino. Good morning, Mr. Chairman, Members of the
Committee. My name is Tony D'Agostino, and I am honored to be
before you today as President Obama's nominee to serve on the
Board of SIPC.
I believe I am well qualified to serve on the SIPC Board
based on my management background in the securities industry
and my hands-on experience working within the capital markets.
Prior to joining Wall Street, I served in the United States
Navy for 24 years. I started out as a young enlisted man flying
in the H-3 helicopter, acted as a rescue swimmer, and operated
anti-submarine warfare equipment flying off aircraft carriers
in the Pacific. After I completed my undergraduate degree at
the University of Kansas, I was commissioned and went on to
serve in roles of increasing responsibility. A few job
examples: I was a briefer for the Secretary of the Navy and
Chief of Naval Operations during Desert Storm. I was an aide to
a Navy admiral and went on to qualify as a surface warfare
officer onboard aircraft carriers, my last ship being the USS
John F. Kennedy.
Since retiring from my career in the Armed Forces, I have
worked in the Capital Markets businesses of Wachovia and UBS.
In both organizations, I served in executive roles, which
allowed me to closely observe and fully appreciate the
intricacies of how the businesses are structured, staffed, and
operated.
As the chief operating officer of Wachovia's equity capital
markets platform, I directly oversaw and managed internal
functions supporting the equity businesses--technology,
compliance, legal, and finance. After serving as COO, I went on
to build from scratch an algorithmic and program trading
business, electronic trading business, and then went on to
manage an internal hedge fund known as a proprietary trading
desk.
I had to study and understand the operational
characteristics of hundreds of different companies in dozens of
diverse industry groups. During the 2008 market collapse where
40-percent losses were the norm, our ability to manage risk--
our fund was down just 2.4 percent. This part of my training to
serve in these roles, I was FINRA-registered with Series 7, 24,
55, and 63.
After Wachovia's collapse and takeover by Wells Fargo, our
division was shut down, and like so many other Americans, I
found myself out of work for the first time in my life. After
nearly a year out of work, I was recruited by UBS where I now
serve as the COO of the Global Quantitative Analytics group.
The QA group is responsible for building sophisticated
mathematical models, which are used to create, price, and
evaluate the risk of complex financial products--derivative
products, CDS, MBS, CMOs, et cetera. I oversee and manage
divisions around the world, which include modeling, trading
support, strategy, and off-shoring.
Our recent economic challenges have inspired me to once
again serve our great country, and I am very proud that
President Obama has asked me to apply my experience in the Navy
and in the capital markets to address these challenges. I
understand the hardships that so many Americans are facing, and
I am dedicated to working with the Board of SIPC to help ensure
that the investors are protected when broker-dealers fail. The
unique combination of more than a decade in the trenches of the
financial services industry and twice that long serving my
country in the Navy allow me to bring a wealth of experience,
hard work, and accountability to the Securities Investor
Protection Corporation.
If confirmed as a Director of SIPC, I promise the President
and this Committee that I will use my experience to maintain
and strengthen SIPC's accountability to the investing public.
In closing, I would like to recognize a few important
people in my life. I am pleased to have some of my family with
me here today: Havilah D'Agostino; Dr. Leigh Vinocur and her
son, Max; as well as several of my friends visiting from up and
down the east coast: Mr. Matti Kon, Scott Kaimien, Jeff
Rassmussen, and Mark Carter.
In addition to my family and friends that are with me
today, I would like to thank some of my mentors over the years
that have given me opportunities that a milkman's son--that a
milkman's son never expected: Colonel Mike Wyly, who happened
to be Senator Jim Webb's commanding officer in Vietnam, as well
as my commanding officer; Rear Admiral Ed Fahy, my commanding
officer from onboard the John F. Kennedy; Mr. Al Berkley,
former president of the NASDAQ; and my dear friend Mickey
Misera, who is the former head of Wachovia's Equity Capital
Markets, and all of my opportunities after my retirement have
been due to Mick.
Mr. Chairman, that concludes my remarks. Thank you for your
attention and consideration. I would be happy to answer your
questions.
Chairman Johnson. Thank you.
Mr. Karwan, please proceed.
STATEMENT OF GREGORY S. KARAWAN, OF VIRGINIA, TO BE A DIRECTOR,
SECURITIES INVESTOR PROTECTION CORPORATION
Mr. Karawan. Good morning. Chairman Johnson, Ranking Member
Shelby, and Members of the Committee, it is indeed a great
honor to appear before you as you consider my nomination to be
a Director of the Securities Investor Protection Corporation.
Growing up in Sheepshead Bay Brooklyn, it never occurred to
me that someday I might have the great privilege of being
before a U.S. Senate Committee with an opportunity to serve the
public in such an important role. I can attribute my good
fortune to a primary cause, and she is sitting behind me today:
my mother, Devorah Einbinder. From my earliest memories, she
stressed the importance of education, instilled in me the work
ethic and values that I carry with me today, and propelled me
to be part of the first generation of our family to attend
college. I want to acknowledge her and thank her for her love
and support, and for traveling up from Florida to be here
today.
For the past 23 years, I have served as a lawyer
responsible for handling complex commercial litigation,
transactions, and regulatory issues. For the first 12 years of
my career, I was in private practice, becoming a partner in the
litigation group of the firm where I practiced. I represented a
variety of financial sector clients in financial, securities,
and other types of complex litigation and disputes. For the
past 11 years of my career, I have been in-house counsel at a
large financial services corporation. In that capacity I have
had litigation management responsibility for the entire
company, including insurance, broker-dealer, and wealth
management operations.
And for the most recent 4 of those 11 years, I have also
served as general counsel of the business segment that includes
broker-dealer and investment adviser operations, with overall
legal responsibility for those businesses. And throughout my
23-year career, I have counseled boards of directors on a
variety of issues.
Now, today's environment is definitely a challenging one.
Financial markets are global and in flux and are recovering
from a devastating crisis. Financial frauds, as we have seen,
are growing ever more complex and sophisticated. Technology--
and the good, and bad, uses to which it can be put--is
advancing at a lightning pace. The types of securities in which
customers can invest are evolving and getting more complex
every day. An experienced, dedicated, proactive, and forward-
thinking SIPC Board is crucial to dealing with these
challenges. If confirmed, I believe that as a result of my
extensive experience dealing with financial services companies,
I believe I am well equipped to serve as a SIPC Director and
confront these challenges head on.
My commitment, if confirmed, is to bring my experience to
bear as a SIPC director, to be unbiased, to be guided but not
ruled by my instincts, to exercise sound judgment with an
absence of hubris, and, most importantly, to always have an
open mind, to hear and value all points of view, and,
ultimately, to do the right thing. Being a passionate advocate
for investor protection will always be one of my primary goals.
Mr. Chairman and Members of the Committee, thank you again
for your consideration of my nomination, and I am happy to
answer any questions you may have.
Chairman Johnson. Thank you, Mr. Karawan.
Commissioner Aguilar and Mr. Gallagher, the SEC has new
responsibilities under Dodd-Frank that entails over 100
rulemakings, 20 studies, and the implementation of the new
rules. In your opinion, does the SEC have the necessary budget
to undertake these tasks as well as to perform its other duties
as a securities regulator, or would it benefit from additional
funding? Mr. Aguilar?
Mr. Aguilar. Thank you, Mr. Chairman. Clearly, the Dodd-
Frank Act imposes a great challenge on the SEC on top of our
core responsibilities: those which have been part of the SEC's
history for the last 77 years. The SEC has had a chronic
problem, in my view, with appropriate budgets for over a
decade. As the markets have been growing exponentially in
sophistication and in size, the SEC staff has remained quite
static and even gone down a little bit. We are only now getting
back to 2006-2007 levels. And on top of that, Dodd-Frank is now
imposing on us both a short-term responsibility and a long-term
responsibility. Short-term, we are required to enact 100 or so
rules, conduct 20 studies, create five new offices, an enormous
task for any agency, especially one of our size, with
approximately 3,800 staffers.
In addition, the Continuing Resolution stage that we went
through in the first half of this fiscal year required us to
freeze hiring, required us to curtail a number of our
activities and to triage the things that we do, while at the
same time trying mightily to fulfill our obligations under the
Dodd-Frank Act, which I think the staff and the Commission has
done an admirable job on. We are not going to meet all of our
deadlines, but I think we are doing so in a measured,
reasonable fashion.
Do we have resources to continue through the rulemaking
phase? It will be a strain, but with the SEC's passionate, hard
working staff, I think the answer is yes. Do we have enough
resources to, on a long-term basis, to effectively regulate new
markets we have never regulated? I think that SEC Chairman
Schapiro has spoken to various Congressional committees and has
indicated that we probably need a more robust budget.
Chairman Johnson. Mr. Gallagher?
Mr. Gallagher. Thank you, Chairman Johnson, for that
question. It is critically important for the nation's investors
and for the markets that the SEC have proper resources to
satisfy its multiple missions. This issue of the proper
budgeting for the agency is one that has been a hot topic for
decades now and it is traditionally one that is handled by the
Chairman of the agency. I can tell you, I do not have all the
details as to the exact budgetary information and the
allocation of resources, but if confirmed by the Senate, I will
wholeheartedly jump into this issue to ensure that the Chairman
has all the support that she needs as she tries to figure out
proper budgeting.
At the same time, I want to point out, we are living in an
extraordinarily difficult financial environment, and the SEC,
like private bodies, needs to ensure that it is operating
efficiently so that every penny that is sent to the SEC by way
of budget is used for the protection of investors, and I hope,
again, if confirmed, to be able to help the agency satisfy that
mission.
Chairman Johnson. Mr. D'Agostino and Mr. Karawan, the
Securities Investor Protection Corporation formed a task force
to further its mission of protecting customers of failed
securities brokerage firms in order to promote investor
confidence. What is your opinion of the task force's progress
thus far? When it issues a report, will you carefully review
its recommendations and take appropriate actions?
Mr. D'Agostino. Thank you, Mr. Chairman. The report has not
yet been issued, and we understand that they have made great
progress and they are going to present some good
recommendations, and when that report is submitted, we will
carefully consider it and evaluate it at the board levels.
Chairman Johnson. Mr. Karawan?
Mr. Karawan. Thank you, Mr. Chairman. I have the same
understanding as Mr. D'Agostino and I would look forward, if
confirmed, to working with the Board to examine the task force
proposal and evaluate them on a speedy basis.
Chairman Johnson. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
Commissioner Aguilar, you have taken credit for giving more
enforcement authority to the staff of the SEC as a member.
While I understand the interest in ensuring that enforcement
cases proceed quickly--they are very important--delegation of
the Commission's powers to the staff should not be undertaken
lightly, particularly when that staff has been implicated in
notable failures, such as Madoff and Stanford. Do the failures
in the Madoff and Stanford cases indicate that SEC
Commissioners need to be more, not less, involved in overseeing
enforcement cases? In other words, what have you learned from
that, the failures there?
Mr. Aguilar. Thank you, Ranking Member Shelby, for that
question. Clearly, the Madoff and Stanford situations are
tragic: tragic to many American investors, and tragic to our
capital markets, with a very adverse impact on investor
confidence. The SEC staff, especially the Enforcement Division
and the Office of Inspections and Examinations, as the market
watchdogs, must maintain a very robust and aggressive posture
when it comes to overseeing our regulated entities, such as
Madoff and Stanford, and the markets as a whole.
I have been quite vocal in trying to look at the SEC's
policies in the enforcement and exam programs: trying to
highlight the ones that I think could be much better,
identifying the ones that I think are ill advised. And I have
made a number of recommendations, many of which have been
adopted, to try to streamline and expedite the process by which
the Commission staff can get active on a case, look robustly at
what is going on, and I have been very supportive of them
taking robust action to quickly remedy the situation.
I do think the Commission and the Commissioners have to
keep a watchful eye on the staff at all times. The delegated
authority to open an investigation that you have alluded to is
one that I did champion early on. I think the staff has found
it to be quite useful. We have now been able to go from finding
out about a fraud to putting a freeze within the course of a
week, which is to the benefit of the American public, and
hopefully we will find assets before they are dissipated.
I do believe that the Commission should keep a watchful
eye--and we have asked the staff to provide us periodic
reports. We meet with the staff to make sure that we know how
they are using that authority, and it is something that
continues to be monitored, both to make sure that it is
appropriately used and that it, quite frankly, does not fall
into not being used when, in fact, it should be being used.
Senator Shelby. Well, we all know this. It is very
important that it is the Commissioners on the Securities and
Exchange Commission that are accountable to the American
people. The staff is accountable to you, and the staff are very
important, but the buck has got to stop with the Commissioners,
has it not?
Mr. Aguilar. I wholeheartedly agree. The buck does have to
stop with the Commission----
Senator Shelby. Mm-hmm.
Mr. Aguilar.----and that is why I believe it is important
for the Commissioners to speak clearly and to speak loudly
about the policies that they think should be in place and to
make sure that they monitor the staff as well as they possibly
can to make sure that they are adhering to the appropriate
policies.
Senator Shelby. Mr. Gallagher, in February of this year,
the Republicans on the Senate Banking Committee here sent a
letter to all of our financial regulators urging them to employ
rigorous economic analysis in their rulemaking. Given the scope
of rulemaking under Dodd-Frank and the weak state of the
economy that we are all confronted with, I believe it is
particularly important that agencies such as the Securities and
Exchange Commission understand the cost and benefits of their
rules and the effect their rules will have on economic growth
be considered.
In that context, what role do you believe economic analysis
should play in the SEC rulemaking? Will you bring any unique
skills in this area to the Commission?
Mr. Gallagher. Well, thank you, Senator Shelby. It is an
excellent question. Now, more than ever, given the large number
of rulemakings that the Commission is undertaking under Dodd-
Frank, it is critically important that the SEC and other
regulators get the rulemakings right, and to me, getting it
right means also properly weighing the costs and benefits of
the rulemaking. It would be impossible to say that you got the
rulemaking right when the costs outweigh the benefits. So it is
critically important.
It is an issue over the last several years that the agency
has had some problems with in the D.C. Circuit and so it is
critically important just functionally that the agency get it
right, weigh the costs and benefits, and without doing so, it
would be very hard to satisfy the missions that it has to
facilitate capital formation, ensure fair and orderly markets,
and protect investors----
Senator Shelby. And ultimately create jobs, right?
Mr. Gallagher. And create jobs, Senator. That is right.
Senator Shelby. Mr. Gallagher, you will be joining on the
Commission at a time when the SEC faces an unprecedented
rulemaking agenda unprecedented. I believe as a result, there
is a risk that less attention will be paid to the SEC's day-to-
day business while the rulemaking syndrome is going. What will
you do to ensure as a Commissioner that the SEC continues to
fulfill its regular routine, but critically important roles of
reviewing filings, examining registrants, and enforcing the
securities laws?
Mr. Gallagher. Thank you, Senator. That is another great
question----
Senator Shelby. You have been there. You have had
experience there.
Mr. Gallagher. I have been there, Senator. I have been both
counsel to a Commissioner and a Chairman and a senior staffer
in one of the divisions, so I think I have a pretty unique
perspective on that issue. I understand the day-to-day. I got
to experience a normal day-to-day for at least a year or two
before the crisis, and after that, I do not know, sincerely,
what a normal day was like.
But the day-to-day business of the agency goes on, to your
point, in addition to all of the Dodd-Frank rulemaking, and if
confirmed as a Commissioner, I think I will have a unique
perspective on ensuring that the agency is paying enough
attention to that day-to-day work while at the same time trying
to meet the mandates of Dodd-Frank.
Senator Shelby. Commissioner Aguilar, the economy, as we
all know, is in a very fragile state, yet the Dodd-Frank Act
has unleashed a flood of new regulations that impose
significant costs on businesses. These costs are passed along
to investors in the form of lower returns and to consumers in
the form of higher prices, generally. Collectively, I believe
they are likely to diminish economic growth and further
increase unemployment. Having said that, do you believe that
the SEC should consider carefully the economic import of its
actions, and what are you doing--you are a Commissioner now--
doing to ensure that the SEC is assessing and taking into
account the economic impact of its regulations?
Mr. Aguilar. Thank you, Senator Shelby. The SEC has a
robust process for promulgating the rules that we adopt. Dodd-
Frank is no exception. We follow the notice and comment
procedure mandated by the Administrative Procedures Act. When
we issued the proposal, we received many comments and many
fulsome comments. I, myself, have an open door policy. I make
sure that I try to listen to all the views from all the
interested parties and take that into consideration, and the
burdens and costs of our rulemaking is certainly one of the
topics that I take into serious consideration, and I also try
to consider the benefits that we are trying to achieve with the
rulemaking that we are trying to adopt.
I think it is important as part of our process to weigh, as
best as we can, the balance between the costs and the benefits
that are mandated by the Dodd-Frank Act, in particular, and
what we are trying to accomplish--and the goals that Dodd-Frank
has asked us to try to accomplish.
Senator Shelby. Mr. Gallagher, in a speech in late 2009,
you noted that, and I will quote you:
it is human nature for people, once they get through the
immediate crisis, to forget the historical errors and jump into
the next industry trend without proper risk reflection and
planning.
Although you were speaking about an industry, regulators
are also human and are prone to forget their past mistakes.
Since you were on the staff--I know you were not a
Commissioner, but you were a very important staffer--at the SEC
during the financial crisis, explain what lessons you learned
from errors made in the run-up to the crisis and how will these
lessons affect the way you fulfill your role as a Commissioner
at the Securities and Exchange Commission.
Mr. Gallagher. Thank you, Senator Shelby. It was a
tremendous honor to serve at the SEC on the staff during the
financial crisis. It was amazing to me to see the hard work and
diligence, the tireless efforts of the staff and the
Commissioners, quite frankly, Commissioner Aguilar included.
The lessons learned from the crisis are many. First and
foremost for me, I learned the incredible importance of
regulatory cooperation and the flow of information amongst
regulators, both domestic and international, and if confirmed
as a Commissioner, that will be something that will be very
important to me, to ensure, whether through the implementation
of the Dodd-Frank Act or participation in international bodies,
that the SEC is properly involved in the information flow and
cooperating well with other regulators.
As to other issues leading up to the crisis, things that we
saw, aggressive risk taking without aggressive risk management
was probably, in a nutshell, the biggest problem, something
that the industry was guilty of and regulators did not pay
enough attention to. And so that is another area where, if
confirmed, I would want to be paying a lot of attention to
ensure that the Commission, whether through participation in
the FSOC or just in our day-to-day business, that we are paying
enough attention to that, Senator.
Senator Shelby. Thank you.
Chairman Johnson. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman.
First, I want to commend Mr. D'Agostino for his outstanding
service in the United States Navy. As a Rock Squad swimmer at
West Point, I am very jealous of a Navy Rescue swimmer, so I
think you have got me already. I do not think you have to do
anything, OK?
Mr. D'Agostino. I can count on your vote.
Senator Reed. You are all set. You are all set.
[Laughter.]
Senator Reed. But, no, remarkable service to the Nation in
the Navy. Thank you, sir.
Let me follow up. I thought Senator Shelby asked a very
good question, Mr. Gallagher, about your experiences, because
you were in several very critical positions and I just want to
make sure I am aware. In your staff position, you had some
involvement with the Consolidated Supervised Entity Program,
which was designed to supervise Lehman, among others. How
deeply engaged were you in the day-to-day activities of Lehman
before it collapsed? Were you getting real-time information?
Mr. Gallagher. Thank you, Senator, for that question. I
came down to the Division of Trading and Markets as a Deputy
Director at the end of July of 2008, so like Commissioner
Aguilar, came into a new role just shortly before Lehman
failed. In that short window, just weeks before Lehman failed,
myself, my boss, Erik Sirri, the Division Director of the
Trading Markets, along with the Chairman and other senior
staff, were getting a fair flow of information and trying to
coordinate with other domestic regulators to ensure that we
could best contain any problem that happened if Lehman did, in
fact, fail.
Senator Reed. There have been some allegations that I have
read publicly where Lehman was reporting liquidity figures
which were much different than the actual figures which it has
been suggested that the regulators knew about. Are those
allegations accurate?
Mr. Gallagher. Senator, I have heard some of those same
reports. I am not aware personally that that was an issue. I
know it was something that was raised, I believe, in the
Trustee's Report regarding Lehman, and I know it is something
that the staff is investigating, or was, at least, when I left,
investigating vigorously, and I assume that to the extent there
was any impropriety, that they will----
Senator Reed. But that would be very disturbing if, in
fact, market information was much different than what
regulators had.
Mr. Gallagher. Absolutely, Senator. Again, one of the
lessons learned was the need for information, not just the
sharing with regulators, but for somebody to have the
information by which you could make rational decisions as a
regulator. And if the businesses were not giving appropriate
information, if they were taking different perspectives on
pricing, for example, of the same types of instruments, then
you cannot have the information you need to make those rational
decisions.
Senator Reed. Do you think, given your experience, that the
SEC is in a stronger position now with the Dodd-Frank
legislation to effectively regulate these institutions?
Mr. Gallagher. There is no doubt that the SEC has many more
tools given to it by Dodd-Frank to regulate the institutions,
the markets, and to take action that before the enactment of
the statute they did not have.
Senator Reed. And I know there is an appropriate concern
with cost-benefit analysis, but the next issue and the hard
issue is, OK, what are the costs and what are the benefits, and
who is paying the costs and who is paying the benefits? And you
can define a cost-benefit analysis in some cases, you know,
what answer do you want? I will give you the analysis.
I think one of the aspects of this crisis was the huge cost
to taxpayers which may have been mitigated or avoided with
better regulation, and I would urge both you gentlemen, when
you consider this cost-benefit analysis, it is not just a
narrow, what cost will be paid by the regulated entity, what
nominal benefit it is in terms of specific information to
consumers, but a much broader, if this fails, we are on the
hook for trillions of dollars, and I hope you do that.
Another aspect, Mr. Gallagher, too, because, again, of your
critical role, and Senator Shelby alluded to it, and that is
the degree at which enforcement is delegated to non-
Commissioners. There are five Commissioners. You have
extraordinarily complicated duties, et cetera. And the
impression that many, particularly critics, have lodged is that
the enforcement agents, division, were, in effect, hobbled.
They had to get permission to do things which previously they
could do on their own--subpoenas, collect information. To a
certain degree, they could settle claims. That was dramatically
held back under Chairman Cox, and I think Commissioner Atkins
was particularly vocal.
Personally, I do not think it resulted in effective
performance and I think it might have done something even
worse, send a message to the street that the cops were off the
beat. So what is your impression now, the new rules that
Chairman Schapiro and others have adopted?
Mr. Gallagher. Thank you, Senator. Let me just say at the
outset, it is imperative for the SEC to have a strong and
vibrant enforcement program. It is imperative for investors. It
is imperative for markets. The agency needs to be seen as the
cop on the beat and there needs to be comfort and confidence in
the markets that the SEC will be there.
As to your specific question of the hobbling of the agency,
I understand that there was some coverage of the issue and
implication that there was hobbling. I think that was largely
related to the Commission diving into an important enforcement
policy issue which related to penalizing shareholders of
corporations. That was a very, very small part of the
enforcement docket, and I know that because I worked for
Chairman Cox, 2 percent or less of the cases. But I think it
got an out-sized reaction, and that, to my initial point, you
cannot have these negative perceptions about the agency.
Whether it is really hobbling somebody or not, it is very bad
for the agency.
As to the changes that Chairman Schapiro has implemented,
the restructuring of the division, some of the new delegations,
I have been looking at it from the outside, and, if confirmed,
am eager to get involved and see how this is paying off, what
dividends have been paid, what are the new efficiencies.
The one thing I can tell you is a constant, though, is that
I have the utmost faith in the Enforcement staff. They are men
and women of just an unbelievable caliber. They have been
through a hard time, and I think with proper encouragement and
oversight from the Commission, they are going to regain the
confidence that they used to have.
Senator Reed. Can I add just one final point to Mr.
Aguilar. There were a couple of situations in which you had a
principled opposition, I believe, and you refrained from
voting. Am I being accurate? I do not want to mischaracterize--
--
Mr. Aguilar. Senator Reed, I think I know what you are
speaking about, and I would not necessarily characterize it
that way. There was an ill-advised staff policy that had been
adopted with respect to certain claw backs that in my mind read
out of the Sarbanes-Oxley Act legislation certain authority
given to the SEC by Sarbanes-Oxley in 2002, and I engaged in a
series of discussions with my colleagues and with the staff to
try to get that policy reversed. While that was going on, there
were a couple of cases where, while the discussion was ongoing,
I thought it best not to participate in--while I continued to
dialog with the staff and with the Commission as to what the
policy should be so we could address those cases under the
appropriate policy. I would have wished that those cases had
been delayed until the policy had been restructured, as it
subsequently was, but the decision was made for them to proceed
with those cases while the dialog was still ongoing for us to
try to develop a better policy.
Senator Reed. Well, all I can say, we have these similar
situations around here, and sometimes votes do not come on
time, but typically, we feel when the vote is called, we have
to vote, so just one impression.
Thank you very much, Mr. Chairman.
Chairman Johnson. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Let me congratulate all the nominees on their nominations.
Mr. Gallagher, there are some of us who believe very
strongly in a free market, but there is a difference between a
free market and a free-for-all market, and many of us believe
that the challenges we faced in September of 2008 when we were
called upon to make sure the Nation did not go into what
Chairman Bernanke described as the potential of a new
depression was the lack of a regulator that instead of being
the cop on the beat was asleep at the switch.
So you have had experience there. You have seen the
consequences. Tell me how you would act today as a Commissioner
to ensure that we have a free market but not a free-for-all
market, that we do not relive--you know, the Ranking Member's
concern about too much regulation, I understand the importance
of having that pendulum just swing just right, but by the same
token, I do not want to have to cast votes again to face
another 2008 in this country. So tell me how you are going to
approach their position.
Mr. Gallagher. Thank you, Senator Menendez. It is a great
question----
Senator Menendez. I only ask great questions.
[Laughter.]
Senator Menendez. Just kidding. I am just kidding.
Mr. Gallagher. We will stipulate it for the next one, then.
[Laughter.]
Mr. Gallagher. As I mentioned earlier, it is critical that
the SEC and the other agencies get these rulemakings right. To
get them wrong could have some major impacts. If confirmed by
the Senate, you have my pledge that I will do everything
possible to ensure the rulemakings are done appropriately, done
as timely as possible, and do not have adverse negative
consequences to the extent we can predict those.
To your point about my prior experience, there is nothing I
want less than to come back to this agency and deal with what I
had to deal with in 2008. It was the most horrific experience
of my life. It had a profound effect on me, my family, and I
will do everything in my power to ensure it does not happen
again.
Senator Menendez. So I would expect you to be part of the
cop on the beat----
Mr. Gallagher. Absolutely, Senator.
Senator Menendez.----not asleep at the switch.
Mr. Gallagher. No doubt.
Senator Menendez. Let me ask you one other question. What
are your priorities as you look at your new role upon
confirmation? Where do you put investor protection?
Mr. Gallagher. I put it number one, Senator. The missions
of the SEC are incredibly challenging--investor protection,
facilitating capital formation, fair and orderly markets, but,
you know, at the end of the day, if investors do not have
confidence in the agency and the markets, then there will not
be an agency around.
Senator Menendez. Commissioner Aguilar, give me a sense--I
know your work at the SEC for the last several years. I know
the work that you did before. But give me a sense of--you
mentioned, touched upon in your opening statement your private
sector experience. Give me a sense of how that private sector
experience informs your work at the SEC.
Mr. Aguilar. Thank you, Senator Menendez, and may I also
say that is an awesome, great question, as well.
[Laughter.]
Senator Menendez. I will not reiterate what I said to Mr.
Gallagher.
[Laughter.]
Mr. Aguilar. It pervades everything I do. In my 30 years as
a professional in securities industries, I have worked at the
SEC, I have worked in private practice, and I have worked for a
very large global asset manager. I have done almost everything
in my private practice that the Commission touches. I have been
a president of a broker-dealer. I have been a senior officer
for an investment advisor. And I think I have been a well
known, and a well respected mutual fund lawyer. I have taken
companies public. I have done a great number of private
placements.
There really is not anything that the SEC does that I did
not do in private practice with one notable exception--and that
is that I was not a litigator. I never got sued. My clients
never got sued as a result of my work. So I found it strange,
to use Ranking Member Shelby's statement, I think, that when I
first became SEC Commissioner, I focused heavily on the
enforcement program, partly because it--it needed to be focused
on, and so I found it strange that I was tagged by a
publication as the Enforcement Commissioner, because it is the
one thing I did not do in my private practice.
But in the role of a Commissioner, most of the matters that
are brought to us for consideration outside of the enforcement
world, I have had some personal experience with in many ways
and I am able to see the practical impact of our rules. I am
able to see what is likely to work, what is likely not to work.
I am looking for smart regulation. I am looking for a
regulation that finds that appropriate balance between the cost
and the benefits, but at the end accomplishes the goals of the
SEC to fulfill our mission and protect investors, maintain
effective and orderly markets, and facilitate capital
formation.
Senator Menendez. Thank you. One last question, Mr.
Chairman, to the SIPC nominees.
I have spoken to many Madoff scam victims in New Jersey and
they are generally dissatisfied with SIPC policies and
reimbursement process. What do you think--or, I should say, why
do you think that is the case, and what would you do to improve
such policies in this area?
Mr. Karawan. Senator, you are obviously batting a thousand
on your questions today, so thank you for that one.
[Laughter.]
Mr. Karawan. From my personal experience in private
practice and as in-house counsel, it is usually failed
expectations that lead to disappointment. So one area to look
at in terms of SIPC's role is do investors understand the
extent and limits of the protections that are provided by SIPC.
If you have the understanding going in, you might not be
disappointed on the back end if you need to rely on SIPC
protections if that should ever come to pass.
So if I am confirmed, one of the things I would be
interested in reviewing are the SIPC disclosures and investor
education materials that are made available, how good they are,
how robust they are, and how well understood----
Senator Menendez. Mr. D'Agostino.
Mr. D'Agostino. Senator----
Senator Menendez. Would you put your microphone on, please?
Mr. D'Agostino. Senator, a lot of people think that SIPC is
kind of similar to the FDIC, and it is not. And it is a common
misperception. When I was talking to some of my partners that
have been in the financial services industry their whole lives,
they did not understand the differences. And so I think a big
part of what we need to do is educate the public. The SEC needs
to educate the public. All regulators need to educate the
public. Broker-dealers, Series 7, Series 6 representatives,
they need to educate the public.
The responsibilities of SIPC are pretty clearly spelled out
in SIPA. The courts ruled on this matter, and I think SIPC has
taken the appropriate approach with regards to SIPA.
Senator Menendez. Do either of you think that there are any
changes needed to the Securities Investor Protection Act?
Mr. D'Agostino. Senator, I have not had an opportunity to
serve on the Board and spend time with colleagues and spend
time with the staff to really understand those issues, and I am
looking forward to the report that is going to be coming out to
help me understand that.
Mr. Karawan. I agree with Mr. D'Agostino on that. The work,
which I understand is fairly extensive, being done by the task
force will be an extremely good starting point as to whether or
not the current state of affairs at SIPC and the statute that
governs it is appropriate and whether it needs modernization.
Senator Menendez. Well, I look forward to working with you.
I understand the question of expectations, and I can see that.
I also think that there are certain failings here for
investors, and I would look forward to working with you in that
regard.
Thank you, Mr. Chairman.
Chairman Johnson. Commissioner Aguilar and Mr. Gallagher,
the Dodd-Frank Act requires the SEC and the CFTC to craft new
rules on the regulation of derivatives. It is important that
the SEC and the CFTC rules be as consistent as possible to
minimize costs and ensure effective oversight.
What is your view on the current SEC/CFTC coordination? And
what can be done by the SEC to ensure that differences between
these sets of rules are minimized and the agencies are
cooperating? Commissioner Aguilar.
Mr. Aguilar. Thank you, Mr. Chairman. In the proud history
of both the CFTC and the SEC, we have, I am told, only met as a
body on three separate occasions, all within the last couple of
years. So we are now learning to work together. Our staffs have
had more periodic involvement with one another. Under the Dodd-
Frank Act they are certainly being asked to develop a number of
rules jointly and consult with one another, and that is
happening regularly.
We have had a number of joint roundtables in the last year,
and I think that the relationship between the two agencies is
developing in an appropriate manner, both at the staff level
and at the Commissioner level.
This country is one of the few countries that has decided
to separate the oversight of the capital markets by having a
separate regulatory agency, and it, therefore, is incumbent
upon us to work twice as hard, three times as hard, to make
sure the two agencies work as jointly as possible both to have
consistency in the regulation and in the protection that
investors have, because you today have the ability to
accomplish the same economic goal by either using an instrument
in the securities field or in the derivatives field. And so we
do not want to have so much fragmentation that things get both
convoluted for the capital markets as well as have things fall
through the cracks.
Chairman Johnson. Mr. Gallagher.
Mr. Gallagher. Thank you, Chairman Johnson. It has
traditionally been very important for the CFTC and the SEC to
enjoy a good and collaborative relationship. With Dodd-Frank
and the number of joint rulemakings, and under Title VII in
particular, it is critically important that they cooperate and
work together.
In my experience from being a staffer, sometimes this
relationship is strained. Unfortunately, sometimes the
relationship is too dependent on personalities at the agencies
and not the formal protocols. And I think right now my sense,
from looking in from the outside, is things are going pretty
well. And my only fear is that is because the personalities
seem to be meshing.
Commissioner Aguilar will have a much better sense of how
things are actually going day to day. I do see these joint
meetings. I know that the staffs seem to be working together
pretty well. But I continue to ponder whether that is simply
because of relationships. And if confirmed as a Commissioner at
the SEC, I can tell you that this is an issue that is of the
utmost importance to me, this regulatory cooperation with the
CFTC, and it is something I am going to work hard ensuring
happens, that we get it right and we cooperate.
Chairman Johnson. Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman, and thank you for
holding this hearing.
I wanted to ask a question about the fiduciary duty. I am
hearing so much concern about this right now. At the end of
April, I sent a letter to the Department of Labor on its
proposed fiduciary rule with Senator Reed of Rhode Island and
Senator Bennet, and in that letter we encouraged the Department
to consult with the SEC, citing the Commission's recent study
on fiduciary standards.
Mr. Aguilar, can you describe what consultation has taken
place between the SEC and the Department of Labor on the issue
of fiduciary duty? And at what level have these conversations
taken place? And do you feel that the Department of Labor has
engaged the SEC adequately, appropriately on this rule, which I
think has wide-ranging implications for securities markets?
Mr. Aguilar. Thank you, Senator. I do know that the SEC
staff has been meeting with the DOL staff on this particular
issue. However, I have not yet been briefed by our staff as to
the nature of those discussions, how many they have had, how
in-depth they have gotten into the discussion. But I would be
happy to look into it upon my return, and if you would like, I
could supplement the record after the hearing.
Senator Hagan. I would appreciate that.
Senator Hagan. Anybody else want to address this issue?
Mr. Gallagher. Senator Hagan, I have no knowledge, being on
the outside now, of what the interactions are with the staff.
But being a practitioner in this space, I can tell you there is
no more important issue than regulatory cooperation between DOL
and the SEC on this issue. The implications, the ramifications
of getting this wrong or one agency or department moving ahead
of the other, could be huge.
Senator Hagan. I agree. Thank you.
Since May 6th of last year, when we experienced the flash
crash, I have heard an increasing number of concerns expressed
by market participants about the stability of the exchanges.
And once again, Mr. Aguilar, can you discuss the direction that
the SEC is taking to address market structure issues that
contributed to the flash crash?
Mr. Aguilar. Thank you, Senator. Even before May 6th of
last year, the staff and the Commission have put forth their
concept release to try to look at the market structure from A
to Z. The market has changed dramatically over the last decade,
both in the volume of high-frequency traders and new products,
such as ETFs that have really mushroomed, and that impact the
trading markets, certainly in the last half-hour or so of a
typical day. And so we put that concept release out, and then
May 6th, of course, overtook those events.
We then, together with the CFTC, put together a task force
to look at the events of May 6th, and reports have come out
particularly on May 6th. But the work is not done. The SEC did
establish single-stock circuit breakers to respond to May 6th,
and they are now looking at limit-up/limit-down mechanism as an
additional measure. And the staff is now developing a plan for
how to continue to study the market structure and how to
sequence the analysis that they need to do and how to consider
what, if any, additional actions should be taken. The SEC
Chairman has spoken about that a fair amount. But I am waiting
to get the staff's considered thoughts on what the next
concrete actionable steps should be and to further analyze and
perhaps consider what additional rules may be required to deal
with market structure.
Senator Hagan. What is the timing to get that report back?
Mr. Aguilar. I think the staff is working on it, and I will
get back to the office and find out the exact thinking on that
and respond with a more accurate statement.
Senator Hagan. OK. Thank you.
Senator Hagan. Mr. Gallagher, what steps do you believe
still need to be taken to ensure that markets are safe for
investors and allow for job-creating capital formation to take
place?
Mr. Gallagher. Thank you, Senator. I assume this question
is in connection with----
Senator Hagan. Yes.
Mr. Gallagher. Yes. As Commissioner Aguilar alluded, a lot
has been going on. A personal digression--in preparing for the
hearing and meeting with the SEC staff--I had not seen them
because I had been in my time-out period, and I got to confess
to one of the lead staffers working on the May 6th initiative
that on May 6th I was in the airport going to visit my sister
with my parents and my son, and I saw the news coming about the
Dow swing, and I had one of these 2008 moments of, you know, a
heart flutter and feeling a little faint. And then I remember I
was not there anymore, and I did not have to deal with it. I
felt bad that they did.
But since then, they have been incredibly active. I mean,
the number of proposals that have come out have been
unbelievable, and quite frankly, in the months leading up to
May 6th, even when I was just leaving the agency, between the
concept release on market structure, the flash order proposal,
there has been more going on in the market structure space than
there has been at the SEC in over 10 years.
I think that dovetails with Senator Shelby's question
earlier about the day-to-day business of the agency. These
initiatives are not necessarily either May 6th or--they are
definitely not Dodd-Frank mandated, but they are incredibly
important to the markets, and they are incredibly important to
get right. Whether it is limit-up/limit-down, the single stock
circuit breaker, the short selling circuit breaker, and all of
the other proposals that the Chairman has put out there, they
all have laudable goals, but we need to ensure that when in
operation together they work effectively and do not hinder the
markets at a time when we are trying to bolster them.
Senator Hagan. True.
Thank you, Mr. Chairman.
Chairman Johnson. I thank the witnesses for your testimony
and for your willingness to serve our Nation.
I ask all Members of the Committee to submit questions for
the record by noon this Friday, and I request that you submit
your answers to us in a timely manner so that we can move your
nominations forward.
This hearing is adjourned.
[Whereupon, at 11:11 a.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF LUIS A. AGUILAR
Nominee to be a Member, Securities and Exchange Commission
June 14, 2011
Chairman Johnson, Ranking Member Shelby, and Members of this
Committee:
It is a great honor to be here before you today. I do want to
acknowledge my wife, Denise, who was not able to accompany me today.
She has been a constant source of support and enabled me to serve as a
Member of the United States Securities and Exchange Commission
(``SEC''). I also want to acknowledge my parents, Juan and Gladys
Aguilar, who sent their two small sons to the United States as Cuban
refugees, to escape the Castro revolution, and would be bursting with
pride to see one of them serving this great country in such a manner.
Three years ago, I had the honor to come before this Committee for
confirmation hearings to be a member of the SEC. It has been my
tremendous privilege to serve as a Commissioner of the SEC. I was, and
remain, humbled to be asked to serve the American people at the agency
where I started my career as a staff attorney over 30 years ago. My
deep respect and admiration for the importance of the institution, and
its mission has only grown during my tenure. I recognize the
significant responsibilities of the SEC to fulfill its statutory
mandate to protect investors, maintain fair and orderly markets, and
facilitate capital formation.
I have remained focused on these responsibilities during these
recent challenging times. The collapse of Lehman Brothers and the
ensuing market turmoil--of a kind not seen since the Great Depression--
began just weeks after I was sworn in as a member of the Commission. In
these extraordinary times, I have dedicated all of my skills,
knowledge, and energy to the work of the SEC. My professional career
spans over 30 years and I have been a practitioner in corporate,
securities, and international law. I have seen the securities industry
from many vantage points. I have worked in Government, private
practice, and in corporate America. I've been an SEC staff attorney, a
law firm partner and a general counsel and head of compliance, and I
have spent time as a domestic and international business person. This
breadth of experiences has served me well as the SEC has taken up, or
been confronted with, a multitude of issues stretching across the
securities and corporate spectrum.
And so, I was deeply honored to be nominated by President Obama to
serve another term as a Commissioner. It has been a privilege to work
with Chairman Mary Schapiro and my other colleagues on the Commission:
Kathleen Casey, Elisse Walter, and Troy Paredes. If confirmed, I look
forward to continuing this work, along with Commissioner-Designate Dan
Gallagher. I believe a great deal of unfinished business remains before
the SEC--work that is vital toward improving our markets as well as the
agency itself.
I am committed to answering these challenges. When I arrived in the
United States as a refugee from Cuba, I was 6 years old and had little
more than the clothes I was wearing. The generosity and opportunities
of this country provided me the foundation to become the person who now
has the honor of appearing before you today. Serving as a Commissioner
to the SEC and being able to apply my securities expertise on behalf of
the American people is a tremendous honor, and truly my privilege.
If the U.S. Senate determines to confirm my nomination to a second
term as a member of the SEC, I promise to work faithfully to serve the
American people at this critical time.
Thank you. I will be happy to answer any questions the Committee
might have.
______
PREPARED STATEMENT OF DANIEL M. GALLAGHER, JR.
Nominee to be a Member, Securities and Exchange Commission
June 14, 2011
Chairman Johnson, Senator Shelby, Distinguished Members of this
Committee, it is a very great honor for me to appear before you today.
I am grateful and humbled by the President's nomination to serve on the
Securities and Exchange Commission.
I would like to introduce you to members of my family that are here
with me today. My wife, Stephanie Gallagher, who was recently named to
be a Federal Magistrate Judge in Maryland--her investiture is this
Friday--is an incredible wife and mother, and she has always been a
tremendous source of support for me, as she has been throughout the
process that brings me here today. With her are my two sons, Danny and
Charlie, and I am incredibly proud of both of them. My parents, Barbara
and Daniel Gallagher, who have come down from Philadelphia for this
hearing, have been small business owners for most of my life. Their
work ethic, integrity, and devotion to family have been a continuous
inspiration to me.
Since its creation, the SEC has been one of the most important
agencies in the Federal Government. Investor protection and oversight
of the capital markets are essential to American investors as well as
our overall economy. The SEC must accomplish its mission in the context
of complex, dynamic, globally connected markets.
This is a time of great importance for the SEC. It is rebuilding
after some setbacks, dealing with a loss of faith in the financial
markets, and facing broad new oversight and regulatory responsibilities
over complex financial instruments and markets. The SEC staff, which is
the engine of the agency, is cognizant of the critical role they play,
and I know from personal experience that the staff is intensely
dedicated to the protection of investors and the health of the capital
markets.
Despite the financial crisis, the U.S. capital markets are the
strongest in the world. To maintain that status, the markets need the
SEC to be a strong and respected regulator. Investors will only commit
capital if they have faith in the fairness of our markets, and the SEC
is charged with instilling and maintaining this confidence. By
requiring transparency and rigorously and fairly enforcing the law as
directed by Congress, the SEC plays a major role in maintaining the
preeminence of the U.S. capital markets. If confirmed, I will strive
every day to ensure that the agency satisfies this mission.
On a personal note, I want to point out that I have been nominated
to fill the seat being vacated by Commissioner Kathleen Casey, who is
someone very well known to this Committee. Commissioner Casey has been
an outstanding Commissioner and has served the country and investors
with integrity and dedication through an incredibly difficult time.
Should I be confirmed, I hope to serve as ably as she has.
Thank you, Mr. Chairman, Senator Shelby, and Members of the
Committee, for this opportunity to appear before you today. I would be
pleased to take any questions you may have.
______
PREPARED STATEMENT OF ANTHONY FRANK D'AGOSTINO
Nominee to be a Director, Securities Investor Protection Corporation
June 14, 2011
Good morning Mr. Chairman and Members of the Committee. My name is
Anthony (Tony) D'Agostino, and I am honored to be before you today as
President Obama's nominee to serve on the SIPC Board of Directors.
I believe I am well qualified to serve on the SIPC Board based on
my management background in the securities industry and my hands-on
experience working in the capital markets.
Prior to joining Wall Street, I served in the United States Navy
for 24 years. I started out in the Navy as an enlisted man flying in
the H-3 helicopter as a rescue swimmer and anti-submarine warfare
specialist. After I completed my undergraduate degree at the University
of Kansas I received my commission and went on to serve in roles of
increasing responsibility, a few examples are: SECNAV-CNO Briefer
during Desert Storm, an Admirals Aide and as a Surface Warfare Officer
onboard the USS John F. Kennedy (CV-67). Since retiring from my career
in the Armed Forces, I have worked in the Capital Markets businesses of
Wachovia and UBS. In both organizations, I served in executive roles,
which allowed me to closely observe and fully appreciate the
intricacies of how these businesses are structured, staffed and
operated.
As the Chief Operating Officer (COO) of Wachovia's Equity Capital
markets platform I directly oversaw and managed internal functions
supporting the Equity Capital Markets business including Technology,
Compliance, Legal, and Finance. After serving as COO, I went on to
build from scratch, the firm's Program and Algorithmic equity trading
business. As the architect for that business I became proficient in all
aspects of electronic trading. I then went on to build another new
venture for Wachovia: I helped build a proprietary Long/Short U.S.
Equity Hedge Fund (i.e., a proprietary trading desk) where I focused on
portfolio and risk management as well as financial analysis. In that
role, I had to study and understand the operational characteristics of
hundreds of different companies, in dozens of diverse industry groups.
During the 2008 market collapse where 40 percent losses became the
norm, the fund we managed was down only 2.4 percent. As part of my
training to serve in these roles, I was a FINRA Registered Principal
and held Series 7, 24, 55 and 63 licenses.
After Wachovia's collapse and takeover by Wells Fargo, our division
was shut down. Like so many other Americans, I found myself unemployed
for the first time in my life. After nearly 1 year out of work, I was
then recruited by UBS where I am currently serving as the COO of the
Global Quantitative Analytics (QA) group. The QA group is responsible
for building sophisticated mathematical models, which are used to
create, price and evaluate the risk of complex financial products
(Derivatives, CDS, CMO, ABS, MBS, etc.). I oversee and manage divisions
around the world, which include quantitative modeling, trading support,
technology, strategy and off-shoring.
Our recent economic challenges have inspired me to once again serve
our great country, and I am very proud that President Obama has asked
me to apply my experience in the Navy and in the Capital Markets to
address these challenges. I understand the hardships that so many
Americans are facing today, and I am dedicated to working with the
Board of SIPC to help ensure that investors are protected when broker
dealers fail. The unique combination of more than a decade in the
trenches of our financial industry and twice that long serving my
country in the Navy allow me to bring a wealth of experience, hard
work, and accountability to the Securities Investor Protection
Corporation Board.
If confirmed as a director of SIPC, I promise the President and
this Committee, that I will use my experience to maintain and
strengthen SIPC's accountability to the investing public.
In closing, I would like to recognize a few important people in my
life. I am pleased to have some of my family with me today: Havilah and
Hannah D'Agostino, Dr. Leigh Vinocur, and her son, Max, as well as my
friends Matti Kon, Scott Kaimien and Jeff Rassmussen.
In addition to my family and friends with me today, I would like to
thank my mentors from over the years that have given me opportunities
that a milkman's son from South Jersey never expected: Col Mike Wyly,
USMC (retired), Rear Admiral Ed Fahy, USN (retired), Mr. Al Berkley,
former President of the NASDAQ and my dear friend Mickey Misera, former
Head of Wachovia's Equity Capital Markets business. Mick believed in me
and hired me directly from active duty to be his COO; all of my
opportunities to work within the financial services industry are due to
him.
Mr. Chairman, that concludes my remarks, thank you for your
attention and consideration. I will be happy to answer your questions.
______
PREPARED STATEMENT OF GREGORY S. KARAWAN
Nominee to be a Director, Securities Investor Protection Corporation
June 14, 2011
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee, it's a great honor to appear before you as you consider my
nomination to be a director of the Securities Investor Protection
Corporation.
As a boy growing up in Sheepshead Bay Brooklyn, I never considered
that I might someday have the privilege of being before a United States
Senate Committee with an opportunity to serve the public in such an
important role. I can attribute my good fortune to a primary cause, and
she's sitting behind me today, my mother Devorah Einbinder. From my
earliest memories, she stressed the importance of education, instilled
in me the work ethic and values that I carry with me today, and
propelled me to be part of the first generation of our family to attend
college. I want to acknowledge and thank her for her love and support,
and for traveling up from Florida to be here today.
For the past 23 years, I have served as a lawyer responsible for
handling complex commercial litigation, transactions and regulatory
issues. For the first 12 years, I was in private practice, becoming
partner in the litigation group of the firm where I practiced. I
represented a variety of financial sector clients in financial,
securities, and other types of disputes. For the past 11 years I have
been in-house counsel for a large financial services corporation. In
that capacity I have had litigation management responsibility for the
entire company, including insurance, broker/dealer, and wealth
management operations.
And for the most recent 4 of those years, I have also served as
General Counsel of the business segment that includes broker/dealer and
investment advisor operations, with overall legal responsibility for
those businesses. Throughout my 23 years of practice, I have counseled
boards of directors on many issues.
Members of the Committee, today's environment is challenging.
Financial markets are global and in flux, and are recovering from a
devastating crisis. Financial frauds are growing ever more complex and
sophisticated. Technology . . . and the good, and bad, uses to which it
can be put . . . is advancing at a lightning pace. The types of
securities in which customers invest are constantly evolving. An
experienced, dedicated, proactive and forward-thinking SIPC Board is
crucial to dealing with these challenges. As a result of my extensive
experience dealing with financial services companies, I believe I am
well equipped to serve as a SIPC director and confront these challenges
head on.
My commitment, if confirmed, is to bring my experience to bear in
my role as a SIPC director, to be unbiased, to be guided but not ruled
by my instincts, to exercise sound judgment with an absence of hubris,
and, most importantly, to always have an open mind, to hear and value
all points of view, and, ultimately, to do the right thing. Being a
passionate advocate for investor protection will be one of my primary
roles.
Mr. Chairman and Members of the Committee, thank you again for your
consideration of my nomination, and I am happy to answer any questions
you may have.
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM LUIS A.
AGUILAR
Q.1. What is your view of the changes the SEC has made to
improve enforcement of the securities laws in the wake of the
Madoff and Stanford Ponzi schemes? How would you work to
support or enhance the effectiveness of SEC enforcement in the
future?
A.1. The SEC has made a number of changes that are designed to
improve enforcement and that seek to respond to weaknesses
identified by the Madoff and Stanford Ponzi schemes. As
outlined by Chairman Schapiro, these include:
LNew management across the major divisions and
offices.
LA new Division of Risk, Strategy, and Financial
Innovation to re-focus the agency's attention on--and
response to--new products, trading practices, and
risks.
LAdditional senior operational personnel,
specifically a Chief Operating Officer and Chief
Compliance Officer.
LEfforts to modernize the SEC's information
technology, including a centralized system for tips and
complaints, enforcement and examination management
systems, risk analysis tools, and financial management
systems.
To better ensure effective performance in detecting and
addressing fraud, the agency has carried out a restructuring of
its two largest programs--enforcement and examinations. These
reforms are intended to maximize the SEC's use of resources and
permit the agency to move more swiftly and strategically.
Specifically, the Division of Enforcement has streamlined
its procedures in order to be able to bring cases more quickly;
removed a layer of management to permit more staff to be
allocated to front-line investigations; created five national
specialized investigative groups dedicated to high-priority
areas of enforcement; and created a new Office of Market
Intelligence to serve as the hub for the effective handling of
tips, complaints, and referrals. The Office of Compliance
Inspections and Examinations (``OCIE'') has been implementing
reforms to the agency's national examination program, in
response to rapidly changing Wall Street practices and lessons
learned from the Madoff and Stanford frauds.
The changes provide greater consistency and efficiencies
across the SEC's 11 regions, and are expected to sharpen the
staff's focus on identifying the higher risk firms that it
targets for examination. OCIE also implemented new policies
requiring examiners to routinely verify the existence of client
assets with third-party custodians, counterparties, and
customers. Going forward, the national exam program plans to
continue to conduct sweeps in critical areas, from trading
practices to market manipulation, to structured products.
I believe it is critical that the SEC's enforcement program
be effective. I have been a strong supporter of reforms to
improve the effectiveness of the program, and I will continue
to do so.
Q.2. The Dodd-Frank Act includes over 100 rulemaking provisions
applicable to the SEC. This is a large undertaking and a
tremendous responsibility. What is your opinion of the progress
of these rulemakings? Will you commit to promulgating rules
that are consistent with the letter and spirit of the Dodd-
Frank Act?
A.2. As you note, the Dodd-Frank Act contains a number of
provisions that require SEC rulemaking, and dozens of other
provisions that give the SEC discretionary rulemaking
authority. In terms of where the SEC stands, as of the most
recent status review by SEC staff in late May of this year, the
SEC has proposed or adopted rules for about two-thirds of the
mandatory rulemaking provisions. As you note, the SEC's
rulemaking responsibilities under the Dodd-Frank Act are a
significant, and important, undertaking.
To help perform these responsibilities effectively, the SEC
buttressed its process for obtaining input from the public and
interested parties, such as by soliciting comment in advance of
formal rule proposals. The SEC's staff has worked very hard to
review these comments, develop formal proposals, review
comments on proposals, and prepare final rules for
consideration by the Commission. The dedication of our staff
has been on display throughout this period.
I am committed to working faithfully to promulgate rules
that are consistent with the letter and spirit of the Dodd-
Frank Act.
Q.3. The Department of Labor has proposed amendments to ERISA
that would expand the activities subject to a fiduciary duty
under ERISA. On May 3, 2011, I co-signed a letter authored by
HELP Committee Chairman Harkin sent to the SEC, DOL and CFTC
about the importance of working together on this issue to avoid
disruption. On June 6, 2011, Chairman Schapiro responded,
stating that the SEC staff has been meeting with and the SEC is
committed to coordinating with DOL ``to prevent potentially
conflicting standards while recognizing the different mandates
of the statutes that each agency administers.'' Would you
support the Chairman's efforts and support coordination by the
SEC and DOL on these matters?
A.3. I understand from SEC staff that there have been several
formal meetings, as well as numerous telephone calls and other
informal communications, between senior staff members of the
SEC, the Department of Labor (``DOL''), and, in some cases, the
Commodity Futures Trading Commission (HCFTC''). Senior staff
members of SEC, CFTC, and DOL have also participated in joint
briefings with Congressional staff on these issues. SEC staff
members attended the hearings held by the DOL on March 1 and 2,
2011, to hear the concerns raised by affected parties, and they
continue to consult with DOL and CFTC staff on these matters.
The consultations with DOL staff have included discussions
of the potential overlap between the DOL's proposed rule
amending the definition of ``fiduciary'' under ERISA and the
SEC's pending rulemaking relating to business conduct rules
applicable to security-based swap dealers and major security-
based swap participants under Title VII of the Dodd-Frank Act.
Senior SEC staff members have also had several meetings with
DOL staff to discuss the interplay between the fiduciary
standard under ERISA (both existing and proposed) and the rules
applicable to broker-dealers regulated by the SEC.
Based on my interaction with the SEC staff, I believe that
they recognize the concerns alluded to in your question
regarding the possible impact of different standards. The staff
informs me that they intend to continue to consult with DOL
staff to avoid potentially conflicting standards. I believe
deeply in cooperation between regulators and support Chairman
Schapiro's efforts to continue coordination and consultation
between the SEC and DOL. Based on the information I have
received from the staff, the extent of the consultation between
the SEC and DOL appears appropriate and productive. I have
asked the SEC staff to continue this consultative process.
Q.4. On May 25, 2011, the Commission adopted final rules to
create a whistleblower program that rewards individuals who
provide the agency with high-quality tips that lead to
successful enforcement actions, pursuant to Dodd-Frank. The
program was designed to help the SEC by identifying wrongdoers
and providing evidence. Would you support the robust
implementation of the Dodd-Frank whistleblower program
consistent with Congressional intent?
A.4. Too often, we see frauds revealed only after the money is
gone and investors are tragically harmed. In an attempt to
systematically combat this, Congress mandated that the SEC
promulgate rules so that whistleblowers would serve as an early
warning system to detect fraud. The goal of the whistleblower
program is to create a system that incentivizes individuals to
come forward with high quality information to help the
Commission expose fraud.
These are critically important goals, and I support robust
implementation of the Dodd-Frank Act's whistleblower program to
support Congressional intent.
Q.5. Public Company Accounting Oversight Board Chairman James
Doty at the recent SEC and Financial Reporting Institute
Conference on June 2 gave a speech entitled ``Rethinking the
Relevance, Credibility and Transparency of Audits.'' In it,
Chairman Doty described an agenda for the PCAOB to work with
the SEC, investors, auditors, preparers, audit committee
members, scholars and other interested parties to analyze the
structural foundation for auditing with a view to enhancing the
relevance, credibility and transparency of the audit. He cited
topics for possible inquiry, including cultural impediments to
auditor independence and skepticism, the auditor's reporting
model, enhancing audit committees' understanding of the PCAOB
inspection process, and audit transparency. Would you support
these goals and such analysis by the PCAOB?
A.5. The PCAOB is a vital institution, one that is able to have
a significant positive effect on investor protection and audit
quality. The SEC has an important responsibility to select the
members of the Board, approve PCAOB rules, and generally to
engage in oversight of the PCAOB. I believe that it is critical
for the SEC and PCAOB to work together for the good of the
public.
I believe the goals outlined by Chairman Doty are
important, and I will support his efforts to carefully analyze
how best to accomplish them.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM LUIS A. AGUILAR
Q.1. There have been a number of recent high-profile criminal
cases concerning insider trading. As we see in the recent
cases, there appears to be an evolution of insider trading from
one-off opportunists to more sophisticated networks and
structuring to obtain nonpublic information. How has insider
trading changed over recent years? Do these changes require
changes at the SEC? Please explain in detail.
A.1. A longstanding goal of SEC law enforcement has been to
deter market participants from unfairly exploiting
informational advantages. As evidenced by recent insider
trading cases, some wrongdoers have expended significant
efforts to obtain material nonpublic information and avoid
detection of their unlawful trading. The Galleon and Cutillo
cases, in which the SEC charged more than a dozen hedge fund
managers, lawyers, and investment professionals, in two
overlapping serial insider trading rings, clearly indicate that
insider trading remains an issue. These cases collectively
constituted one of the largest insider trading prosecutions in
Commission history. Moreover, on Monday, June 20, a defendant
in the first expert network case was convicted for selling
inside information about multiple companies to hedge fund
traders. As your question notes, these are not one-off
opportunists.
While these cases were successful, they highlight changes
in the nature of insider trading schemes. These schemes appear
to be more lucrative than a single episode, can result in a
pattern of activity, and may involve persons who traditionally
were considered gatekeepers, such as lawyers. The SEC's
response to these new schemes should include tailored
investigative techniques. In addition, the elements of any
response should include (i) better market data and (ii) better
analysis of that data.
The SEC has taken some steps to develop better market data
and data analysis. These have already paid dividends and
computer analysis of trading records has helped the SEC to
bring charges in complex insider trading schemes, such as the
recent actions against Matthew H. Kluger and Garrett D. Bauer.
However, there is much more that is possible with regard to
technology and data analytics. Chairman Schapiro and I have
championed rules that would require standardized market data
across a fragmented market structure, and that would permit SEC
investigators to track a securities transaction from the
original order through execution and settlement. This is often
referred to as a consolidated audit trail. I also support
efforts to establish a state-of-the-art IT forensic lab within
the Division of Enforcement.
Q.2. What is your view concerning the imposition of corporate
penalties by the SEC?
A.2. As the Commission has said, corporate penalties are an
essential part of an aggressive and comprehensive program to
enforce the Federal securities laws, and the availability of a
corporate penalty, as one of a range of remedies, contributes
to the Commission's ability to achieve an appropriate level of
deterrence through its decision in a particular case.
Q.3. What should be the top five priorities of the SEC? Please
explain in detail?
A.3. The SEC has an essential responsibility to oversee the
U.S. capital markets, and maintain their preeminence.
Accomplishing this goal requires the SEC to focus on many
things. Of these, I believe the top five priorities at this
time are:
LThe SEC must maximize its resources, improve its
use of technology, and work toward reforming the agency
to support its mission. In particular, the SEC must
continue to ensure that its enforcement and examination
programs are effective. It is vital for the protection
of investors and the maintenance of market confidence
that the SEC hold wrongdoers accountable, and return
stolen money to those who have been harmed.
LContinue and complete the implementation of the
Dodd-Frank Act's rulemaking directives to accomplish
the goals Congress intended. I believe the SEC should
continue to implement the Dodd-Frank Act's provisions
in a measured, thoughtful way that improves the
strength of the financial system and quality of the
capital markets.
LEstablish required investor initiatives. It is
essential that the SEC have investors at the forefront
of its mind. Congress agreed, and the Dodd-Frank Act
requires, the implementation of two initiatives to
accomplish this goal: (1) establishing an Investor
Advisory Committee; and (2) creating the Office of the
Investor Advocate. I believe it is important to
expeditiously re-establish the Investor Advisory
Committee, which the SEC had established in 2009. In
addition, I would like to see the prompt establishment
of the Office of the Investor Advocate.
LStrengthen our oversight and understanding of the
markets, and work toward preventing market breaks like
May 6th from occurring again. The SEC must continue to
strive to address the problems manifested in the May
6th market break. In addition, the SEC should adopt a
consolidated audit trail to enable it to
comprehensively monitor trading activity and perform
meaningful market surveillance for suspicious activity.
LRecruit and retain a high quality, diverse, and
motivated workforce, dedicated to serving the public
interest. The SEC can and must do a better job of
recruiting and retaining a diverse, knowledgeable
workforce, who are committed to fulfilling the
Commission's mission--protecting investors, maintaining
fair and orderly markets, and facilitating capital
formation.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGAN FROM LUIS A.
AGUILAR
Q.1. Mr. Aguilar, In March Federal financial regulators
published a proposed rule that would implement Section 956 of
the Dodd-Frank Act. Section 956 requires regulators to issue
rules that prohibit ``covered financial institutions'' from
entering into incentive-based compensation arrangements that
encourage inappropriate risks.
``Covered financial institutions'' are defined to include
investment advisers that have $1 billion or more in total
consolidated assets. The proposed rule seems to ignore assets
under management and leverage employed by institutions.
It would seem to me that an asset manager's consolidated
assets could be minimal relative to its assets under management
and more importantly, to the leverage it employs. Wouldn't you
agree?
A.1. Section 956 of the Dodd-Frank Act requires the SEC and six
other Federal agencies to engage in rulemaking regarding the
incentive-based compensation of ``covered financial
institutions.'' As you note, the joint proposal by Federal
agencies defines ``covered financial institutions'' in a way
that includes investment advisers that have $1 billion or more
in total consolidated assets.
As a general rule, asset managers do not consolidate the
assets and liabilities of a managed fund. As a result, it is
true that an asset manager's consolidated assets can be small
relative to the assets held by funds that are under management,
and relative to the leverage of such funds.
Q.2. In that case, if one of the reasons for the standard under
Section 956 is to avoid compensation arrangements that could
lead to material financial loss to the institution, shouldn't
some consideration be given to assets under management or
leverage when defining covered financial institutions?
A.2. Earlier this year, after extensive inter-agency
discussions, the Commission, the Board of Governors of the
Federal Reserve, the FDIC, the Office of Comptroller of the
Currency, the National Credit Union Administration, the Office
of Thrift Supervision, and the Federal Housing Finance Agency
(the ``Agencies'') jointly proposed rules pursuant to section
956 of the Dodd-Frank Act, which concern incentive-based
compensation arrangements at financial institutions with assets
of $1 billion or more.
The Agencies sought to propose a rule that could be applied
consistently to the different categories of entities that might
be ``covered financial institutions''--depository institutions
and their holding companies, credit unions, broker-dealers,
investment advisers, Fannie Mae, Freddie Mac, and any other
financial institution that the Agencies, by rule, determine
should be included. The proposal measures ``total consolidated
assets'' by the financial institutions' own balance sheets (as
reported to their regulators), thus drawing a distinction
between an institution's own assets and the assets it has under
management. Nonetheless, the proposing release reflects
awareness that it may be appropriate to consider a different
measure for investment advisers, and it specifically solicits
public comment on the issue. The release states, ``Commenters
are asked to provide additional comments on the proposed method
of determining asset size for investment advisers, and
specifically to address whether the determination of total
assets should be further tailored for certain types of
advisers, such as advisers to hedge funds or private equity
funds, and if so, why and in what manner.''
As the Commission considers adopting final rules jointly
with the other Agencies, I will carefully consider this issue
and any comments we receive on the subject.
Q.3. Mr. Aguilar, during your testimony before the Committee
you offered to follow up on certain questions about the
coordination between the SEC and the Department of Labor with
respect to the Department of Labor's proposed rule on Fiduciary
Duty.
I understand that you have not yet been briefed on the
nature of those discussions, but would like to understand
better what coordination is taking place. In particular, at
what level have these conversations taken place? What has been
the nature of the coordination? Do you feel that the Department
of Labor has engaged the SEC actively, adequately and
appropriately on this rule writing, which I think has wide
ranging implications for securities markets?
A.3. Having consulted with SEC staff, I can confirm that there
have been several formal meetings, as well as numerous
telephone calls and other informal communications, between
senior staff members of the SEC, the Department of Labor (DOL),
and, in some cases, the Commodity Futures Trading Commission
(CFTC).\1\ Senior SEC staff members participating in these
discussions have included the Chief Counsel and Associate
Director of the Division of Investment Management, and the
Acting Co-Chief Counsel of the Division of Trading and Markets.
Senior members of the SEC, CFTC, and DOL have also participated
in joint briefings with Congressional staff on these issues.
SEC staff members attended the hearings held by the DOL on
March 1 and 2, 2011, to hear the concerns raised by affected
parties, and they continue to consult with DOL and CFTC staff
on these matters.
---------------------------------------------------------------------------
\1\ The CFTC published its proposed rules regarding Business
Conduct Standards for Swap Dealers and Major Swap Participants with
Counterparties on December 22, 2010. 75 FR 80638 (Dec. 22, 2010),
available at http://cftc.gov/ucm/groups/public/@lrfederalregister/
documents/file/2010-31588a.pdf. In response, the CFTC received a number
of comments relevant to the SEC's consideration of its own rulemaking
regarding business conduct standards pursuant to the Dodd-Frank Act.
---------------------------------------------------------------------------
The consultations with DOL staff have included discussions
of the potential overlap between the DOL's proposed rule
amending the definition of ``fiduciary'' under ERISA and the
SEC's pending rulemaking relating to business conduct rules
applicable to security-based swap dealers and major security-
based swap participants under Title VII of the Dodd-Frank Act.
Based on my interaction with the SEC staff, I believe that they
recognize the concerns, to which you alluded during the
hearing, regarding the possible impact of differences between
business conduct obligations imposed by the Dodd-Frank Act and
the proposed revised definition of ``fiduciary'' under ERISA.
The staff informs me that they intend to continue to consult
with DOL staff to avoid potentially conflicting standards.
Senior SEC staff members have also had several meetings
with DOL staff to discuss the interplay between the fiduciary
standard under ERISA (both existing and proposed) and the rules
applicable to broker-dealers regulated by the SEC. As you know,
market participants have expressed concern about being a
fiduciary under ERISA when they offer securities to Individual
Retirement Account customers.
Based on the information I have received from the staff,
the extent of the consultation between the SEC and DOL appears
appropriate and productive. I have asked the SEC staff to
continue this consultative process.
------
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM DANIEL
M. GALLAGHER, JR.
Q.1. What is your view of the changes the SEC has made to
improve enforcement of the securities laws in the wake of the
Madoff and Stanford Ponzi schemes? How would you work to
support or enhance the effectiveness of SEC enforcement in the
future?
A.1. I support strong and vigorous enforcement of the Federal
securities laws and support changes at the Commission to
achieve that goal. The Commission has already made several
changes in response to the Madoff and Stanford Ponzi schemes.
The Commission has promulgated rules designed to improve the
protection of investor assets in the custody of financial
professionals. The Office of Compliance, Inspections and
Examinations has revamped its examinations of investment
advisers and broker-dealers to include a focus on asset
verification and other important areas of customer protection.
The Enforcement Division has restructured and devoted more
resources to its tips and complaints processes, including the
creation of a new Office of Market Intelligence.
If confirmed, I will actively work to support the
effectiveness of the Division of Enforcement. I will regularly
interact with the Enforcement staff at all levels so that I am
aware of the needs of the Division, and I will work to maintain
and enhance the esprit de corps in the Division. I will also
focus on ensuring that the SEC is appropriately engaged with
other law enforcement agencies, and that SEC enforcement
resources are being focused and used to maximum advantage.
Q.2. The Dodd-Frank Act includes over 100 rulemaking provisions
applicable to the SEC. This is a large undertaking and a
tremendous responsibility. What is your opinion of the progress
of these rulemakings? Will you commit to promulgating rules
that are consistent with the letter and spirit of the Dodd-
Frank Act?
A.2. The Dodd-Frank Act has mandated a rulemaking agenda that
is more extensive than at any other time in the SEC's history.
Looking in from the outside, I believe the SEC is making good
progress in proposing and adopting Dodd-Frank related rules in
a timely manner. I understand that some deadlines will not be
met, but I believe this is understandable given the large
number of rules and the complexity and importance of many of
the rules. If confirmed, I will be committed to promulgating
Dodd-Frank related rules in accordance with the statutory
mandates.
Q.3. The Department of Labor has proposed amendments to ERISA
that would expand the activities subject to a fiduciary duty
under ERISA. On May 3, 2011, I co-signed a letter authored by
HELP Committee Chairman Harkin sent to the SEC, DOL and CFTC
about the importance of working together on this issue to avoid
disruption. On June 6, 2011, Chairman Schapiro responded,
stating that the SEC staff has been meeting with and the SEC is
committed to coordinating with DOL ``to prevent potentially
conflicting standards while recognizing the different mandates
of the statutes that each agency administers.'' Would you
support the Chairman's efforts and support coordination by the
SEC and DOL on these matters?
A.3. Yes. If confirmed, I will strive to ensure that the SEC
and DOL are working together on these critically important
initiatives. It is of the utmost importance to investors--
especially those who are saving for retirement--that the SEC
and DOL ensure that the rulemakings work appropriately
together, and are rolled out in a way that allows for proper
implementation and investor education and protection.
Q.4. On May 25, 2011, the Commission adopted final rules to
create a whistleblower program that rewards individuals who
provide the agency with high-quality tips that lead to
successful enforcement actions, pursuant to Dodd-Frank. The
program was designed to help the SEC by identifying wrongdoers
and providing evidence. Would you support the robust
implementation of the Dodd-Frank whistleblower program
consistent with Congressional intent?
A.4. If confirmed, I will be duty-bound to follow Congressional
mandates with respect to the whistleblower provision and the
rest of the Dodd-Frank rulemakings.
Q.5. Public Company Accounting Oversight Board Chairman James
Doty at the recent SEC and Financial Reporting Institute
Conference on June 2 gave a speech entitled ``Rethinking the
Relevance, Credibility and Transparency of Audits.'' In it,
Chairman Doty described an agenda for the PCAOB to work with
the SEC, investors, auditors, preparers, audit committee
members, scholars and other interested parties to analyze the
structural foundation for auditing with a view to enhancing the
relevance, credibility and transparency of the audit. He cited
topics for possible inquiry, including cultural impediments to
auditor independence and skepticism, the auditor's reporting
model, enhancing audit committees' understanding of the PCAOB
inspection process, and audit transparency. Would you support
these goals and such analysis by the PCAOB?
A.5. I believe that auditors play a critical role in our
capital markets, and it is imperative that investors have
confidence in the independence and competence of auditors. If
confirmed, I would look forward to working with the PCAOB on
all matters.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM DANIEL M. GALLAGHER, JR.
Q.1. There have been a number of recent high-profile criminal
cases concerning insider trading. As we see in the recent
cases, there appears to be an evolution of insider trading from
one-off opportunists to more sophisticated networks and
structuring to obtain nonpublic information. How has insider
trading changed over recent years? Do these changes require
changes at the SEC? Please explain in detail. Would the
practice of granting stock options in advance of the
announcement of good news, or so-called ``spring-loading'' of
stock options, constitute insider trading? Why or why not?
A.1. The SEC enforcement program must keep pace with changes in
the securities markets. While the tools of insider trading have
evolved since the infamous scandals of the 1980s, such as the
use of foreign accounts, Internet trading, emails, and instant
messages instead of phone calls and faxes, the complexity of
some schemes remains unchanged. I believe that the SEC has the
appropriate legal remedies available to investigate and bring
insider trading cases. If confirmed, I would work to ensure
that the Enforcement staff has the appropriate technological
resources, including surveillance tools, to discover suspicious
trading patterns and to pursue insider trading cases.
With respect to the options grant question, I believe that
this issue arose in connection with the options backdating
investigations in 2006. There was an argument advanced that the
practice of granting options ahead of the public disclosure of
good news could constitute insider trading because a board
would be approving grants while in possession of material
nonpublic information. The countervailing argument was that
such a situation would not give rise to insider trading
liability because both parties to the transaction, the employee
and the corporation acting through the board, would be fully
informed of the relevant information and the board should be
acting in the best interests of the corporation and the
shareholders. I do not believe a court addressed this issue
under the Federal securities laws. I understand both sides of
this debate, and I believe that the facts and circumstances of
a particular case would dictate whether there is insider
trading or some other basis for liability. Putting aside the
insider trading analysis, I believe that companies employing
this practice should fully and fairly disclose to investors
that options may be granted in this manner.
Q.2.a. Several articles and critics have asserted that then-
Chairman Christopher Cox engineered procedural and tactical
changes to reduce the SEC's enforcement division's power.
Specifically, critics point to control of the Commission's
calendar to delay and water down enforcement cases, reduction
in the staff's ability to negotiate individual and corporate
civil monetary penalties, and shifting priorities away from
larger public companies to petty-fraud cases.
During your tenure with Chairman Cox, what was your role in
managing the Commission's Enforcement calendar?
A.2.a. One of my duties when I was counsel to Chairman Cox was
to work with the Division of Enforcement (and other Divisions
or Offices as necessary), the Secretary's Office, and the
Commissioners' offices to finalize a roster of enforcement
recommendations that had been prepared by the Secretary's
Office for the weekly closed meetings held by the Commission.
We would also decide whether some recommendations could be sent
to the Commission for consideration on a seriatim basis,
thereby allowing more room on the weekly closed meeting roster
for pressing or complicated recommendations. The primary goal
of this process was to maximize the amount of recommendations
considered by the Commission each week.
Q.2.b. How important is a robust enforcement division?
A.2.b. As I stated in the confirmation hearing, I believe it is
critically important for the SEC to have a robust Enforcement
Division, and it is also important that investors and markets
have confidence that the SEC is actively policing the markets.
SEC Enforcement cases can and should have a deterrent effect,
and deterrence is a significant part of the Commission's effort
to police the markets. The SEC Enforcement program is the most
high profile aspect of the Commission's work, and the
effectiveness of the SEC is judged by investors and others in
large part on the work of the Enforcement Division. If
confirmed, I will actively support the work of the Division of
Enforcement.
Q.2.c. What is your opinion on the degree of independence that
the SEC enforcement staff should have with respect to
determining what matters to pursue and what recommendations to
make to the Commission?
A.2.c. I believe that the Enforcement staff is, and has
traditionally been, very independent in determining what to
investigate and what to recommend to the Commission. I also
believe it is important for the Commission to play an active
role in overseeing the work of the Division, to see that Staff
has adequate support and resources, and to ensure that the
Enforcement program is meeting the policy goals of the
Commission.
Q.2.d. If you were to become a Commissioner, what additional
recommendations do you have for improving enforcement at the
SEC?
A.2.d. Chairman Schapiro and Enforcement Director Khuzami have
implemented several important changes in the Division of
Enforcement over the last 2 years. I believe that the impact of
these changes has not yet been fully realized, and if confirmed
I will study the effectiveness of the changes and the potential
for further enhancements and refinements. One thing I would
focus on in particular is the use of technology by the
Enforcement Staff, whether the technology is sufficient, and
what additional technological resources are needed.
Q.3. What is your view concerning the imposition of corporate
penalties by the SEC?
A.3. Civil monetary penalties are part of the SEC's enforcement
arsenal and should be used in appropriate cases, including
enforcement cases brought against corporations. Corporate
penalties can be an effective tool for the SEC to remediate
securities law violations, particularly when they are returned
to harmed investors through the Commission's Fair Funds
authority, and to deter wrongdoing. At the same time, a
corporate penalty should not be used in a way to harm the
investors and shareholders the SEC's enforcement program should
protect and who have already been harmed by the conduct.
In 2006, a unanimous Commission adopted a policy statement
regarding the imposition of corporate penalties. The Commission
policy statement analyzed and attempted to implement the
guidance provided by the Committee on Banking, Housing, and
Urban Affairs in a report that accompanied the statute
providing for the SEC's penalty authority in 1990. The
Committee's report noted, among other things, that shareholders
could be harmed by a corporate penalty unless the shareholders
received an improper benefit from the company's securities law
violation. The Committee report also recognized that corporate
penalties can have a deterrent effect on would-be violators of
the securities laws.
Q.4. In 2007, the Commission endorsed the concept of ``scheme
liability,'' which considered the ability of shareholders to
sue third parties for another company's fraud. What is your
view of scheme liability? Please explain in detail.
A.4. The ``scheme liability'' theory is the private liability
corollary of the SEC's aiding and abetting authority. Congress
expressly gave the SEC authority to bring aiding and abetting
actions, but did not provide for a private right of action for
the same activity. Questions about scheme liability have arisen
in private securities cases based on an implied right of action
under section 10(b) of the Exchange Act and Rule 10b-5.
Congress and the courts have been the principal architects of
the scope of that implied right of action, and the Supreme
Court rejected the scheme liability theory in the 2008
Stoneridge case. I believe it is important for the SEC to
exercise its statutory aiding and abetting authority, when
appropriate, to address activity that supports securities laws
violations.
Q.5. The SEC staff from time to time issue interpretive
guidance in the form of Staff Accounting Bulletins (SABs) or
Staff Legal Bulletins (SLABs). In your opinion, what is the
role of ``Staff Accounting Bulletins'' or ``Staff Legal
Bulletins''? What weight do they have? Do you agree with this
role? Why or why not?
A.5. Although I have not worked with SABs or SLABs on a regular
basis, my understanding is that both types of bulletins are
meant to provide guidance to corporate filers regarding the
content of filings made with the Commission. The bulletins are
issued by the Staff, not the Commission, and they appear to be
issued infrequently. The Staff makes it clear in these
bulletins that the guidance is not official Commission policy
such as a rule or formal Commission interpretation.
I believe it is very useful for registrants and others to
have timely staff level guidance on issues that are new or
unclear, including the guidance relating to accounting
practices that is included in SABs and SLABs. I also believe
that the Staff is cognizant of when legal or policy issues are
important enough to warrant Commission level approval, and that
the Staff will elevate those issues to the Commission.
Q.6. What should be the top five priorities of the agency?
Please explain in detail?
A.6. On a macro level, I believe that the SEC needs to continue
to focus on having the most effective enforcement program
possible, and to study, monitor, and take action on issues of
systemic risk posed by the markets and market participants
overseen by the agency. With respect to examples of specific
issues of priority, I believe that the following issues, which
I address in no particular order of importance, are currently
important to the SEC:
A. Dodd-Frank Act implementation.
It is important that the SEC and other agencies meet the
mandates Congress established in the Dodd-Frank Act, while at
the same time striving to promulgate rules that do not have
negative unintended consequences. If confirmed, I would look
forward to helping the SEC meet these very difficult goals.
B. Market Structure/May 6 Initiatives
The SEC has taken several important steps to address the
``flash crash'' of May 6, 2010. And before the flash crash, the
agency was very active in the market structure area. For
example, the SEC proposed a very important concept release on
market structure issues in early 2010 that garnered much public
comment. I believe it is important for the SEC to study these
issues carefully and to receive appropriate public comment as
the proper functioning of the equity markets is crucial for
U.S. investors.
C. Credit rating agency oversight
Since Congress gave the SEC statutory authority to oversee
certain rating agencies in 2006, the agency has been very
active in processing registrations and promulgating rules in
this area. And with the increased authority and other mandates
in the Dodd-Frank Act, the SEC will continue to focus on the
proper oversight of credit rating agencies over the next
several years. Given the important role that rating agencies
play in the U.S. capital markets, and the problems with certain
rating agency activities that emerged during the financial
crisis, this is an area that will require careful attention by
the Commission.
D. Organizational Issues
As described in the Boston Consulting Group's SEC
Organizational Study and Reform report that was mandated in the
Dodd-Frank Act, there are numerous operational issues that the
agency needs to address. It is imperative that the SEC be
incredibly efficient so as to maximize the resources allocated
to it by Congress, and to ensure that investors are protected.
An obvious area of focus (as indicated in the BCG report)
should be the agency's technology resources. The SEC cannot be
fully effective if its technology is vastly inferior to that of
the markets and market participants it is charged
withoverseeing.
E. Fixed Income Markets Oversight
The SEC has become very active with respect to the
oversight of municipal markets over the last few years. I
believe that the Commission should be studying in detail these
and other fixed income markets to better understand how they
operate, and whether the protections that are in place for
investors are adequate. At a time when the Commission is
examining the equities markets at a micro level and beginning
to oversee certain aspects of the credit markets, the SEC
should also devote resources to fixed income market oversight
as all of these markets are interconnected and vital to the
health of our economy.
Based on the lessons learned from the events of the last
several years, I assume that the SEC will need to focus on
other new and pressing issues, perhaps even in the near term.
The securities markets are dynamic and constantly evolving, and
issues will undoubtedly arise that will take priority over
those listed above.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGAN FROM DANIEL M.
GALLAGHER, JR.
Q.1. Mr. Gallagher, In March Federal financial regulators
published a proposed rule that would implement Section 956 of
the Dodd-Frank Act. Section 956 requires regulators to issue
rules that prohibit ``covered financial institutions'' from
entering into incentive-based compensation arrangements that
encourage inappropriate risks.
``Covered financial institutions'' are defined to include
investment advisers that have $1 billion or more in total
consolidated assets. The proposed rule seems to ignore assets
under management and leverage employed by institutions.
It would seem to me that an asset manager's consolidated
assets could be minimal relative to its assets under management
and more importantly, to the leverage it employs. Wouldn't you
agree?
A.1. I agree that an asset manager's consolidated assets could
be much smaller than its assets under management. Whether a
manager's Consolidated assets could be minimal relative to the
leverage it employs would depend, I believe, on the nature of
the investment strategies--which would include the use of
leverage--employed by the asset manager.
Q.2. In that case, if one of the reasons for the standard under
Section 956 is to avoid compensation arrangements that could
lead to material financial loss to the institution, shouldn't
some consideration be given to assets under management or
leverage when defining covered financial institutions?
A.2. Because this is a pending rulemaking, I do not believe it
would be appropriate for me to express a view at this time. If
confirmed, however, you have my commitment that I will study
and seek to fully understand this issue and will work to ensure
that the final rule is designed to accomplish the statutory
purpose.
------
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM ANTHONY
D'AGOSTINO
Q.1. The recent failure of Madoff has diminished the SIPC fund.
What is your view of the adequacy of the fund? If confirmed,
how would you recommend that the SIPC oversee the adequacy of
the fund in the future?
A.1. The SIPC Fund has been well managed and adequately funded
since its inception.
The Madoff fraud is an example of a ``Black Swan'' event
that would test the adequacy of virtually any investor
protection program.
With hindsight as my guide, I believe the fund should now
be expanded to a level that will better prepare SIPC for
similar outlier events in the future.
If confirmed, I would recommend that the current assessment
rate be maintained until such a time as the fund is adequately
funded to address future outlier events.
The Board will need to work with Congress to determine what
the appropriate funding level might be going forward. Recent
decisions by the Securities and Exchange Commission indicate
they are taking a more expansive view of the protection than
has historically been provided by SIPC. In that regard, the
starting point for the appropriate funding level is a clear
understanding of what is, and what is not, protected under the
SIPC statute.
Q.2. I understand that certain conflicts of interest may exist
in connection with you serving on the SIPC Board and that you
have agreed to recuse yourself on certain SIPC matters. Please
describe the conflicts and the scope of your recusals.
A.2. By statute, `` . . . three such directors shall be
selected from among persons who are associated, with, and
representative of different aspects of, the securities
industry.''
I am qualified for the Board because I am an employee of
UBS Securities, UBS, like every large financial institution has
transactions that were in some way connected to Madoff and/or
Lehman.
Because of the scope of the Madoff fraud and the size of
Lehman Brothers, it would be nearly impossible to find a
qualified Board member that came from a firm that did not have
some connection to Madoff and/or Lehman. I believe that large
firm representation on the SIPC Board is particularly important
at this time. Under Dodd-Frank, Congress has created a new
scheme for the resolution of systemically important firms,
including securities broker-dealers, in which SIPC have a role.
I believe that my position at UBS makes me particularly
qualified to offer guidance, knowledge, and experience as the
resolution program is developed and put into place.
When discussions arise and when decisions are required
about issues that may affect UBS, I will seek and follow the
advice of SIPC counsel and recuse myself from discussions and
decisions as appropriately advised.
As reference, a departing member of the Board, Mark
Shelton, is employed by UBS and also recused himself on Lehman
matters because UBS was/is involved in LBI claims trading and
litigation with the LBI trustee.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR REED
FROM ANTHONY D'AGOSTINO
Q.1. What should be the top five priorities of SIPC? Please
explain in detail?
A.1. --In light of the recent SEC direction regarding the
Stanford fraud, we need to take a hard look at revising SIPA,
and make appropriate recommendations to Congress on how to
update the Act. SIPC needs an updated, clear statutory mandate
of the extent of protection under the statute.
--An adequate fund to carry out a revised statutory
mandate.
--Adequate staffing and technology at SIPC to implement the
mandate.
--Education of the public investor regarding the extent and
level of protection provided by SIPC.
--Ensure that SIPA is properly aligned with the risks
associated with modern-day sophisticated markets and securities
investment products.
------
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM GREGORY
S. KARAWAN
Q.1. The recent failure of Madoff has diminished the SIPC fund.
What is your view of the adequacy of the fund? If confirmed,
how would you recommend that the SIPC oversee the adequacy of
the fund in the future?
A.1. From my experience being on the senior leadership team of
a large financial services company, I am very familiar with
issues such as reserve adequacy, surplus capital, and funding
sources. I'm also aware that assessing such issues requires a
detailed review of relevant data and metrics in order to form
reliable, well informed opinions. Assessing reserve adequacy,
or, by analogy, the adequacy of the SIPC fund, is not something
I would be comfortable ``ball-parking''. I would want detailed
data, metrics and analyses to inform an opinion on funding
adequacy. At a minimum, I would like to see, for example,
historical data on fund adequacy, the average size of investor
accounts, the trend in terms of account-size growth, the
average investor loss in a broker-dealer liquidation, the
average SIPC covered loss in a broker-dealer liquidation, the
trend in terms of growth of these data points, and perhaps a
stochastic analysis of fund adequacy given the likelihood of
events in the future. As of today, I do not have this type of
information in order to assess the current adequacy of the SIPC
fund. If confirmed, however, I believe that such an analysis
should be performed at least annually in order to oversee the
adequacy of the fund, with perhaps a quarterly summary review
to ensure that intervening events have not altered the view of
fund adequacy.
Q.2. I understand that certain conflicts of interest may exist
in connection with you serving on the SIPC Board and that you
have agreed to recuse yourself on certain SIPC matters. Please
describe the conflicts and the scope of your recusals.
A.2. My brother, Howard Karawan, suffered losses as a result of
indirect investments with Bernard L. Madoff Investment
Securities, LLC (``Madoff'). My brother did not invest directly
with Madoff, but rather through a feeder fund, and accordingly,
he is not expected to receive any direct advances from SIPC.
However, my brother did file a claim in the Madoff liquidation
proceeding, and has objected to the trustee's denial of the
claim. The objection will likely be the subject of litigation
in that proceeding. As a result, I may have a potential
conflict of interest with respect to the Madoff proceeding. I
will recuse myself from involvement in any issues giving rise
to even the appearance of a potential conflict of interest in
this regard.
Additionally, I am currently employed by Genworth
Financial, Inc., a financial services company, which includes a
subsidiary that is a broker-dealer. As such, I am associated
with and representative of the securities industry. I also
receive deferred compensation from General Electric Corporation
(``GE'') and own shares in Citigroup Inc. (``Citigroup''),
which have broker-dealer subsidiaries, and own life insurance
through Metropolitan Life Insurance Company (``MetLife''),
which has a broker-dealer affiliate. I do not believe that any
of these associations present a conflict of interest with
respect to my service on the SIPC Board of Directors if
confirmed. However, if a specific situation arose, such as, for
example, a potential liquidation of the Genworth Financial
subsidiary broker-dealer, I would recuse myself from Board
activities involving that situation.
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RESPONSE TO WRITTEN QUESTION OF SENATOR SHELBY FROM GREGORY S.
KARAWAN
Q.1. The Madoff liquidation is one of the biggest the
Securities Investor Protection Corporation has ever handled.
According to the Corporation's annual report for 2009, the
Madoff liquidation, together with the Lehman liquidation,
``dominated SIPC's agenda in a way that SIPC has never
previously experienced in its 39-year history.'' Issues related
to Madoff will continue to occupy a substantial part of the
Corporation's agenda for some time. However, your confirmation
papers note that, because of a conflict, you will have to
recuse yourself from all matters relating to the Madoff
liquidation. Is it true that you will have to recuse yourself
from all Madoff-related issues? Won't your recusal
significantly reduce your utility as a Board member?
A.1. Although the Madoff liquidation has dominated the SIPC
Board's agenda, I am advised that the amount of activity and
time devoted to the Madoff liquidation is naturally trailing
off since its peak in the 2009 timeframe. And, given recent
events, the amount of time devoted to situations such as the
Stanford liquidation is likely to significantly eclipse the
time devoted to the Madoff liquidation.
Additionally, the work of the modernization task force is
being finalized, with the likely result that there will be a
number of recommendations that will require analysis,
discussion, and possibly implementation. That work is also
likely to require significant devotion of Board member time and
attention.
I believe that my utility as a Board member may actually be
greater in that we have existing Board members continuing to
devote the necessary time and attention to the Madoff
liquidation, a matter with which they have significant
involvement and experience, while I could pick up a greater
share of the laboring oar on these other significant, and
important issues.
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RESPONSE TO WRITTEN QUESTION OF SENATOR REED FROM GREGORY S.
KARAWAN
Q.1. What should be the top five priorities of SIPC? Please
explain in detail?
A.1. As I alluded to in my testimony before the Committee, the
complexity and sophistication of financial frauds are growing,
financial markets are global, investment vehicles are evolving
every day, and technology is advancing rapidly. Without being
steeped in the facts and details of what might presently be
SIPC's priorities, which might alter my view, the confluence of
all these things would suggest to me that, amongst SIPC's top
priorities, should be the following:
LThe adequacy of the SIPC fund (for further detail,
see my response to Question 1 from Chairman Johnson).
LThe adequacy of current SIPC protection limits.
LWhether SIPC has all the necessary subject matter
experts at the operational level to deal with these
global and growing complex challenges.
LReviewing the work and recommendations of the
modernization task force. I would include, as part of
that work, reviewing whether legislation needs to be
amended and updated to deal with the more sophisticated
manner in which financial frauds are now taking place
to help clarify which situations fall under SIPC
coverage, and which do not.
LAssessing and improving investor disclosure and
education, and SIPC communication about the level,
extent, and scope of SIPC protection.
Additional Material Supplied for the Record