[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 
                                Affairs


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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

                              ----------                              

                         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.
                                ------                                


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.
                                ------                                


 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





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