[Senate Hearing 112-409]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-409
 
CONTINUED OVERSIGHT OF THE IMPLEMENTATION OF THE WALL STREET REFORM ACT 

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

                                HEARING

                               before the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT 
ON THE FINANCIAL REGULATORY FRAMEWORK, AND THE IMPACT OF THE FINANCIAL 
    CRISIS ON AMERICAN CONSUMERS, INVESTORS AND THE OVERALL ECONOMY

                               __________

                            DECEMBER 6, 2011

                               __________

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


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

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

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

                     Dwight Fettig, Staff Director
              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel
                     Laura Swanson, Policy Director
                   Glen Sears, Senior Policy Advisor
                 William Fields, Legislative Assistant

                 Andrew Olmem, Republican Chief Counsel
                Hester Peirce, Republican Senior Counsel
                   Michelle Adams, Republican Counsel

                       Dawn Ratliff, Chief Clerk
                     Riker Vermilye, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor

                                  (ii)
                            C O N T E N T S

                              ----------                              

                       TUESDAY, DECEMBER 6, 2011

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2
    Senator Menendez.............................................     4
    Senator Brown................................................     4
        Prepared statement.......................................    40
    Senator Moran
        Prepared statement.......................................    40

                               WITNESSES

Neal S. Wolin, Deputy Secretary, Department of the Treasury......     5
    Prepared statement...........................................    41
    Response to written questions of:
        Chairman Johnson.........................................    99
        Senator Shelby...........................................   100
        Senator Schumer..........................................   104
        Senator Crapo............................................   104
        Senator Toomey...........................................   105
Daniel K. Tarullo, Member, Board of Governors of the Federal 
  Reserve System.................................................     7
    Prepared statement...........................................    49
    Response to written questions of:
        Senator Shelby...........................................   108
        Senator Schumer..........................................   110
        Senator Crapo............................................   111
        Senator Toomey...........................................   113
Mary L. Schapiro, Chairman, Securities and Exchange Commission...     8
    Prepared statement...........................................    62
    Response to written questions of:
        Chairman Johnson.........................................   114
        Senator Shelby...........................................   123
        Senator Schumer..........................................   124
        Senator Crapo............................................   124
        Senator Toomey...........................................   126
Gary Gensler, Chairman, Commodity Futures Trading Commission.....    10
    Prepared statement...........................................    78
    Response to written questions of:
        Chairman Johnson.........................................   127
        Senator Shelby...........................................   129
        Senator Crapo............................................   129
        Senator Toomey...........................................   130
    Accompanied by Jill E. Sommers, Commissioner, Commodity 
      Futures Trading Commission.................................    16
Martin J. Gruenberg, Acting Chairman, Federal Deposit Insurance 
  Corporation....................................................    11
    Prepared statement...........................................    82
    Response to written questions of:
        Senator Shelby...........................................   132
        Senator Crapo............................................   133
        Senator Toomey...........................................   134
John Walsh, Acting Comptroller of the Currency, Office of the 
  Comptroller of the Currency....................................    13
    Prepared statement...........................................    88
    Response to written questions of:
        Senator Shelby...........................................   134
        Senator Crapo............................................   137
        Senator Toomey...........................................   138

              Additional Material Supplied for the Record

Committee letter to Federal financial regulators regarding the 
  rulemaking process.............................................   149
Securities and Exchange Commission response to Committee 
  regarding the rulemaking process...............................   152
Federal Deposit Insurance Corporation response to Committee 
  regarding the rulemaking process...............................   164
Comptroller of the Currency response to Committee regarding the 
  rulemaking process.............................................   186
Board of Governors of the Federal Reserve System response to 
  Committee regarding the rulemaking process.....................   250
Federal Housing Finance Agency response to Committee regarding 
  the rulemaking process.........................................   258
Consumer Financial Protection Bureau response to Committee 
  regarding the rulemaking process...............................   263
National Credit Union Administration response to Committee 
  regarding the rulemaking process...............................   268



CONTINUED OVERSIGHT OF THE IMPLEMENTATION OF THE WALL STREET REFORM ACT

                              ----------                              


                       TUESDAY, DECEMBER 6, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:04 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 call this hearing to 
order.
    Today this Committee continues its oversight of the 
implementation of the Wall Street Reform Act. Since the last 
implementation hearing in July, there have been significant 
developments regarding rule proposals, rule finalizations, and 
more broadly, additional concerns about the impact of the 
crisis in Europe.
    We do not have to imagine a far-off crisis to be reminded 
of why we passed Wall Street reform. The current situation in 
Europe underscores the importance of implementing new rules 
that enhance supervision of large, complex financial firms and 
the financial system as a whole, reduce risk in the 
marketplace, and support financial stability.
    Over the past 18 months, since the passage of the Wall 
Street reform bill, much progress has been made. Agencies and 
offices have been merged or created, and some very important 
rules, including the rules for orderly liquidation and living 
wills, have been finalized. The Consumer Financial Protection 
Bureau has opened its doors and is doing excellent work on 
projects like simplifying mortgage and student loan forms 
through its ``Know Before You Owe'' initiative. But work 
remains to be done.
    Some of the most complex rulemakings of the Wall Street 
Reform Act are the ones still under consideration: the 
Qualified Residential Mortgage determination otherwise known as 
QRM, the Volcker Rule, provisions to enhance supervision of 
nonbank financial and bank-holding companies, and the rules 
under which nonbank financial firms will be designated 
``systemically important.'' I want timely resolution of these 
critical, outstanding rulemakings, and I am looking forward to 
hearing about the next steps for these rules from our panelists 
today.
    I recognize that these rulemakings are difficult, but this 
is the time when tough decisions have to be made by our 
regulators.
    While our economy is starting to show signs of recovery 
from the financial crisis, the ongoing turmoil in Europe is a 
stark reminder that we must continue to monitor threats to 
financial stability. The Wall Street Reform law gave our 
regulators new tools to better address potential threats, to 
create well-functioning markets while also reducing systemic 
risks, and to improve supervision. But until the new rules are 
implemented, our financial system and our economy remain 
vulnerable to these threats.
    I want to thank the regulators before us today for their 
tireless work over the last 18 months continuing implementation 
of this important law. In addition, you are all dealing with 
many challenges, including funding constraints, the bankruptcy 
of MF Global, and other supervisory issues that the 
institutions you regulate face as the economy continues to 
recover from the financial crisis. I have no doubt that you and 
all your staffs will keep up the important work.
    Senator Shelby, your opening statement.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Welcome to the 
Committee, all of you.
    Today our financial regulators will give us a progress 
report on their implementation of the Dodd-Frank Act. When 
Dodd-Frank was passed, the American people were promised that 
financial regulators would have all the tools and powers that 
they need to properly regulate financial institutions and to 
protect investors and consumers.
    Unfortunately for the American people, more powers and more 
tools cannot help when regulators fail to do their jobs. This 
lesson is vividly demonstrated by the Commodity Futures Trading 
Commission's failed regulation of MF Global. The CFTC's most 
basic responsibility is to ensure that customers are protected 
when a firm fails, yet 37 days have passed since MF Global 
filed for bankruptcy and more than $1 billion in customer funds 
are still missing and unaccounted for.
    It is unclear how much longer customers must wait while a 
bewildered CFTC searches for their money. Holding the CFTC 
accountable for its regulatory failures will not be an easy 
task. Already Chairman Gensler has been evading questions about 
his role in the regulation of MF Global. Prior to the firm's 
bankruptcy, it appears that Chairman Gensler had contacts with 
MF Global and its CEO, Jon Corzine, concerning the CFTC's 
regulation of the firm. But when he was called to account for 
the firm's bankruptcy and the missing customer funds, Chairman 
Gensler decided that he needed to recuse himself from matters 
dealing with MF Global. The victims of MF Global I believe 
deserve better.
    Accordingly, I have asked the CFTC's Inspector General to 
examine the Commission's oversight and regulation of MF Global. 
I have also asked him to determine whether Chairman Gensler's 
recusal was appropriate and whether Mr. Gensler should have 
recused himself much earlier in the process. In the absence of 
a Committee investigation, the IG's examination will help 
determine whether MF Global received special consideration by 
the CFTC.
    Although the CFTC's failures have received the most 
attention, our other financial regulators have had their own 
difficulties. Over the last year, it appears that the 
Securities and Exchange Commission has been operating as a no-
doc regulator in its rulemakings and enforcement actions.
    First, the SEC's proxy access rule was struck down as 
arbitrary and capricious by the D.C. Circuit because the SEC 
failed to properly conduct economic analysis before issuing the 
rule. Just last week, a Federal court refused to endorse a 
major SEC settlement because the SEC failed to provide 
sufficient evidence that the settlement was in the public 
interest. Meanwhile, banking regulators have struggled to 
effectively implement several key rules. Most importantly, the 
proposal to implement the Volcker Rule has been marred by 
misconduct, ambiguity, and interagency discord. Drafts of the 
proposed rule were leaked to the press, prompting Inspector 
General inquiries into whether agency personnel violated 
confidentiality rules.
    When regulators finally issued a proposed rule, it came in 
the form of a 298-page concept proposal with over 1,300 
questions. We all agree that banks should not be allowed to 
gamble with taxpayer-guaranteed deposits, yet the ambiguity in 
the proposed rule threatens to make compliance costly and 
difficult, especially for smaller banks.
    Further, the CFTC has not signed on to the Volcker proposal 
and may opt to draft its own rule. The Financial Stability 
Oversight Council was established to ensure that regulators 
properly coordinate their rulemakings. I hope to hear today why 
the Council was unable to secure agreement on the Volcker Rule. 
More than a year has passed now since the enactment of Dodd-
Frank, and it is now evident that it has not lived up to its 
promises. In fact, it has exacerbated many problems by granting 
large bureaucracies greater powers while further insulating 
them from congressional oversight.
    For much too long, we have sacrificed the voice of the 
people on the altar of regulatory independence. What we are 
left with are massive bureaucracies insulated from the people 
they are supposed to be protecting and unaccountable for their 
actions. This week, the President is calling for the 
confirmation of the Director of the Bureau of Consumer 
Financial Protection. This massive new bureaucracy was designed 
by the drafters of Dodd-Frank to be virtually unaccountable to 
the American people. Before we spend hundreds of millions of 
dollars on a new Federal Government agency, I believe we should 
ensure that it can be held accountable for its actions. 
Therefore, I and 44 of my Republican colleagues have informed 
the President that we will not consider the nomination of 
anyone to be the first Director until the Bureau is made 
accountable to the American people and we have had some 
legislative structural changes.
    The authors of Dodd-Frank believed that more Government was 
better, more regulators, more rules, more regulations, and more 
bureaucrats with more independence empowered to make choices 
for others. We were told that we could expect great things. The 
first year has shown that little has changed. Dodd-Frank 
contains many flaws, but the failure to improve the 
accountability of our financial regulators may be its greatest 
shortcoming.
    Thank you.
    Chairman Johnson. Thank you, Senator Shelby.
    Are there any other Members who wish to make a brief 
opening statement?
    Senator Menendez. Mr. Chairman?
    Chairman Johnson. Yes, Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman, for holding the 
hearing. Thank you to all of our witnesses.
    I was proud to support the Wall Street Reform and Consumer 
Protection Act. If implemented correctly, I believe it will 
result in better loan underwriting, better protections for 
consumers, better oversight of risks that affect the stability 
of the financial system, greater transparency in derivatives, 
and progress toward ending too big to fail so that the 
decisions of those who at large institutions ultimately became 
the collective risks of the entire country. I do not want to 
relive 2008 again.
    So it is important to take the time to get the rules right, 
but it is also important to know that progress is being made, 
so I look forward to hearing from the witnesses.
    And, finally, with respect to the Consumer Financial 
Protection Bureau that I also advocated for, regardless of what 
you think of the new consumer watchdog, it is time for the 
Senate to understand something about majority rule. A majority, 
a bipartisan majority, of the U.S. Senate voted for the Dodd-
Frank Wall Street reform law. Part of that law is the Consumer 
Financial Protection Bureau. It needs a Director. It needs a 
Director to ultimately level the playing field. This nominee 
has been highly commended by both the private sector and the 
consumer sector. But without having a Director, there are a 
whole host of rules that cannot be written, which only 
perpetuates an uneven playing field where community banks and 
credit unions have to abide by regulations and nonbank lenders 
do not, which is not fair to consumers or the industry members 
who play by the rules.
    So it is time to allow for an up-or-down vote on Richard 
Cordray and to get us moving forward on the proposition that a 
bipartisan majority of the U.S. Senate representing the country 
should be able to have its day and move forward.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. I want to echo the 
words from my colleague Senator Menendez about the importance 
of the Consumer Financial Protection Bureau. I am, I think, the 
only one on the panel who knows Attorney General Cordray 
personally fairly well, and as Senator Menendez said, he has 
support in the public sector and private sector from 
Republicans and Democrats, including his successor as Attorney 
General. Former Senator DeWine is supporting him, and it is the 
only time--I have mentioned this to the Committee before and 
talked to Chairman Johnson about it, too, and to Ranking Member 
Shelby. This is the only time, the Senate historian said, in 
American history where one political party has blocked a 
nominee because they do not like the makeup of the agency, they 
do not agree with the existence of the agency, so they block 
the administrator for the agency. And that just does not make 
sense, and it is unprecedented, as I said, and it does not 
serve this country. And we know that banks are treated 
differently from nonbanks as a result. That does not serve 
anybody's interest well. It does not protect the public, and it 
is just the kind of overreach that we have seen far too often 
around here. And I am sorry to say that, but I think that, 
again, speaks volumes about why we need to do what we need to 
do.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you all. I want to remind my 
colleagues that the record will be open for the next 7 days for 
opening statements and any other material you would like to 
submit.
    I would like to welcome our witnesses back to the Banking 
Committee, and we will keep the introductions brief.
    The Honorable Neal S. Wolin is Deputy Secretary of the U.S. 
Department of the Treasury.
    The Honorable Dan Tarullo is currently serving as a member 
of the Board of Governors of the Federal Reserve System.
    The Honorable Mary Schapiro is Chairman of the U.S. 
Securities and Exchange Commission.
    The Honorable Gary Gensler is the Chairman of the Commodity 
Futures Trading Commission.
    The Honorable Marty Gruenberg is the Acting Chair of the 
Federal Deposit Insurance Corporation.
    Mr. John Walsh is the Acting Comptroller of the Currency of 
the Office of the Comptroller of the Currency.
    I thank all of you for being here today. I would like to 
ask the witnesses to please keep your remarks to 5 minutes. 
Your full written statements will be included in the hearing 
record.
    Secretary Wolin, you may begin your testimony.

STATEMENT OF NEAL S. WOLIN, DEPUTY SECRETARY, DEPARTMENT OF THE 
                            TREASURY

    Mr. Wolin. Thank you, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee, for the opportunity to 
appear today.
    Congress passed financial reform 18 months ago in the 
aftermath of the financial that cost this country 9 million 
jobs, trillions of dollars, and countless opportunities. Today 
our country's foremost challenge is helping the millions of 
Americans who lost their jobs in the recession find new 
employment. Nearly 3 million private sector jobs have been 
created within the last 2 years, but our economy is not 
creating new jobs fast enough.
    The President has laid out a set of ideas that together 
would create nearly 2 million jobs, and we hope Congress will 
move forward with them. But at the same time, our current 
economic challenges only increase our commitment to 
implementing financial system fully, quickly, and carefully.
    Those reforms address the flaws and failures in the 
financial system that led to the crisis from which our economy 
and our country is still recovering. While we believe providing 
certainty as soon as possible is important, Treasury and the 
independent regulators are committed to balancing speed with 
time for broad public engagement and debate, time for 
coordination amongst U.S. regulators and our international 
counterparts to help achieve a level playing field, and time 
for analyses of costs and benefits to help ensure rules that 
build a stronger, more resilient financial system within 
placing unnecessary burdens on industry.
    Since reform was passed last July, we have made substantial 
progress while abiding by these principles. Financial 
regulators have now publicly proposed or finalized nearly all 
the major rules relating to the core elements of reform. The 
ultimate shape of both individual rules and reform as a whole 
is becoming clearer by the week.
    Treasury has also made substantial progress standing up new 
institutions to help ensure our financial system is stronger 
and more resilient going forward. The members of the Financial 
Stability Oversight Council have been meeting regularly for 
over a year. The Office of Financial Research is providing it 
with critical data and analytical support. And the Federal 
Insurance Office has begun carrying out its mission to monitor 
the insurance industry.
    Treasury has also been responsible for standing up the 
Consumer Financial Protection Bureau. President Obama has 
nominated Richard Cordray, an outstanding advocate for American 
consumers, to serve as its first Director, but his confirmation 
has not moved forward. Without a Director, the CFPB is unable 
to exercise its full authority, and as a result, our economy 
remains vulnerable to some of the same regulatory gaps that 
contributed to the financial crisis, and consumers continue to 
lack common-sense protections.
    The CFPB's limited authority affects the financial security 
of tens of millions of American families who rely on nonbank 
institutions for financial products and services. Until the 
Director is in place, the CFPB cannot supervise nonbanks that 
do business with Americans every day in the mortgage, payday, 
and private student lending markets, among others.
    We have a responsibility to make sure the CFPB can exercise 
its full authority to protect servicemembers, students, 
seniors, and the American people as a whole from the types of 
unfair and predatory practices that proliferate in the run-up 
to the financial crisis.
    Full implementation of the Dodd-Frank Act is critical for 
protecting Americans not only from poor consumer protections, 
but also from the excess risk and fragmented oversight that 
played such important roles in bringing about the crisis.
    In implementing reform, our goal is to build a financial 
system that is not prone to panic and collapse, that helps 
Americans save for retirement and borrow to finance an 
education or a home without experiencing deception or abuse, 
and that helps businesses finance growth and investment and 
strengthens our economy.
    We appreciate the leadership and support of this Committee 
throughout the reform process, and we look forward to working 
with Congress as we move forward toward this common goal.
    Thank you.
    Chairman Johnson. Thank you.
    Mr. Tarullo, please proceed.

 STATEMENT OF DANIEL K. TARULLO, MEMBER, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Tarullo. Thank you, Mr. Chairman, Senator Shelby, and 
Members of the Committee. There are a lot of witnesses and a 
lot of Senators, so let me just make two introductory points.
    First, I think you all recognize that there is a bit of 
tension between the various goals that we all have in trying to 
implement a very complicated piece of legislation. We want to 
get it right. We want to have a process that is very 
considered. We want to have a very open and transparent 
process. And then we want to get it all done quickly. And it is 
not going to be possible to get everything done quickly if the 
fairness, the openness, the transparency, and the considered 
quality of the deliberations are not going to be adhered to. I 
think, though, we are making considerable progress, and 
although a few of the statutory deadlines have not been met, I 
think we are well on our way to getting the major pieces of 
Dodd-Frank into place.
    The second point I would like to make will come as no 
surprise to many Members of the Committee since I try not to 
miss any opportunity to re-emphasize the importance of capital 
in our prudential regulatory system. Dodd-Frank, of course, 
addressed capital in several particulars. It did not provide a 
comprehensive approach to capital. But what we have tried to do 
is to incorporate the elements of capital regulation set forth 
in Dodd-Frank into an overall integrated approach to capital 
regulation that tries to take account of the shortcomings of 
that system prior to the crisis. I think the shortcomings were 
basically three:
    One, both the quality and quantity of capital in individual 
institutions was lower than it needed to be before the crisis.
    Two, there was only a micro-prudential, that is, a firm-by-
firm approach to looking at capital rather than looking at how 
firms and the stability of firms affected the system as a whole 
in a macroprudential fashion.
    And, third, capital assessment was too static. We tended to 
take snapshots of how capital looked at a particular moment 
rather than the dynamic perspective that suggests or shows what 
capital ratios could be like if bad things occur.
    What we have done is, in coordination with our banking 
colleagues here and abroad, to negotiate and now get ready to 
implement a set of enhancements to both the quality and 
quantity of capital for individual firms. That is, I think, 
helped from my perspective a lot by the Collins amendment to 
Dodd-Frank because since Collins puts a floor under the amount 
of capital that is required for a firm, it allays a lot of the 
concerns that I had and I think some Members of the Committee 
had that Basel II might allow capital to drift too low.
    Second, with respect to macroprudential capital regulation, 
we are moving forward with a set of enhanced prudential 
standards for the largest, most systemically important 
institutions, including enhanced capital standards.
    And, third, with respect to that snapshot dynamism issue, 
Dodd-Frank, as you know, calls for stress tests for larger U.S. 
institutions. The full Dodd-Frank provisions and the full Dodd-
Frank stress test approach will be implemented next year. But 
in the beginning of this year and now starting again for the 
beginning of 2012, we have been running and will be running 
stress tests on our largest institutions as part of our annual 
capital review.
    I would just close by saying that I think there is a lot 
going on in Dodd-Frank. We are making progress. But, again, I 
just want to remind everybody of the centrality of capital 
regulation to the safety and soundness of our financial system.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you.
    Chairman Schapiro, please proceed.

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

    Ms. Schapiro. Chairman Johnson, Ranking Member Shelby, and 
Members of the Committee, thank you for inviting me to testify 
on the Securities and Exchange Commission's ongoing 
implementation of the Dodd-Frank Act.
    The Dodd-Frank Act significantly changes the SEC's 
regulatory landscape. It brings hedge fund and other private 
fund advisers under the regulatory umbrella, creates a new 
whistleblower program, establishes an entirely new regime for 
the over-the-counter derivatives market, enhances the SEC's 
authority over credit rating agencies and clearing agencies, 
and heightens regulation of asset-backed securities.
    In the months since the Act's passage, we have made 
significant progress in our efforts to meet these broad new 
responsibilities. Of the more than 90 provisions in the Act 
that require SEC rulemaking, we have proposed or adopted rules 
for over three-fourths of them. In addition, we have finalized 
12 studies and reports required by the Act.
    As I have noted in my prior testimony before this 
Committee, our rulemaking efforts are informed by a substantial 
outreach effort. SEC Commissioners and staff have participated 
in scores of interagency and working group meetings; conducted 
seven public roundtables; met with hundreds of interested 
groups and individuals, including investors, academics, and 
industry participants; and received, reviewed, and considered 
thousands of public comments.
    All of these efforts, in addition to congressional input 
and robust Commission debate, are helping us write rules that 
effectively protect investors and the financial system without 
imposing undue burdens on market participants. My written 
statement underscores in detail the breadth and complexity of 
our Dodd-Frank rulemaking activities. However, I would like to 
emphasize a few of our recent actions.
    Just over a month ago, the Commission adopted a new rule 
that requires hedge fund and other private fund advisers 
registered with the Commission to report systemic risk 
information. This rule, adopted jointly with the CFTC and in 
heavy consultation with FSOC, will dovetail with the enhanced 
private fund reporting adopted earlier this year and is scaled 
to the size of the funds.
    In August, our final rules became effective establishing 
the whistleblower program mandated by the Act. Since then, the 
Commission has received hundreds of tips through the program 
from individuals all over the country and in many parts of the 
world. We already are reaping the early benefits of the 
whistleblower program through active and promising 
investigations utilizing crucial whistleblower information, 
some of which we expect will lead to rewards in the near 
future.
    With regard to credit rating agencies, the Commission 
proposed rules intended to strengthen the integrity of credit 
ratings by, among other things, improving their transparency. 
In addition, the Commission received public comment to inform 
its upcoming study on the feasibility of establishing a system 
in which a public or private utility or self-regulatory 
organization would assign NRSROs to determine the credit 
ratings for structured finance products.
    To implement the new oversight regime for the over-the-
counter derivatives market, the Commission proposed rules in 13 
areas required by Title VII. In the coming months, we expect to 
propose our last Title VII rules regarding capital margins, 
segregation, and recordkeeping requirements for security-based 
swap dealers and swap participants.
    Along with our fellow regulators, the Commission also 
proposed rules to implement the Volcker Rule and to provide for 
increased regulation of financial market utilities and 
financial institutions that engage in payment, clearing, and 
settlement activities that are designated as systemically 
important.
    In addition to these areas, the Commission proposed rules 
affecting the registration of municipal advisers, asset-based 
securities, and corporate governance.
    In the new few months, we expect to adopt additional rules 
regarding specialized disclosure provisions related to conflict 
minerals, coal or other mine safety, and payments by resource 
extraction issuers to foreign or U.S. Government entities. In 
addition, we intend to address the relevant international 
issues of Title VII holistically in a single proposal, and we 
expect to seek public comment on an implementation plan for all 
of the key rules under Title VII with the goal of ensuring the 
rules take effect in a logical, progressive, and efficient 
manner that minimizes unnecessary disruption and costs to the 
markets.
    The SEC has made tremendous progress, but the provisions of 
the Dodd-Frank Act vastly expand our responsibilities and will 
require additional resources to fully implement the law. While 
we seek to use existing resources as efficiently as possible, 
the new responsibilities assigned to us are so significant they 
cannot be achieved solely by wringing efficiencies out of our 
existing budget. Attempting to do so will severely hamper our 
ability to meet both new and existing responsibilities.
    I would note that, regardless of the amount appropriated to 
the SEC, our budget will be fully offset by the fees we collect 
and will have no impact on the Nation's budget deficit.
    Thank you for inviting me to share with you our progress to 
date and our plans going forward. I look forward to answering 
your questions.
    Chairman Johnson. Thank you.
    Chairman Gensler, please proceed.

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING 
   COMMISSION; ACCOMPANIED BY JILL E. SOMMERS, COMMISSIONER, 
              COMMODITY FUTURES TRADING COMMISSION

    Mr. Gensler. Good morning, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee. I am glad to be here with 
fellow regulators and also with CFTC Commissioner Jill Sommers.
    Three years ago, both the financial system and the 
financial regulatory system failed. More than eight million 
jobs were lost, and today, millions of Americans continue to 
struggle. Swaps played a central role in the crisis. Swaps, so 
important for managing and lowering risk for end users, also 
concentrated risk in the financial system, and in response, 
Congress and the President came together and enacted the 
historic Dodd-Frank Act.
    The CFTC is working to complete the Dodd-Frank rules 
thoughtfully, not against a clock, and though Congress gave us 
1 year to complete the task, we will take more time, as is 
appropriate, I believe. The agency has benefited from 
significant public input, including more than 25,000 comment 
letters, 1,100 meetings, and we have conducted 14 public 
roundtables, and yesterday we announced two more public 
roundtables, and no doubt we will get benefit from even more 
beyond that.
    The Commission has substantially completed the proposal 
phase of the rule writing and this summer turned the corner and 
began finalizing rules, after asking people to comment on the 
whole mosaic at one time. And we have finished 20 rules and 
have a full schedule of meetings well into next year.
    Each of our final rules have benefited from careful 
considerations of cost and benefits and we ask the public to 
continue to give us advice in this area.
    Mentioning just a few areas that we finalized: large trader 
reporting, so for the first time we know what the large traders 
are doing in physical commodities, registration of the data 
repositories themselves; aggregate position limits; risk 
management for the clearinghouses, these bodies that are going 
to have significant more transactions in them. We also finished 
rules giving the Commission more authority to prosecute 
wrongdoers who recklessly manipulate markets, giving us 
authorities that the SEC has had for years.
    And yesterday, we completed a rule first proposed in 
October 2010 to enhance customer protection regarding 
investment of their funds. This rule brings customers back to 
the protections they had prior to exemptions granted by the 
Commission between 2000 and 2005 and it will prevent investment 
of customer funds in foreign debt as well as lending customer 
money within the firm, which is called intercompany or in-house 
repurchase agreements. I have consistently felt that the CFTC 
needed to strengthen customer fund protection and I am pleased 
that the Commission acted yesterday in this regard.
    The Commission is also looking to soon finish rules on 
segregation for cleared swaps. These are cleared swaps. But 
segregation of funds, both in the futures market and in the 
swaps market, is the core foundation of customer protection and 
our agency is looking across the board, the audit regimes, the 
examination regimes, the custodial regimes, the working 
relationships with the self-regulatory organizations, to see 
what can we do more to enhance these protections and protect 
customers.
    Moving forward, we are working to finish key transparency 
rules, including the specific data to be reported to 
regulators, so all of us at this table can have more 
information and the public can have more information in what is 
called real time reporting.
    As mandated by Dodd-Frank, the CFTC is working closely with 
the SEC on further definitions of swap dealer and swap and I 
hope that we can get these done shortly.
    An important matter to all of us is nonfinancial end users 
have a choice on whether or not to use central clearing. This 
was Congress's mandate. But I think consistent with that 
intent, as well, the CFTC's margin proposal states that 
nonfinancial end users will not be required to post margin on 
uncleared swaps, and the CFTC is dedicated to maintaining the 
ability of end users to hedge risk without being pulled into 
those margin and clearing regimes.
    Now, as the CFTC finalizes rules, I will say we do need 
more resources. We are just over 700 staff members. That is 
about 10 percent more than we were in the 1990s at our peak, 
and since then, the futures market has grown dramatically, 
about fivefold. And in addition, we are asked to oversee this 
complex and very large $300 trillion notional amount swaps 
market. We rely a lot on self-regulatory organizations, but I 
dare say we probably need some more funding so that the Nation 
can be assured we can actually oversee the futures and swaps 
markets and enforce the rules to promote the transparency and 
protect the public.
    Furthermore, as many Members have mentioned, the current 
debt crisis in Europe has put a stark reminder of the need for 
us to move forward, complete reform, and adequately resource 
the agency.
    I thank you.
    Chairman Johnson. Thank you.
    Chairman Gruenberg, please proceed.

  STATEMENT OF MARTIN J. GRUENBERG, ACTING CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Mr. Gruenberg. Thank you, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee. Thank you for the 
opportunity to testify on the FDIC's implementation of the 
Dodd-Frank Act.
    The FDIC has made substantial progress on implementing the 
requirements of the Act, especially in the two primary areas 
where we have principal rulemaking responsibility, deposit 
insurance reforms and orderly liquidation authority.
    Regarding deposit insurance, the FDIC has issued final 
rules that permanently increase the standard coverage limit to 
$250,000 and temporarily provide unlimited deposit insurance 
for non-interest bearing transaction accounts.
    In addition, the FDIC adopted a final rule that redefines 
the deposit insurance assessment base from domestic deposits to 
assets. The new definition reduces the share of assessments 
paid by community banks as a group compared to the largest 
institutions, better reflecting each group's share of industry 
assets. As a result of this new rule, second quarter 2011 
assessments for banks with less than $10 billion in assets were 
about a third lower in aggregate than first quarter 
assessments, even though the overall amount of assessment 
revenue collected remained about the same.
    The FDIC also has substantial flexibility under the Act to 
manage the Deposit Insurance Fund. The FDIC's Fund Management 
Plan is designed to maintain a positive fund balance, even 
during a banking crisis, while preserving steady and 
predictable assessment rates through economic and credit 
cycles.
    Regarding orderly liquidation authority, a fundamental goal 
of the Act is to promote financial stability by improving 
regulators' ability to deal with systemic risk and the 
challenges posed by systemically important financial 
institutions. In July, the FDIC issued a final rule 
implementing the FDIC's orderly liquidation authority. The rule 
defines the way creditors will be treated and how claims will 
be resolved in an FDIC receivership. Many aspects of the rule 
are similar to the rules in bankruptcy. Shareholders and 
creditors in receivership will be exposed to losses under the 
statutory priority of claims. The rule, however, will allow 
continuity of critical operations, both to prevent the 
financial system from freezing up and to maximize the value 
recovered from the assets of a failed SIFI, or systemically 
important financial institution.
    The FDIC also has adopted two rules regarding resolution 
plans. The first resolution plan rule, jointly issued with the 
Federal Reserve Board, requires bank-holding companies with 
total consolidated assets of $50 billion or more and certain 
designated nonbank systemically important financial 
institutions to develop, maintain, and periodically submit 
resolution plans to regulators. The plans will detail the 
manner in which each covered company would be resolved under 
the Bankruptcy Code and will include information on credit 
exposures, cross guarantees, and organizational structure.
    The second rule would require complementary resolution 
plans from insured depository institutions with assets of $50 
billion or more.
    In the event of a cross-border resolution of a covered 
financial company, the Dodd-Frank Act requires the FDIC to 
coordinate to the maximum extent possible with appropriate 
foreign regulatory authorities. Through the Financial Stability 
Board of the G20 countries and the Basel Committee, the FDIC 
and U.S. regulators are working to promote greater 
harmonization of national laws governing resolutions and 
improved coordination. We have also been engaging on a 
bilateral basis with foreign supervisors on resolution 
planning.
    In regard to bank capital, interagency agreement has been 
reached on an alternative to the use of credit ratings as 
required by the Dodd-Frank Act that will be included as part of 
a Notice of Proposed Rulemaking to implement new capital 
requirements on assets held in a bank's trading book. This 
Notice of Proposed Rulemaking will be acted on by the FDIC 
Board at a Board meeting tomorrow, and this rulemaking is 
pursuant to a Basel Committee capital agreement.
    Finally, given the effects of the recent financial crisis 
on community banks and concerns raised about the potential 
impact of the Dodd-Frank Act on these institutions, the FDIC is 
undertaking a series of initiatives relating to community 
banks. The FDIC will hold a national conference early next year 
that will focus on the future of community banks. We will also 
organize a series of regional roundtable discussions with local 
community bankers around the country and undertake a major 
research initiative to study a variety of issues relating to 
community banks.
    The FDIC will also undertake a review of our examination, 
rulemaking, and guidance processes to identify ways to make 
supervision more efficient, consistent, and transparent without 
compromising supervisory standards.
    Mr. Chairman, that concludes my oral statement. I would be 
glad to respond to your questions. Thank you.
    Chairman Johnson. Thank you.
    Comptroller Walsh, please proceed.

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

    Mr. Walsh. Chairman Johnson, Ranking Member Shelby, and 
Members of the Committee, I appreciate the opportunity to 
report on the OCC's progress in implementing the Dodd-Frank 
Act.
    Since I last testified before the Committee on July 21, the 
integration of OTS staff has been successfully completed and 
the supervision of Federal savings associations has been 
integrated into our bank supervision operation. We also have 
continued our work to support the CFPB and the FSOC as well as 
our efforts to strengthen risk-based capital, leverage, and 
liquidity requirements. Finally, we have made significant 
progress on key regulations to implement the Dodd-Frank Act. So 
this morning, I would like to highlight a few of the items that 
are detailed in my written statement.
    In operational terms, the integration of the OTS into the 
OCC has been successfully completed, but we are continuing to 
participate in a variety of outreach activities to maintain an 
active dialogue with Federal savings associations, including 
expansion of the former OTS advisory committees on mutual 
savings associations and minority institutions. Our integration 
efforts are now focused on coordinating and consolidating the 
various rules and policies that apply to Federal savings 
associations and national banks, and as part of this effort, we 
aim to eliminate duplication and reduce unnecessary regulatory 
burden.
    Our dealings with the CFPB over the last several months 
have focused on consumer complaints and policy and exam 
coordination. The OCC has continued to provide significant OCC 
staff and infrastructure support to process consumer complaints 
on the CFPB's behalf.
    With respect to rulemaking, the CFPB is required to consult 
with the prudential regulators prior to proposing a rule and 
during the rulemaking process. The CFPB currently has in 
process several rulemakings where interagency consultation will 
be critical, and we are working on a consultation agreement 
that will provide the prudential regulators reasonable time to 
review, discuss, and comment on CFPB rulemakings.
    Another area of focus is the coordination of supervisory 
activities among the CFPB and prudential regulators. The Dodd-
Frank Act requires the CFPB to consult with the prudential 
regulators regarding respective schedules for examination, to 
conduct their respect exams simultaneously, and to share and 
comment on resulting draft reports of examination. Some of 
these requirements do not mesh well with how bank examination 
activities are actually conducted, so the OCC and other 
prudential regulators are working with CFPB to develop an MOU 
to implement a practical approach to coordination that avoids 
unnecessary regulatory burden on insured depository 
institutions, which we believe to have been the Congressional 
intent.
    The OCC continues to be an active participant in the 
activities of the FSOC. Since July, the Council issued its 2011 
Annual Report to Congress and has held additional meetings and 
conference calls to discuss current market and regulatory 
developments that could have potential systemic risk 
implications for the U.S. financial sector and broader economy. 
Facilitating candid, confidential exchanges of information 
regarding risk to the financial system is one of the principal 
benefits of the FSOC.
    A clear lesson of the financial crisis was the need to 
bolster the quality and quantity of capital held by financial 
institutions, as others have mentioned. Harmonizing Dodd-Frank 
capital requirements with the revised Basel standards is one of 
the principal challenges the OCC and the other Federal banking 
agencies face, and we are working with the other agencies to 
ensure the reforms are carried out in a coordinated, mutually 
reinforcing manner.
    Finally, since the July hearing, the OCC has issued a 
number of proposed rules required under the Dodd-Frank Act on 
credit risk retention, margin and capital requirements for 
covered swap entities, and incentive compensation. OCC and 
agency staff are carefully evaluating the thousands of comments 
received on these three proposed rulemakings and are now 
actively engaged in considering the many issues raised.
    More recently, and after months of intensive study and 
analysis, the banking agencies and the SEC jointly published 
the Volcker Rule, which is open for public comment through 
January 13, 2012.
    In summary, since July, much has been accomplished. We will 
continue to move forward to complete the many projects 
underway. I look forward to keeping the Committee advised of 
our progress and I am happy to answer your questions.
    Chairman Johnson. Thank you. I would like to thank all of 
our witnesses for their testimony.
    As we begin questions, I will ask the Clerk to put 5 
minutes on the clock for each Member.
    Secretary Wolin and Governor Tarullo, how would delaying 
the implementation of Wall Street Reform leave the U.S. economy 
more susceptible to fallout from the European debt crisis? And 
Chairman Gruenberg, as the situation in Europe leads to the 
failure of large interconnected financial firms, is the FDIC 
prepared to resolve it? Secretary Wolin.
    Mr. Wolin. Mr. Chairman, the core elements of Dodd-Frank 
were designed to build a stronger, more resilient financial 
system, one that is less prone to crisis, less vulnerable to 
stress. And Europe certainly underscores the importance of 
moving forward with implementation of the statute to make sure 
that appropriate capital cushions and other enhanced prudential 
standards are put in place to make sure that derivatives are 
brought within the regulatory fold, to make sure that we 
continue to make progress on orderly liquidation authority and 
its modalities and living wills and so forth, so that we both 
can be best protected from whatever Europe provides us, but 
also whatever other stresses our financial system happens to 
encounter. So I think it is critically important that we move 
forward.
    Chairman Johnson. Governor Tarullo.
    Mr. Tarullo. Thank you, Mr. Chairman. Dodd-Frank was 
structured, I think, to respond to two kinds of stresses or 
problems in U.S. firms: One, some of the specific, if I can put 
it this way, internally generated problems that characterized 
the pre-crisis period with mortgage-backed securities and the 
like; and second, as Secretary Wolin just indicated, a 
generalized capacity to absorb loss.
    I think what we are facing in Europe right now is the 
prospect of or the possibility of an externally generated set 
of problems for the U.S. firms rather than the internally 
generated problems. Here, I think that the capital is the most 
important consideration, and here, we began moving back in 2009 
to push our institutions to enhance their capital buffers. 
Since the beginning of 2009, our 19 largest institutions have 
accreted or raised approximately $300 billion in capital, more 
than a 40 percent increase in what was held beforehand.
    I do not think any of us would discount the possibility for 
difficulties in the United States if there were severe problems 
in Europe, but I do think that at the core, which is to say the 
capital and liquidity positions of our large institutions, we 
have made a lot of progress since the beginning of 2009, 
progress which is, I think, enhanced and rounded out by the 
Dodd-Frank provisions.
    Chairman Johnson. Chairman Gruenberg.
    Mr. Gruenberg. Mr. Chairman, if we were confronted with the 
failure of a systemically important financial institution, it 
would only be in the event that the systemic resolution 
authorities of the Dodd-Frank Act had been triggered. If that 
were to occur, we believe we today have the authorities and the 
capability to carry out the FDIC's responsibilities under the 
law.
    We have been working for the past year since the enactment 
of the legislation on internal resolution plans for our most 
systemically important financial institutions. We have been 
consulting closely with our fellow agencies and we have also 
been engaging with the foreign supervisors of the foreign 
operations of our major companies. So, if necessary, we think 
we are prepared today to carry out our responsibilities under 
the law.
    Chairman Johnson. My office has been contacted by people 
from all across South Dakota deeply concerned about frozen 
accounts and missing funds connected with the collapse of MF 
Global. Chairman Gensler, Chairman Schapiro, what is being done 
to track down the estimated $1.2 billion in missing funds and 
what steps are being taken at your agencies and at the SROs you 
oversee to ensure the integrity of segregated accounts at other 
broker-dealers and at FCMs to make sure that nothing like this 
ever happens again? Chairman Gensler.
    Mr. Gensler. Senator, as I am not participating in the 
matters of this specific company, it may be appropriate for 
someone else at the agency, or Commissioner Sommers, who is 
here, to follow up and take the specifics on the company.
    But more generally, with regard to the importance of 
protecting customer funds and segregated funds, we are taking a 
number of steps. Yesterday, we finalized a rule on investment 
of customer funds. I have consistently felt we needed to do 
that since we proposed that in October of 2010. We are also 
working along with self-regulatory organizations, doing a 
limited review of the largest, even the smallest Futures 
Commission Merchants to ensure where they are as of November 
and December of this year.
    But I did not know on the specifics whether you wanted----
    Chairman Johnson. Commissioner Sommers, do you have 
anything you would like to add about the ongoing CFTC 
investigation?
    Ms. Sommers. Thank you, Senator. The CFTC currently has 
dozens of staff members working on MF Global issues. We have 
auditors, investigators, and attorneys looking into the matter. 
We are working closely with the trustees, staff, and with the 
forensic accountants to make sure that we are tracing all of 
the transactions that went in and out of the customer 
segregated funds at MF Global. The number of different accounts 
and the number of different transactions that did occur has 
made this a very complex process for both our staff and the 
forensic accountants that the trustee is using, but we all are 
working through these issues and hope to resolve them very 
shortly.
    Chairman Johnson. Chairman Schapiro, do you have anything 
to add?
    Ms. Schapiro. What I would add, Mr. Chairman, is that the 
securities side of MF Global was very much smaller, only about 
400 active securities accounts, compared with many thousands of 
futures accounts. And while the company did not report a 
shortfall in the reserve account, the equivalent of the 
segregated account on the securities side, we are, of course, 
not relying on any representations whatsoever from the company. 
We are working closely with a SIPC trustee to ensure that money 
can be traced and recovered for the estate.
    And we are also looking at our rules to see if there are 
other things we could be doing differently to bolster the 
integrity of the custody practices of broker-dealers. We have a 
very strong customer protection rule that already only allows 
customer funds to be invested in U.S. Government securities 
that are backed by the full faith and credit of the United 
States. But we have also proposed some rules with respect to 
requiring separate audits of broker-dealer custody practices 
that would also enhance SRO and SEC examination authority of 
broker-dealers and would require broker-dealers to file regular 
reports with the agency with respect to their custody 
practices. And there is a pending FINRA rule proposal out for 
comment right now that would greatly enhance financial 
reporting by broker-dealers. So we are also looking carefully 
to see if there are additional things that we can be doing.
    The trustee has filed a motion with the court to transfer 
the bulk of those 400 securities accounts to another firm and 
that motion will be heard on Friday by the court.
    Chairman Johnson. Chairman Gensler, CFTC staff participated 
in the interagency effort in questioning the Volcker Rule 
proposal, but the CFTC did not sign on to the joint text 
adopted by the other regulators almost 2 months ago. When can 
we expect the CFTC to issue its Volcker Rule proposal, and will 
there be any differences in the CFTC proposal from the text 
issued by the other regulators in October?
    Mr. Gensler. Mr. Chairman, we did at a staff level 
participate and I would envision that we would move forward 
with the proposal consistent with what other regulators have 
done. It has really just been a capacity issue of bringing 
things forward to a Commission. We had our last meeting in 
October 18 and then the next on December 5. We also had a 
changeover of one Commissioner retiring and another one coming 
on board. So I would envision to get feedback from staff and 
Commissioners and move forward with something consistent with 
what other regulators have done.
    Chairman Johnson. My time is up, but I do have additional 
questions for all of you regarding QRM, Wall Street Reform 
implementation road map, the FSOC, and oversight of the SEC.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Gensler, according to the MF Global bankruptcy 
trustee, as much as $1.2 billion or more of customer funds are 
missing from the CFTC--are missing there. The CFTC is the 
regulator. Where have you been there? And second, do you know 
where the money is?
    Mr. Gensler. Senator, as I am not participating in the 
matters, it may be appropriate--I do not know if----
    Senator Shelby. Why are you not participating, for the 
record?
    Mr. Gensler. No, absolutely, sir. I think it is a good 
question. Though the attorneys at the CFTC, the Chief Ethics 
Officer, and the General Counsel had indicated to me that they 
did not see a reason, legal or ethical reason for me to not 
participate, I reached out to them that as it turned to an 
enforcement matter and before we had our first closed door 
surveillance meetings--we have closed door surveillance 
meetings every Friday and have for 30-plus years--and said I 
did not really want my participation to be a distraction--there 
had already been some questions--from this important matter.
    Senator Shelby. Are you not participating because of a 
prior relationship with the Chairman of MF Global, Jon Corzine?
    Mr. Gensler. I had left Wall Street 14 years earlier, but I 
had participated with this Committee, actually, with Paul 
Sarbanes----
    Senator Shelby. I understand.
    Mr. Gensler.----on the Dodd--oh, no, that was called 
Sarbanes-Oxley.
    Senator Shelby. But did you recuse yourself because of your 
relationship, past or present, with the Chairman of MF Global, 
Mr. Corzine?
    Mr. Gensler. I--I indicated to our General Counsel that 
Thursday, November 3, that I thought--that I did not want my 
participation to be a distraction----
    Senator Shelby. So the answer is----
    Mr. Gensler.----from the very important matters----
    Senator Shelby.----yes or no?
    Mr. Gensler.----going forward----
    Senator Shelby. Wait a minute. Wait a minute. I asked you a 
question. Did you recuse yourself from proceedings dealing with 
MF Global because of your prior relationship with Mr. Corzine 
way back 14 years ago or currently, or a combination?
    Mr. Gensler. Well, it was--it might even have been broader. 
I just did not want to be a distraction because I had been at 
the same firm and he had been my boss, but also----
    Senator Shelby. Well, you thought you might have a conflict 
or the perception of one, is that right?
    Mr. Gensler. No. What the lawyers told me pretty 
straightforward was there was no reason that I needed to not 
participate. But as it turned to an enforcement matter and an 
investigation about these very important matters, because it is 
critical to find out where the money was, I did not want my 
participation to be a distraction from the very--there are 
excellent career staff at the CFTC----
    Senator Shelby. Let me ask you another question here.
    Mr. Gensler. Sure.
    Senator Shelby. Since you have been Chairman of the CFTC, 
has the Chairman of MF Global contacted you or the CFTC 
regarding the regulation of MF Global in any way?
    Mr. Gensler. I do not know about his contacts with the rest 
of the agency. There was one courtesy meeting----
    Senator Shelby. Wait a minute----
    Mr. Gensler.----at the very beginning of----
    Senator Shelby. So you had a meeting. There was a meeting 
there. You called it a courtesy meeting. But you had a meeting 
with the Chairman of MF Global, Mr. Corzine, right?
    Mr. Gensler. There was a courtesy meeting when he took the 
job, and then there was one staff phone call----
    Senator Shelby. Now, was the meeting--excuse me. I do not 
mean to be rude----
    Mr. Gensler. No, I am sorry----
    Senator Shelby.----but I want to get the point.
    Mr. Gensler. Right.
    Senator Shelby. Was the meeting at CFTC?
    Mr. Gensler. Yes. Yes.
    Senator Shelby. And was it after Mr. Corzine became 
Chairman of MF Global?
    Mr. Gensler. Yes, it was, sir.
    Senator Shelby. And what did that have to do with him 
taking the job, meeting with you, or meeting with your staff or 
members?
    Mr. Gensler. He was head of an agency--head of a company, 
and he came by and there were staff at the CFTC----
    Senator Shelby. OK.
    Mr. Gensler.----and myself there, yes, in the spring of 
2010.
    Senator Shelby. Did you or any of the staff ever have any 
conversations, dialogue, or interaction with Mr. Corzine 
regarding the regulation of what he could do and not do at MF 
Global?
    Mr. Gensler. Well, as reported on our Web site, there was 
one general call----
    Senator Shelby. Well, I am not interested in reporting on 
the Web site. Just tell us what happened.
    Mr. Gensler. Well, it was a broader thing. In July of this 
year, there was reaching out--as part of the 1,100 meetings 
that we have had on the Dodd-Frank rulemaking, one of them 
included CFTC staff, myself. It was a telephone call about this 
rule about investment of customer funds.
    Senator Shelby. So you had a meeting there regarding the 
Chairman of MF Global, right?
    Mr. Gensler. That is correct, conducted by telephone. That 
is correct.
    Senator Shelby. Now, my last follow-up is part of my first 
question to you, because my time is limited. Do you or the 
CFTC, do you know where the $1.2 billion is today----
    Mr. Gensler. I am not participating----
    Senator Shelby.----and if you do not know, why do you not 
know?
    Ms. Sommers. Senator, we are working closely with the 
forensics accountants that have been hired by the trustee to 
try to locate any missing customer funds. We continue to work 
through those issues, but we have not located all the funds 
that are missing, but we continue to----
    Senator Shelby. So the answer is you do not know where the 
money is.
    Ms. Sommers. That is right.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman.
    Governor Tarullo, let me begin with you. You and your 
colleagues have a complicated challenge implementing the 
Volcker Rule, and that is to me a broader issue with respect to 
how derivatives and complicated instruments are going to be 
treated on the books of these major companies. It is 
complicated. That is why Congress directed the agencies do it 
because the process of reaching out, getting opinions from the 
affected industry, getting comments, et cetera, is something 
that in our legislative process we do not do as systematically.
    But the other complicating factor here, too, is there has, 
I think, clearly been an attack on the budgets of the agencies 
so that their resources are in question whether they can carry 
out some of these sophisticated issues. And we are also seeing 
at least the potential for challenges at the circuit court on 
the Administrative Procedures Act with respect to the economic 
analysis, and I find that interesting because that was not even 
part of Dodd-Frank. That is a predecessor statute that called 
for consideration of the economic consequences, not a cost/
benefit analysis. I think the courts are writing a lot into 
that statute.
    But all of that having been said, in this period of time 
where it is very difficult to deploy effective rules with 
respect to Volcker, with respect to clearing platforms, with 
respect to the treatment of derivatives, the only fallback I 
think you have is capital--capital that will assure the 
Congress and the American public that they will not have to go 
in and once again, as they did in 2008, provide huge direct 
financial support, and as we have discovered recently, indirect 
financial support through the borrowing facilities of the Fed.
    Is that your perspective? Are you prepared to explicitly 
consider the additional capital that these institutions must 
bear if we cannot effectively deploy these rules?
    Mr. Tarullo. Senator, as I indicated earlier, we have been 
proceeding with the improvement of capital regulation across 
the board. With respect to the trading side of major 
institutions where obviously the Volcker Rule has particular 
salience, we are on the verge of putting out a proposed 
regulation along with our fellow banking agencies which would 
implement the so-called Basel 2.5 rules. Those are the ones 
applicable to the trading books.
    Second, when we did the capital review exercise earlier 
this year and as we undertake it again, which we have just 
begun to do, for early 2012, we have including for our largest 
institutions a so-called trading book shock, something which 
would essentially build on the 2008 shock to traded assets to 
stress test them under the current environment. This year we 
have also added a specifically European component to that, 
taking into account the potential impact on sovereigns in the 
European Union.
    The reason I mention the stress test part of this is back 
to the point I made in my introductory remarks, that we need a 
dynamic as well as a static picture of capital, and so what we 
tried to do in these stress tests is to say assume an adverse 
scenario, assume bad things happening, both in the banking book 
and the trading book, and make sure that the firms could 
sustain the kinds of losses associated with that adverse 
scenario and still emerge sufficiently well capitalized to be a 
viable financial intermediary.
    So I absolutely think that capital is central here. I 
realize I have become a bit of a broken record on this, but I 
do think that capital is the foundation for a well-structured 
financial regulatory system which definitely needs to be 
complemented with other forms of regulation.
    Senator Reed. But without these other forms of regulation, 
then--and I do not want to put words in your mouth--it would 
seem to me that the capital level would be some percentage 
point higher because you do not have these other complementary 
transparent platforms or rules and----
    Mr. Tarullo. When we set capital requirements, we do try to 
look at how those requirements relate to other regulatory 
arrangements. So I think it is the case that in the absence of, 
for example, restrictions on proprietary trading, we would need 
to look at the potential losses associated with an unregulated 
proprietary trading undertaking.
    Senator Reed. So there is a point, at least analytically, 
at which if the Volcker Rule was adopted and these other 
measures--more effective use of clearing platforms, more 
products being traded, cleared, rather than over-the-counter 
bilateral transactions--that potentially at least capital would 
not be as high for banks. And I find one of the ironies is 
that, you know, the industry and others are fighting so hard 
against these, and they may end up with higher capital levels 
that impede their ability to lend, to participate in the 
economy. And I guess the moral of the story is, at least I hope 
it is, you cannot have it both ways. You cannot undermine all 
of these regulatory structures and then expect to have very low 
capital levels because there is no protection for the taxpayer.
    Mr. Tarullo. Certainly, the riskiness of a particular asset 
is affected by the regulatory environment in which that asset 
can be purchased, and I think that is a core point. Obviously, 
if a firm is able to take on a substantial portfolio of risky 
assets, capital requirements will have to be higher.
    Senator Reed. Thank you very much, Mr. Chairman.
    Chairman Johnson. Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman.
    Chairman Gensler, this is the second time that you have 
appeared, before me at least, since MF Global hit the front 
pages, and I must admit your nonparticipation explanation makes 
less sense to me today than before you appeared the first time. 
Let me try to understand this.
    You worked for former Senator Corzine 14 years ago. Is that 
correct?
    Mr. Gensler. Well, I worked with Goldman Sachs, the firm, 
for 18 years, finishing in 1997. That is correct.
    Senator Johanns. Right. And up until the time you decided 
on November 3rd that you were not going to participate anymore, 
you had regulated MF Global. Correct?
    Mr. Gensler. Yes, as Chairman of the Commission overseeing 
125 futures commission merchants and thousands of other 
registrants.
    Senator Johanns. Never occurred to you prior to November 
3rd that you should not be participating with MF Global?
    Mr. Gensler. I raised the question with the staff when I 
came on board at the CFTC which companies to be involved in or 
not involved in, and they had said there was no specific 
reasons not to participate. But then as this turned to an 
enforcement matter--October 31st, Halloween--as it turned to an 
enforcement matter, they repeated that, but as we were getting 
closer to that Friday surveillance meeting, I had indicated to 
them that I thought that it would be best not to be a 
distraction, the hard-working and very excellent staff of the 
agency with regard to something that could be a specific 
investigation about specific individuals as well, and----
    Senator Johanns. Why would you be a distraction? You see, 
what it feels like up here, having been in something like your 
seat myself, is that when this got uncomfortable because money 
is not there that should be there, and for whatever reason you 
folks did not discover that until it looks like it is too late, 
you do not want to come up here and answer questions. Every 
hard question you are asked, you said, ``Well, I am not 
participating,'' and you asked Commissioner Sommers to step up 
and offer something. And to me it looks like you are ducking 
the responsibilities of your job.
    I do not understand why you would be a distraction.
    Mr. Gensler. Senator, I take the responsibilities of the 
job very seriously, and I think that the protection of customer 
funds and positions is just paramount and it is core to our 
regime and the farmers and ranchers and many energy merchants 
because those are the people that really need to work on and 
use these instruments to hedge are critical to this. So----
    Senator Johanns. So when----
    Mr. Gensler. I would far prefer, actually, as you suggest, 
to be able to address it. But when I turned to the general 
counsel--and this was--in my 2 \1/2\ years, this is not the 
first time that I might not be involved in a specific 
investigation of individuals where there is excellent career 
staff, 170-plus attorneys and so forth in the enforcement 
areas--there are auditors and so forth--to get the direction of 
four other excellent Commissioners and not be a distraction by 
my personal involvement and participation, and it----
    Senator Johanns. But as----
    Mr. Gensler.----turning to an enforcement matter.
    Senator Johanns. But as President Truman so famously 
observed, the buck stops with you. So after this hearing, when 
farmers from Nebraska call me and say, ``What did Chairman 
Gensler say about getting my money back?'' My response to them 
is, ``Well, he did not want to become a spectacle, and so he is 
not participating, and I have nothing to offer in terms of 
where Chairman Gensler might be on that. He has got good staff, 
and they are handling it.''
    But, you see, from our standpoint we want a person to come 
before us and answer the hard questions. That is what your job 
is about, and it just feels to me like you are not discharging 
the responsibilities of that job.
    Mr. Gensler. Well, I feel, sir, that I am. I am doing it to 
the best of my abilities, and I had a judgment, and it was not 
the first time over these 2 \1/2\ years when it turns to an 
enforcement matter that may involve particular individuals--and 
in this case, though it was 14 years earlier, and 9 years 
earlier when the Sarbanes-Oxley work was done--that that 
Thursday I said to the general counsel, you know, ``What do you 
recommend here? And how do you have me not participate so I am 
not a distraction to the American public and to the important 
matters?'' The critical matters that we do share on this is 
ensuring that customer funds are protected, that money is 
accounted for, that segregation happens every day, and that 
people can have confidence in these markets.
    Senator Johanns. Well, let me just wrap up with this. It 
seems to me very, very fundamental. If you have money from 
customers in this account and you have your own account over 
here or the company's account, you do not mix the two, and you 
do not appropriate money from customers to do your own risky 
trading. That seems to be basic. I bet that has been the law 
since the beginning of time, and this is not tough. And I do 
not understand, and you are not clarifying for me why you would 
not be participating in this.
    Mr. Gensler. In terms of the law, the law is absolutely 
clear. The Commodities and Exchange Act is clear. There were 
some exemptions granted in 2005 that yesterday the Commission 
voted to narrow and take back, but there were exemptions 
granted in 2005 about lending customer money to other parts of 
a firm through something called ``repurchase agreements.'' And 
in October of 2010, we proposed to narrow that, to dial that 
back. I have been consistent about that for these 14 months and 
believed that we needed to do that. But we went through, you 
know, the healthy process of notice and comment and hearing 
from the public as well.
    Senator Johanns. And that is not what happened here.
    Mr. Gensler. Well, I cannot comment on the specifics of 
that.
    Senator Johanns. Yes, because you are not participating.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Secretary Wolin, let me ask you, 60 Members of the Senate 
voted to pass the Wall Street Reform Act. That is well beyond a 
simple majority. That included the Consumer Financial 
Protection Bureau.
    Now, it seems to some of us that it is both unprecedented 
and rather extreme for Republicans to refuse to confirm anyone, 
regardless of how qualified they are, as Mr. Cordray is, to 
lead an agency because they oppose the existence of an agency 
that is accountable in a dozen different ways under the law, 
and that is meant to help consumers versus large financial 
institutions. If Republicans in the Congress continue to oppose 
even an up-or-down vote--you know, they do not have to vote for 
this person, but allowing us to have an up-or-down vote to 
confirm a Director--can you explain what the practical 
consequences of not having a Director means for consumers, for 
middle-class families, for this agency?
    Mr. Wolin. Thank you, Senator, for that question. 
Absolutely, as you have said and as my opening statement says, 
without a confirmed Director in this position, the Consumer 
Financial Protection Bureau will not have authority to 
supervise and enforce very common-sense consumer protections 
with respect to payday lenders, mortgage brokers, mortgage 
lenders, mortgage servicers, and student loan providers. And I 
think if you look at what the Consumer Bureau has done to date, 
you see the kind of overwhelming importance of their effort. 
They are trying to make clearer mortgage disclosure, clearer 
credit card disclosure, clearer disclosure for students who 
take out loans. They are trying to help servicemembers and 
seniors make sure that they get the information they need in a 
clear form so that they can make essential choices about what 
consumer products they want to purchase or not and what kinds 
of variations of those products. And we know that the absence 
of all that disclosure was an important element of what caused 
the financial crisis in 2008 and 2009.
    And so from our perspective, we are talking about very 
common-sense, very tangible protections for everyday Americans 
of all sorts with respect to some of the most important 
financial judgments they will have to make.
    Senator Menendez. And isn't it true that, for example, 
community banks and credit unions will be at a disadvantage 
because they will have to live under the regulations but 
nonbank institutions or certain others--there is a whole 
universe of institutions that cannot be regulated, unlike 
community banks and credit unions, unless there is a Director 
to help promulgate the regulations?
    Mr. Wolin. That is true, Senator. The Consumer Bureau has 
authority now to do these things with respect to banks. It is 
only the nonbanks that they do not have that authority. So we 
have the unhappy circumstance of banks being regulated in these 
ways, which they should be, but all the nonbanks, with whom 
millions and millions of Americans engage every day, are not 
being looked after in this way.
    Senator Menendez. And in pursuing this line of questioning 
in a different respect, I have heard a lot of rhetoric about 
regulations of Wall Street causing a loss of jobs or slowing 
economic growth. But can you name a single action in all of 
American history that caused a greater loss of American jobs or 
slowing the growth that we have had in this economy than when 
we allowed Wall Street financial institutions to largely do 
whatever they wanted running up to the financial crisis that 
culminated in 2008? Isn't it a fact that it was the failure to 
regulate big Wall Street banks and the derivatives market that 
caused the losses of millions of American jobs over the last 
several years?
    Mr. Wolin. Well, we know, Senator, that the financial 
crisis led to the destruction of enormous amounts of job and 
wealth and people to lose their homes. We know that an 
important reason for that was our not having a financial 
regulatory system that was adequate to the task. That is why 
the enactment by this Congress of Dodd-Frank was so critical 
and that the implementation work that my colleagues to the left 
are currently engaged in is so critically important so that we 
make sure that we have a system that is stronger and more 
resilient and that better protects not just the financial 
system but the well-being and the resources of Americans across 
our country.
    Senator Menendez. And, finally, on a different matter, as 
the Subcommittee Chair on Housing, I am very concerned that if 
the qualified residential mortgage definition being worked 
out--there are several of you, I understand, who are engaged in 
this, so I would like you to respond to that--by regulators is 
not broad enough, it could hurt the housing market, especially 
if you proceed with high downpayments of 20 percent or more, 
which is where the marketplace has already taken itself to in 
expectation that this is what you are going to do. Now, that is 
a whole universe of very responsible borrowers that will be 
largely eliminated at the end of the day.
    For example, that was a universe in which I bought my first 
home, and I have been a very responsible borrower over a long 
period of time. Why would you seek to eliminate that whole 
universe of very potentially responsible borrowers by, you 
know, systematically just saying 20 percent or above is the 
mark?
    Mr. Walsh. I am happy to start on that one. The QRM is a 
narrow definition in a risk retention rule, and the basic point 
of the rule, we believe, and the requirement in law is to 
encourage risk retention in securitizations. The question is: 
Should there be exemptions or exceptions to the securitization 
requirement? And the QRM definition is drawn pretty narrowly in 
order to identify mortgages that are so well underwritten that 
no risk retention is needed, but then leaving substantial space 
for other products that do not meet the QRM definition to be 
provided to the market, but to do so within the risk retention 
framework that the law requires.
    It is one of the issues we have to confront. There have 
been many, many, many comments on that issue. But it is not 
intended to define what an acceptable mortgage is. It is 
intended to define an exception from the broader rule. So it is 
one of the things we will be grappling with.
    Senator Menendez. Are you going to be--you know, there is a 
lot of uncertainty surrounding whether your next step is to 
issue final regulations or another proposed version. Can you 
assuage the concerns of borrowers and lenders alike by saying 
you plan to issue a reproposal?
    Mr. Walsh. Well, that is a collective decision of people 
down the table here based on the comments. I think for myself 
it will depend on how different a proposal we are looking at 
once we have made the series of decisions in response to 
comments. If it is very fundamentally different, then I would 
like to see more comment. But we will have to decide that 
collectively.
    Senator Menendez. Mr. Chairman, thank you. I just want to 
say there are many different ways in which we look at how to 
make sure that risk is reviewed. I just find this movement 
toward this 20 percent to me to be arbitrary. It is one of a 
series of factors that should be considered, but it should not 
be the driving factor. And this housing market does not need 
any more body blows to it if we are going to lead to a 
recovery.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Moran.
    Senator Moran. Mr. Chairman, thank you very much.
    Chairman Gensler, based upon your voluntary recusal, I do 
not think you can answer this question at this moment, and it 
is not necessary for your colleague to join us at the table, 
but maybe the CFTC could answer this.
    I thought the CFTC, at least at first blush, made sensible 
reform yesterday in regard to the use of the segregated 
accounts, altered the investment opportunities for customers in 
those segregated accounts. And while that does appear to me to 
be sensible, everything that I have read about MF Global, I do 
not see that that rule would have changed any of the outcome of 
what has transpired at MF Global. And while they may have been 
doing things with that money that this rule would affect, we 
really have--I mean, what I read is we have fraud. We have the 
taking of customers' funds and they are gone.
    So I would like to have the CFTC explain to me why this 
change in this rule may have been a tool that would have 
prevented what occurred at MF Global from occurring, and no 
need, again, for you to answer that today, but if the CFTC 
could respond to the Committee with that question, I would 
appreciate it.
    Senator Moran. Then let me ask Chairman Schapiro a 
question. Senator Warner and I soon this week are going to 
introduce legislation that we hope will generate additional 
startups and revive entrepreneurship in this country's economy. 
President Obama has talked about Section 404 of Sarbanes-Oxley. 
We heard testimony last week in this Committee about how it 
remains one of the most egregious deterrents toward 
entrepreneurs, small business men and women accessing capital, 
but I do not know that you or the--SEC has said anything about 
the cost/benefit analysis of Section 404 and its compliance as 
it relates to small firms.
    Ms. Schapiro. Senator, I am happy to talk about that. As 
you know, we share the concern about access to capital for 
small businesses. We have created a new advisory committee that 
is helping us confront small business capital formation issues. 
We are looking at all kinds of initiatives, including raising 
the limit on Regulation A offerings, whether 500 shareholders 
is still the right number for a company to have to begin 
publicly reporting to the SEC, whether we should relax the 
general solicitation ban, and a number of other things, 
crowdfunding and others. So we have a lot on our plate and a 
lot of initiatives ongoing.
    I will say that I have personally weighed in with a concern 
about raising the 404(b) exemption as high as, I believe, some 
bills are considering doing. It is currently $75 million, 
which, in fact, covers 60 percent of all public companies. 
Those companies do not have to do 404(b) reporting. To go to $1 
billion, which I think some bills are contemplating, would 
concern me because we have understood from investors 
consistently that the independent auditors' reporting on 
internal controls is, from their view, a very important 
investor protection and gives them a lot of confidence when 
investing in companies. And the worst result I think we could 
have would be for investors to lose confidence generally again, 
as they did after Enron, in the quality and the integrity of 
financial statements. And the bigger the company gets, the more 
the concern I would have about that.
    In addition, it is not at all clear to us--and we look at 
these considerations very carefully--that exempting from 404(b) 
for these larger companies would, in fact, save audit costs, 
because internal controls have to be tested in the audit of the 
financial statements, anyway.
    So we would be happy to work with you and talk with you in 
detail about it, but I do have some concerns because 404(b), 
investors consistently tell us, has been very important to 
their willingness to commit capital.
    Senator Moran. Well, I do think it is important that we 
have your expertise, the SEC's expertise on this topic. I think 
it is timely. I think entrepreneurship, startup companies are a 
great opportunity for our country's economy, and I do know--I 
mean, I sincerely believe there is an impediment, but we need 
to find the right threshold, the right balance for protection, 
but also to increase the opportunity to access capital. And so 
I would welcome your more timely answers to those questions.
    My final question, and it is a broad one, and this comes 
from Chairman Johnson's question. My take on what I heard 
across the table was that Dodd-Frank--and I was not on this 
Committee at the time that Dodd-Frank was passed and signed 
into law. It may have reduced the risk of failure of financial 
institutions that create a systemic risk, and regulators have 
additional authorities to wind down businesses that are 
failing. But I did not hear anybody indicate that Dodd-Frank 
reduces the number of institutions that are too big to fail, 
that would meet that definition, that the public, I think, and 
me as a Member of the House of Representatives thought Dodd-
Frank was addressing, reducing the number of firms that, if 
they failed, there would be a systemic risk. And what I heard 
today in your response to the Chairman's question was nothing 
suggests that the concentration of economic power is any less 
today or that there are fewer firms whose failure would cause a 
dramatic consequence to the U.S. economy, but two things--
nothing wrong with either one of those two things, is we have 
greater authorities to wind down one of those firms in that 
circumstance, and we have a greater opportunity to prevent any 
of those institutions from risky behavior that causes them to 
fail.
    What have I missed in that discussion that you had in 
response to the Chairman's question?
    Mr. Wolin. Senator, I think all those things are true; that 
is to say, the statute decreases the probability that firms 
will fail by making sure that they are better protected, better 
buffered, have stronger standards, are engaging in less risky 
activity; and also, of course, as Chairman Gruenberg noted, we 
have new tools, the Government does, to deal with failure if 
and when it does occur in ways that are orderly and that do not 
require the taxpayers' resources to deal with the situation.
    But I think it also does this, which you are getting at: It 
makes sure that firms are better protected from each other so 
that the buffers, the kinds of things that make it less likely 
for any one firm to fail help make sure that when a particular 
firm fails, other firms are better insulated, better protected 
from those circumstances. One key element of that whole dynamic 
is what Governor Tarullo has pointed to as being, of course, a 
central aspect of this, which is capital. And there are lots of 
other ways, and I am sure other colleagues on the panel can 
speak to them. But I think it is all of those things. It is 
reducing the likelihood of failure, better making sure that 
other firms are protected from failure of a particular firm, 
and dealing with a firm that fails in a way that is orderly and 
is protected from the taxpayer.
    Mr. Tarullo. Senator, let me just add two things to what 
Secretary Wolin said.
    First, I do think it is important that market discipline 
play a much greater role than it did in the pre-crisis period. 
So a number of the things that we are talking about here, 
whether it is the FDIC's orderly liquidation authority or the 
enhanced prudential standards, the disclosure that we are doing 
in accordance with the stress tests, all of those are means to 
enhance market discipline as a complement to basic regulation.
    The second thing I would say is that there are two forms of 
systemic risk that we need to be concerned with. One is the one 
you highlighted, which is the number of firms which in and of 
themselves would cause a systemic problem if they were to fail. 
But second is a set of activities, correlated activities within 
the financial system that may be conducted by a broader number 
of not huge organizations, which themselves could create some 
systemic risk if, for example, there were a shock to the value 
of the assets that were underlying those transactions. And that 
is really what MBS was. MBS involved big institutions, to be 
sure, but it involved a lot of others.
    So when you talk about derivatives reform, central clearing 
and the like, you are talking as much about systemic problems 
that can arise in nongigantic firms as well as gigantic ones. 
But I will say to you quite honestly, I think we are going to 
need some more work and thinking there to make sure that we are 
identifying those forms of risk and not just allowing an 
arbitrage out of one set of institutions into another.
    Senator Moran. When you say market discipline, is that my 
phrase ``moral hazard''? Is that what you are----
    Mr. Tarullo. It is the other side, it is the flip side of 
moral hazard, sir, yes.
    Senator Moran. OK. Thank you.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair.
    I want to start with a brief discussion on the difference 
between qualified residential mortgage, which was an exception 
to the risk retention rule, as Mr. Walsh pointed out, and 
qualified mortgage, which was a term used to define a mortgage 
that meets ability-to-pay standards--in other words, getting 
rid of the liar loans.
    Mr. Wolin, under the section for the qualified mortgage, 
again, the ability-to-pay standards, a series of requirements 
are laid out, and those requirements include not being a 
balloon mortgage, being fully amortized, not being negatively 
amortizing, being verified income, and so forth, and meeting 
the ratios in regulation or statute for debt to income, all of 
those basically, yes, it has been underwritten and ability to 
pay.
    Two terms are used in this section, one of which refers to 
a presumption and the other to safe harbor. Now, technically 
those are two different things in the law, and I think you have 
produced two different rules based on which direction the rules 
will go, two different draft rules.
    Do you have a sense right now which way you are going to go 
on this?
    Mr. Wolin. I do not, Senator. I think it has yet to be 
determined, and I think how the QRM and the QM, which, as you 
note, have different purposes but also have some interplay, 
relate to one another is, I think, also something that needs to 
be worked through in the end, of course, by regulators. We 
will, you know, offer our views, and in the case of the QRM 
rules, we have a coordinating function that the statute 
provides to us, but the regulators will, of course, in the end 
make their judgments.
    Senator Merkley. The qualified mortgage is completely under 
this section presumption of ability to repay and is distinct 
and different from the risk retention version.
    Mr. Wolin. Right.
    Senator Merkley. I will note that later in that section 
there is a reference directly to the safe harbor. Certainly 
that was the discussion that was taking place among those of us 
who were immersed in trying to get rid of the liar loans, was 
that you would have a safe harbor. Thank you.
    Governor Tarullo, I wanted to turn to the G-SIFI surcharge, 
and I believe that earlier in the year you called for a 
surcharge, which we might call an anti-bailout equity buffer, 
of as much as 7 percent which could bring the total amount up 
to 15 percent for tier one capital ratio. But I think the Fed 
ultimately adopted 3 percent, that is, essentially instead of 
getting to 15 percent, they get to 11 percent. And for most 
organizations, under the scaled bucket structure, it would only 
be 1 percent or 2 percent.
    So is it fair to say that you lost and that you are still 
concerned about that?
    Mr. Tarullo. No, so, Senator, what I said in that speech, 
in June, I believe, was that the methodology that we--which is 
to say Fed economists--had pursued in trying to calibrate what 
an appropriate surcharge would be had produced a range of 
possible surcharges that would have been somewhere between 1.5 
and 7 percent. As you indicate, the Basel agreement was for 3 
percent as being at the top. That is obviously within. And the 
2 to 2.5 that would apply to a lot of SIFIs is obviously within 
that range.
    I did not at the time propose it, but I did want people to 
see that a methodology which asked the question how can we 
equalize the risk of failure of one of these systemic 
institutions and the impact that it would have on the financial 
system to that of a medium-size institution could under some 
not implausible assumptions produce an amount of a surcharge 
greater than we had intended to propose.
    There are other--this is relevant to my response to Senator 
Reed's question earlier. When one thinks about which number to 
choose once you have gotten a range, I think you want to take 
several things into consideration: one, how are you feeling 
about the underlying capital system, the quality of capital and 
the like; two, to what degree are there other regulatory 
structures which suggest that you need to go higher or lower in 
that range that you have got; and, three--and I think we do 
take this into consideration-- the degree to which we can get 
agreement from our international counterparts to move their 
SIFIs in a similar direction.
    So, you know, as with Basel III, personally I would have 
been a little happier with a little higher number, but I do 
think that the numbers that we got in the international 
negotiations and in coordination with the OCC and the FDIC are 
well within that range which analytically we think will provide 
the kind of additional buffer support that is needed.
    Senator Merkley. Thank you. Because my time is out, I will 
just close by noting that the total amount of buffer becomes 
much less than many such as those at the Stanford Business 
School have proposed, and this is in the context of certainly 
significant exposure to European banks and some exposure that 
is not fully understood in terms of the credit default swaps 
and how the dominoes line up in that manner. So I applaud your 
ongoing effort to have this first line of defense be one that 
is robust and substantial.
    Thank you.
    Chairman Johnson. Senator Corker.
    Senator Corker. Again, Mr. Chairman, thank you for calling 
the hearing, and I thank each of you for being here.
    Mr. Wolin, the CFPB, the Consumer Financial Protection 
Bureau, we have had numbers of conversations about it, and I 
have talked to the White House several times over the course of 
the last several months. But, you know, in fairness, even the 
Treasury's proposal that came forth regarding the Bureau had a 
board, and even the Treasury Secretary has said, yes, you know, 
we felt there should be a board.
    I do not know whether you are enjoying being part of a 
political game that is taking place regarding this, but I would 
just say, look, some basic checks and balances with this 
organization I think would cause the logjam that is taking 
place on this to really be broken up, and I am sort of 
surprised that you all continue to be a part of this political 
game that is taking place. But I do hope at some point in time 
we will be able to have a meeting of minds and have just a 
simple kind of thing that most people in Tennessee and across 
our country would like to see, and that is some accountability. 
But I hope that will happen, and you do not need to answer 
that. I know it is not going to happen this week because 
everybody is having so much fun with it.
    But on GSEs, in February you all came forth with sort of a 
multiple choice of what could happen with GSEs. I am surprised 
that you have not come forth with any solution toward the GSEs, 
and you do not have to go on forever, but explain to me why you 
have not. I mean, it is a pretty basic issue that all of us 
know needs to be dealt with. We had looked forward to working 
with you, and when we realized you really just did not have the 
appetite for taking it on, we have offered a bill ourselves. I 
hope you will look at that, but could you tell us why you are 
not really pursuing any type of GSE reform at this time?
    Mr. Wolin. Well, Senator, let me--and I want to come back 
to the CFPB thing, if I might for a second as well. We are 
keenly interested in pursuing proposals for housing finance 
reform. We laid out some options, as you note. We continue to 
work on refining sort of what we think the right approach is 
and have tried to be clear, working with folks across the 
Congress, that we are keen to engage in that conversation.
    So we have been continuing to work on plans. We have 
engaged----
    Senator Corker. Are you going to come forth with a plan?
    Mr. Wolin. Well, I do not know whether we are going to have 
a specific thing or when, but certainly we hope to. This is 
obviously critical, and at some point we will be bringing 
something forward.
    Senator Corker. I would just say in general the observation 
is that you all are really succumbing to politics and are 
unwilling to take on the tough issues that need to be dealt 
with that really cause people in our country to be divided 
taking on tough issues like this and really promoting other 
political stances like you are right now, the CFPB, and not 
trying to solve it. So I just want to tell you it is 
disappointing, and I do hope that very soon somehow that might 
change.
    To you, Mr. Gensler, I was not really----
    Mr. Wolin. Could I respond to that, Senator?
    Senator Corker. Sure, if you can do it briefly.
    Mr. Wolin. I think we have tried to take on lots of very 
complicated----
    Senator Corker. You have not taken on GSEs as you said you 
would. You have not done that. You have not taken it on. You 
came out with a multiple choice that makes everybody happy, and 
you did not do what you said you would do. You all said you all 
would come forth at the beginning of this year with a real 
proposal. The year is almost over, and you have not done that.
    Mr. Wolin. I would say this, Senator, that we have put out 
some very serious ideas. We continue to work on proposals, and 
we will work with whoever on the Hill wants to continue to work 
with us.
    Senator Corker. Good. Thank you.
    Mr. Gensler, I was not going to weigh in on this. I figured 
others would do it. I do have some other questions I want to 
ask other folks. But I just was not going to do it. I have to 
tell you that it appears to me--I do not know if you would make 
the same decision again, but the people that care about MF 
Global really care about what happened running up to the point 
in time that you recused yourself. I mean, the enforcement 
piece, it will take its own course, and I am sure it will be 
tough. But it feels to me like you panicked, and it was more 
about a career-enhancing situation to avoid accountability. And 
I just have to tell you as a person, I know I fall short of 
this, but I do try to take on the tough issues and not dodge 
tough issues. You know, I may not be coming back because of 
that. But, you know, it appears to me, candidly, that you 
really took a career-enhancing--I think it has actually not 
turned out to be the case, but a career-enhancing position by 
trying to take yourself out of this at a moment in time when 
really the rest of--I mean, Corzine is not the chairman anymore 
of the company, so it seems like now is a great time for you to 
be involved. But I was disappointed with your testimony, and I 
would love to talk to you about it some other time. But it does 
not seem to me that it makes any sense at all and was done 
solely to enhance your career here.
    Mr. Gensler. Senator, I would look forward to that, and I 
feel that you have given me good advice throughout my 2 \1/2\ 
years here. But really what happened is, as it turned to a 
specific enforcement matter that could involve specific 
individuals, not just the company but specific individuals, 
about compliance with laws, not just one law but various laws, 
and there were some questions coming that Thursday I was up in 
the Senate testifying on position limits, actually, but I 
reached out to the general counsel, and I said I know that you 
are saying that it was 14 years ago and 9 years ago and so 
forth, but that my very participation could be such a 
distraction on the enforcement matter. And then I said, ``So 
what do we do elsewise?'' And to your very good question, the 
general counsel said, ``Well, enforcement involves, the 
bankruptcy involves the very heart of the questions of where is 
the money,'' and so forth.
    So I do not think, sir--and I appreciate what you are 
saying because it is a balancing. All of us that are in this 
town, there is a balancing of these very hard decisions. So I 
made a judgment on that Thursday. It was certainly not for the 
reasons you are saying because you have observed this is still 
a very challenging topic. Even not participating it is a 
challenging topic.
    Senator Corker. Well, thank you.
    Mr. Gensler. It was a balanced judgment.
    Senator Corker. And let us talk about that.
    Mr. Wolin and Mr. Tarullo, I know Treasury, when Volcker 
came out, my guess is that there were people at Treasury that 
thought, ``What in the world?'' especially when it came out. 
And I know Treasury first opposed Volcker internally, and now 
it is part of our law. And over time I guess you have figured 
out the best way to deal with Volcker was to make sure that 
treasurys were exempt from Volcker. All other trading in debt 
is going to become far less liquid--in other words, you buy a 
GE bond or somebody else, there is going to be no liquidity. 
But you artfully exempted treasurys so it would not have any 
effect on Treasury's ability to have liquidity in trading debt 
instruments that are very important to you.
    I am just wondering if you think that was an appropriate 
response to Volcker, to basically say, OK, we will let it apply 
to everybody else but us? I wonder if you and Tarullo might 
respond to what that is going to do in debt markets by crowding 
people out of the private side and, candidly, causing people to 
more focus on something that they know is highly liquid?
    Mr. Wolin. Let me start, Senator, by saying we were in 
favor of the Volcker Rule. I came before this Committee and 
testified with Paul Volcker and was clear about----
    Senator Corker. Not in the beginning.
    Mr. Wolin. The statute was the creation of this Congress. I 
think from our perspective we wanted to make sure and I think 
industry was keen for us to make sure that we excluded certain 
things from the provisions. How that gets worked through in the 
rulemaking obviously is not for the Treasury to participate in, 
so I will defer to Governor Tarullo. But I have a hard time 
imagining that this is going to have a particularly important 
effect when all is said and done on the overall debt markets 
and their liquidity.
    Mr. Tarullo. Senator, with respect to liquidity for other 
instruments more generally, I think a lot of this will depend 
on the efficacy of one of the concepts that lies behind the 
proposal, which is to try to adjust the metrics and the 
oversight to the relative liquidity of the markets for the 
particular assets. So, for example, in the exceptions for 
underwriting and market making, it will be appropriate to 
evaluate what a firm does differently if it is making a market 
in a relatively less liquid asset, which, for example, could be 
a bond in a smaller firm, as opposed to making a market in 
Fortune 500 equities that are traded on the New York Stock 
Exchange.
    So we will try to minimize the effect upon liquidity in 
markets by implementing the market-making and underwriting 
sections as sensibly as we can, taking account of the 
differences in markets. I do not know what 3 or 4 or 5--well, 
it will surely be more than that because the rule will not take 
effect for another 2 \1/2\ years, but what 5 or 6 or 7 years 
from now, how the nature of trading in these instruments will 
have changed. It may well be that a bunch of it just migrates 
to some different firms.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman, and thank you for 
holding this Committee hearing.
    Governor Tarullo, in your written testimony, you devoted 
much of your discussion to capital regulation after Dodd-Frank. 
I agree that this is an issue of utmost importance. European 
banks currently hold large portfolios of sovereign debt that 
would satisfy liquidity coverage ratios under Basel III. Yet we 
have seen declines in the liquidity and value of these assets. 
It has been reported that the Basel Committee may add equities 
and corporate debt to the list of assets that can be used to 
satisfy the liquidity requirements.
    Could you discuss this possibility? Would you agree that 
banks are best served by holding a diverse pool of ``high-
quality liquid assets'' such as cash, U.S. Treasurys, covered 
bonds, and central bank reserves?
    Mr. Tarullo. Certainly, Senator. I should say at the outset 
that the interest in taking another look at the liquidity 
coverage ratio began well before the current period of stress 
on European sovereigns. We, which is to say, the Federal 
Reserve, was one of the entities which asked internationally to 
take another look at the liquidity coverage ratio, and I would 
say, to be fair to those who came up with the original 
proposal, it was in large part because we had never had 
quantitative liquidity requirements before, either nationally 
or internationally, and so we, that is to say, the Board, 
thought that it was particularly important that, before putting 
any such requirement in place, there be a pretty close look and 
a look that involved principles at central banks and 
regulators.
    One of the precepts, I think, for the renewed look was just 
the point that you were making, that if you are worried about 
the liquidity of a firm, what you are really asking is how well 
are the liabilities and the assets of that firm matched so that 
in a period of stress it can cover its needs over some period 
of time so that it has a plan, it can develop a plan for 
longer-run survival. And what I had thought was that the 2008 
period gave us a very good real-life experiment to test what 
kinds of instruments actually do remain liquid even during a 
period of stress like that, for example, highly traded equities 
of large companies.
    So that is, in fact, one of the motivations for the 
rethink, and I believe that once the international group at the 
Basel Committee that is looking at the LCR has finished its 
evaluation next year, you will see some changes in things like 
what qualifies and assumed run rates and the like to try to 
conform the requirements somewhat more closely to the 
experience we actually had in late----
    Senator Hagan. Let me follow up on that. The Volcker Rule 
provides an exclusion for accounts used to establish or acquire 
a position for the purposes of the bona fide liquidity 
management.
    Mr. Tarullo. Right.
    Senator Hagan. And I would expect that the Basel 
Committee's definition of the bank's stock of liquid assets for 
liquidity coverage ratio purposes and the trading account 
exclusion for bona fide liquidity management would be closely 
linked. Is that an appropriate expectation?
    Mr. Tarullo. Well, I think for certain we would want to 
take the revised liquidity coverage ratio into account in 
thinking about what is a legitimate liquidity management 
program. But, remember, the LCR is only a 30-day window, and if 
you are looking at sound liquidity management for a firm, 30 
days is important because of that breathing period that I 
mentioned a moment ago, but you actually want to make sure that 
the book is better matched going well out beyond 30 days.
    So while we would take LCR into account, good sound 
liquidity management will include things other than just the 
LCR.
    Senator Hagan. Thank you.
    Chairman Schapiro, the proposed Volcker Rule prohibits a 
banking entity from acquiring an ownership interest in, or 
sponsoring a ``covered fund'' unless otherwise permitted under 
the rule. I was hoping to clarify certain aspects of what 
constitutes a covered fund.
    Would the ``covered fund'' definition apply to foreign 
funds such as mutual funds or other regulated collective 
investment vehicles offered to U.S. investors?
    Ms. Schapiro. Senator, it is a little hard to answer that 
straightforwardly, but I will try to. We started, when we--
first of all, working very closely with our colleagues in the 
bank regulatory world because at the end of the day this rule 
is really about protecting the safety and soundness of the 
banks as a result of their investment or sponsorship. So we 
started with a statutory provision given to us by Congress, 
which was really quite broad, and then we worked to try to 
determine where that breadth was over-inclusive and actually in 
some instances under-inclusive, and came up with what we 
thought was a pretty tailored definition.
    I think comments are going to be critically important to us 
in refining this so that we come up with a meaningful 
definition that does not create gaps and loopholes but is also, 
as I said, not over-inclusive.
    We did propose to include--and the CFTC may want to speak 
to this--commodity pools and foreign funds because we thought 
that was an area where there ought to be coverage. We have 
gotten a lot of pushback on those issues, and so we will be 
reviewing those comments very, very carefully.
    Senator Hagan. I was relieved to see that a joint venture 
between a banking entity and an ``operating company'' would 
still be permitted under the rule. However, to my knowledge, 
the term ``operating company'' remains undefined. Given that 
joint ventures are not the type of corporate structures that 
the Volcker Rule was intended to cover, I would expect that 
definition to be broad. Can you comment on what is meant by the 
term ``operating company''?
    Ms. Schapiro. Just to say that that is actually an example 
where we thought the statute was over-inclusive, and so we 
sought to create exemptions there for joint ventures that are 
operating companies or vehicles that are used to merge an 
entity with or into a banking entity or its affiliates. I 
understand that there are those who feel that we did not make 
those exclusions broad enough, and so we are looking at that.
    Senator Hagan. And then one final thing under that 
question. I noted that credit funds that originate and invest 
in loans and other extensions of credit on a long-term basis 
were not exempted from the covered fund definition. Would you 
agree that credit funds allow the banking system to share 
credit risk with investors?
    Ms. Schapiro. Well, I think, again, that is something--I do 
not have a good answer for you on that, but, again, we will be 
sure we look at that carefully. All of these issues around 
covered funds are obviously complex and technical, but that is 
why the comments will be very valuable to us, as well as the 
input from our colleagues who regulate the banks.
    Senator Hagan. OK. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman. Thanks to all the 
witnesses.
    Like a lot of folks, I have a broad concern with the notion 
of SIFIs and regulation of that, and the general concern is 
that in trying to deal with too big to fail in this way, we are 
going to end up encouraging or incenting too big to fail. 
Specifically, just as an example, the Wall Street Journal has 
reported that the biggest too-big-to-fail banks pay about 78 
basis points less for their funds than their rivals.
    Has that sort of factor in the market been examined in 
terms of the SIFI issue? What will be the impact of designating 
these nonbanks as systemically important in the market? And is 
there going to be the consequence that some of them actually 
gain advantage? Has that been examined in a rigorous way?
    Mr. Tarullo. I think you are addressing me, Senator?
    Senator Vitter. I guess I would love your reaction, 
Governor, as well as Secretary Wolin's.
    Mr. Tarullo. OK, so let me start. I think with respect to 
too big to fail, it is not a binary exercise; that is, one does 
not go from being perceived as clearly too big to fail one day 
to being perceived clearly not too big to fail the next day. 
And I think what you have heard today and probably have heard 
on past panels is a process that is in place to try to change 
in a real way the perception of too big to fail among 
systemically important institutions in the United States. And 
that happens, first, through the kinds of capital standard that 
I was describing earlier. I think, second, it happens through 
making market discipline real for these institutions.
    When the FDIC is able to develop, as it is in the process 
of doing, a credible liquidation authority, what you begin to 
see, as I think you have probably observed, outsiders, 
including ratings agencies, saying there is not the level of 
implicit support that they had imputed to U.S. firms in the 
past any longer, and that has actually laid behind some of the 
downgrades that the ratings agencies have done. They have said 
explicitly this is not about the condition of the bank; it is 
just what we think--how much we think the Government would 
stand behind them.
    So we absolutely look at market indicators to show us to 
what degree market discipline is becoming a reality for these 
firms in the same way that it is a reality for a middle-sized 
regional bank in the Midwest.
    Senator Vitter. Secretary?
    Mr. Wolin. Senator, I would just add this thought to what 
Governor Tarullo said, which is that no one is lining up to be 
designated as a SIFI--those who might be designated lining up, 
quite displeased with the prospect, and that is because it 
comes with a set of enhanced prudential standards that they 
will have to meet. And, you know, it ties in to what the 
Governor was saying, I think, with respect to how we think 
about what the ultimate implication of this is, more buffers, 
more standards, and so forth.
    So I do not think being designated as a SIFI is something 
that people see as an advantage either with respect to cost of 
funding or otherwise. It will come with sort of a more onerous 
set of requirements.
    Senator Vitter. OK. Thank you. And just one other comment 
about a completely separate topic to the Chair of the SEC, 
Chairman Schapiro. First of all, the Stanford case, as you 
know, has been very important to me because of the number of 
Louisiana victims. Senator Shelby is in a similar situation. A 
lot of folks are affected. The SEC did take action in June, and 
I thank you for that. It was very long in coming, going back to 
well before your tenure, but the SEC finally took positive 
concrete action. I thank you for that.
    You have been personally very engaged since then to try to 
get SIPC to do the right thing and act, and we have had many 
conversations about it. And I also thank you for that, and I am 
sincere about both of those things.
    Having said that, this again is dragging on 6 months after 
your positive concrete action, and so I would just encourage 
you publicly, the same way I have encouraged you privately, 
that I think the SEC needs to take definite action again before 
the end of the year in a positive way. And I am afraid that is 
going to mean suing SIPC. It seems to me that is what is going 
to be required based on my information and my conversations. I 
hope there could be another more positive and immediate 
outcome, but bottom line, I really encourage you in the 
strongest possible terms to make sure to take the next step, 
definite action before the end of the year.
    Ms. Schapiro. Senator, I appreciate that, and I think you 
know I share deeply your concern about this and that we not 
take longer than is absolutely necessary, and that we try to 
get to the best possible result for the victims. That is what 
we are working very hard on, and the Commission is equally 
engaged in getting to resolutions as quickly as we possibly 
can.
    Senator Vitter. Thank you.
    Chairman Johnson. For the past few minutes, there has been 
a vote pending in the Senate. Senator Shelby has some quick 
questions.
    Senator Shelby. Thank you, Mr. Chairman.
    To the SEC, Chairman Schapiro, your tenure as the Chairman 
of the SEC has been marked by a number of major failures. These 
failures include investor protection failings that was just 
brought up, Stanford; failures in court like the recent 
Citicorp settlement decision; rulemaking failures like the 
proxy access rule that was rejected by the D.C. Circuit. There 
have also been operational failures like the Commission's lease 
of the Constitution Center; management failures like your 
general counsel's involvement in the Madoff case; and the 
continuing internal control failures identified by the GAO, the 
Government Accountability Office.
    As head of the SEC, do you take responsibility for any of 
these failures? Does the buck stop with you? Or what do you 
say?
    Ms. Schapiro. Well, Senator, let me start by saying that 
the GAO found that the SEC had no material weaknesses in its 
internal controls over financial reporting this year for the 
first time in years. The agency's issues with respect to 
internal controls have gone on through many Administrations, 
but we cleared both material weaknesses this year. I am 
extremely proud of that and extremely proud of the staff's 
work.
    The agency has had some stumbles. I have always taken 
responsibility for being transparent about them and for fixing 
them going forward. But I think your recitation ignores the 
unbelievable amount of great work that has gone on at the SEC 
in the last 3 years, including the fact that we had a record 
year in enforcement last year, more enforcement cases filed 
than ever before in the history of the agency, more rulemakings 
successfully completed, more rulemakings successfully completed 
through unanimous votes by the Commission than in a very long 
time. And we have worked hard to remedy many issues that have 
been of longstanding concern at the agency. I do take 
responsibility. I testify often about them. But I am enormously 
proud of this agency's record.
    Senator Shelby. Secretary Wolin, your opening statement 
gave the impression to some of us that nonbank lenders are 
completely unregulated. Of course, you know that is not totally 
true. Explain to the American people how these lenders are 
currently regulated at the State level and also by the Federal 
Trade Commission.
    Mr. Wolin. Senator Shelby, I would say they are 
substantially unregulated for consumer protection. They are, 
depending on the State and depending on what kind of nonbank 
financial firm it is, regulated in States. But I would say that 
what we have now is no Federal regulator who is focused on the 
nonbank financial sector with respect to consumer protection in 
a serious way, and that, of course, leaves an unevenness as 
between banks and nonbanks.
    Senator Shelby. Are you at Treasury and on behalf of the 
Administration, are you guys--Senator Corker brought it up--are 
you seriously interested in talking to the Republican 
leadership about how we can move forward on the consumer 
protection head and all of this? In other words, we have 
submitted three recommendations to you, one of which he brought 
up, Senator Corker, dealing with the Treasury's initial 
recommendation that this consumer agency be accountable, that 
it have a board and so forth. Are you guys seriously interested 
in trying to negotiate with us on this and let us move forward 
where we can regulate a lot of these nonbank banks?
    Mr. Wolin. Well, I think, Senator, what we are very 
interested in is the Senate considering Richard Cordray. As you 
know, the statute provided a very intricate set of protections, 
checks and balances with respect to the CFPB. It has gotten 
oversight by this Congress, by the GAO, independent audits, 
reporting requirements. Its rules are subject to coordination 
with the regulators to my left. It can be overturned by a vote 
of the FSOC. There are a whole set of things there that, in the 
end, Congress determined were the right governance structures 
for this entity, and we think that, having done that, it is 
important for the Senate to consider the President's nominee.
    Senator Shelby. Sure. One last question, Mr. Chairman. Just 
to go back to Chairman Gensler. You were involved in crafting 
the Dodd-Frank legislation. You testified at many hearings, 
crafted statutory language, and attended countless meetings. 
You even sat at the table during the Agriculture Committee 
markup and staffed members into the early morning hours during 
the conference.
    Since the passage of Dodd-Frank, you have testified 
numerous times against changes to Dodd-Frank and have been to 
Europe many times to lobby their regulators. In fact, according 
to your written testimony, you will be meeting with foreign 
regulators on Thursday.
    Chairman Gensler, in all candor, do you not think that if 
you had spent less time protecting your political turf, your 
regulatory turf, and more time protecting customers and 
overseeing firms like MF Global, it is less likely that MF 
Global would be where they are today and the customers' money 
would not be missing?
    Mr. Gensler. Senator, I think it is about protecting the 
American public. It is what the CFTC does every day prior to 
Dodd-Frank and after Dodd-Frank. It is about ensuring that end 
users and their customers get the benefit of these markets to 
hedge a risk, lock in a price and do what they do well. We are 
an agency that relies heavily on self-regulatory organizations. 
We are only 10 percent larger than we were in the 1990s, and 
that is----
    Senator Shelby. But making you larger does not make you 
better, does it?
    Mr. Gensler. Not necessarily. Absolutely. We agree on that.
    Senator Shelby. Mm-hmm.
    Mr. Gensler. We have to be more efficient----
    Senator Shelby. Mm-hmm.
    Mr. Gensler.----use technology better----
    Senator Shelby. Sure.
    Mr. Gensler.----use the collaborative process with other 
regulators here and around the globe, enter into memorandums of 
understanding, having mutual recognition with those 
international regulators. We are a small regulator that has to 
leverage, really, off of the self-regulatory organizations and 
other regulators, but I think that the hard working staff at 
the CFTC is there, and as Chairman, I do take responsibility 
for those things that do well and those things that do poorly. 
I do take responsibility and this job seriously, sir.
    Senator Shelby. Do you believe that the CFTC has failed the 
American people as far as MF Global is concerned?
    Mr. Gensler. Again, I am not participating in the matter, 
but let me answer it more generally.
    Senator Shelby. Well, you can----
    Mr. Gensler. If people----
    Senator Shelby.----answer it specifically----
    Mr. Gensler. No, no, I think----
    Senator Shelby. Have they either failed it or they have 
not? Obviously, they have failed.
    Mr. Gensler. I think that--I think that when our legal 
system says to segregate funds, it means to segregate funds, 
and customers need to be able to rely on that every day from 
every firm.
    Senator Shelby. And if people have not done it, they should 
pay the consequences?
    Mr. Gensler. Well, that is what our law says, sir.
    Senator Shelby. When they break rules and laws.
    Mr. Gensler. That is what our laws say.
    Senator Shelby. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. Thank you all for your testimony and for 
being here with us today.
    Shortly, the Senate will take another significant vote to 
ensure that American consumers, including servicemembers and 
older Americans, have the strong consumer protections that they 
want, need, and deserve. I urge my colleagues to not let 
politics trump the needs of American consumers and stop any 
filibuster on Richard Cordray's nomination to be the first 
Director of the Consumer Financial Protection Bureau. Mr. 
Cordray is an extremely well qualified candidate who deserves a 
vote on his nomination.
    Thank you all for your hard work, continuing to implement 
the Wall Street Reform and Consumer Protection Act.
    This hearing is adjourned.
    [Whereupon, at 12:13 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank you, Mr. Chairman, and thank you for holding this hearing and 
for your commitment to the Committee's oversight role.
    At a June Subcommittee hearing, representatives from the three 
banking regulators shared the lessons that they learned from the 
financial crisis. They also described the steps that they are taking to 
reform the financial system.
    But I find several recent regulatory actions troubling.

    In particular:

    The major bank-holding companies have transferred 
        significant portions of their derivatives exposure into their 
        bank subsidiaries that are backed by the Federal Government; 
        and

    The Federal Reserve provided $7.7 trillion in secret, low-
        cost loans--unknown to both Treasury and Congress--to financial 
        companies, particularly the six biggest megabanks.

    These examples clearly demonstrate three things:

    First, we need more transparency.
    Certainly some trade secrets need to be protected, but the lack of 
transparency that exists in the financial sector is paralleled perhaps 
only by our national security establishment.
    Dodd-Frank took some steps in this direction, but we need to do 
more.
    Second, regulators, the Treasury Department, and Congress are far 
too lenient with a Wall Street that they view as more essential than it 
actually is.
    Preventing excessive risk-taking and moral hazard requires 
significant costs and reforms for any institution seeking support from 
the U.S. Government, and by extension the taxpayers.
    As both Governor Tarullo and Senator Shelby have argued this 
includes more equity at the biggest megabanks--a sentiment that I know 
some other panelists might disagree with.
    Third, not enough has been done to help those outside of the 
financial sector--most especially the middle class on Main Street.
    Many in Ohio and around the Nation are hurting--families and 
businesses, students and seniors.
    Daily, we are reminded of the inadequacy of the response to the 
financial crisis. This failure to fight for middle class Americans is 
all that much starker when we view it against the gifts that have been 
bestowed upon Wall Street.
    The result is a system that is good for the regulated institutions, 
but bad for policymakers, investors and other market participants, and 
taxpayers.
    One of the central lessons of the financial crisis is that terrible 
things can happen when institutions are allowed to run wild--free from 
oversight or accountability.
    So far, I'm sorry to say that the regulators' deeds have not 
necessarily matched their words.
    Thank you, Mr. Chairman.
                                 ______
                                 
               PREPARED STATEMENT OF SENATOR JERRY MORAN
    While today's hearing is intended to review the financial stability 
of the United States, I believe it is critically important that we also 
take this opportunity for a basic review of the facts in the collapse 
of MF Global. Kansans are rightfully frustrated. Many have lost their 
confidence in the markets and in Government as funds that were legally 
required to be segregated have seemingly been stolen from the firm. I 
strongly urge this Committee to consider a series of hearings to 
specifically investigate the failure of MF Global and to identify 
solutions which can restore confidence.
    Additionally, I would hope today's hearing could provide an 
opportunity to debunk the myth that Senate Republicans are standing in 
the way of improved consumer protection. The commitment and request 
made by 45 Senators remains the same today as it did 7 months ago: no 
confirmed Director, regardless of party affiliation, until basic 
changes are made to the structure of the CFPB. I have had a legislative 
proposal pending in the Senate since April which would accomplish our 
goals for reform. Nothing I have proposed is radical; in fact it is 
based on returning the CFPB to the President's original design and 
funding mechanism. Our collective time and energy would be better spent 
working on a solution which can bring accountability to the Bureau 
rather than a doomed vote which does nothing to advance our reform 
efforts or protect consumers.
    This rhetoric we will witness this week may grab headlines, but it 
ignores a basic fact: accountability and transparency at the CFPB is a 
goal that should be shared by every policymaker interested in 
protecting consumers from the abuses of the past.
    Even if the President decides to change course and constructively 
engage with the Senate in quickly passing some basic reforms to the 
structure of the agency, the CFPB will remain an incredibly powerful 
Government bureaucracy. Nothing I have proposed would undue those 
authorities or responsibilities. My concern, however, is that without 
additional transparency and accountability, the result of a poorly 
drafted rule could lead to less credit and less opportunity for 
consumers and small businesses alike.
                                 ______
                                 
                  PREPARED STATEMENT OF NEAL S. WOLIN
              Deputy Secretary, Department of the Treasury
                            December 6, 2011
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for the opportunity to discuss Treasury's progress 
implementing the Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010 (the Dodd-Frank Act).
    The Dodd-Frank Act is the strongest set of financial reforms 
enacted since the Great Depression, and was passed in the wake of the 
worst financial crisis this country has experienced since that time.
    That crisis cost nearly nine million jobs, wiped out more than a 
quarter of household wealth, and deeply compromised Americans' trust in 
our financial system.
    Today, our country's foremost challenge is helping the millions of 
Americans who lost their jobs as a result of the recession find new 
employment. Nearly three million private sector jobs have been created 
within the last 2 years, but our economy is not creating new jobs fast 
enough.
    Congress took an important first step by passing important 
provisions of the President's American Jobs Act that provide tax cuts 
for hiring unemployed or service-disabled veterans and repeal a tax on 
Federal contractors. It should pass the remainder without delay. 
Independent economists estimate that the provisions in the American 
Jobs Act, taken together, would create up to two million new jobs and 
add nearly 2 percentage points to economic growth next year.
    At the same time as we work to create jobs, Treasury is focused on 
implementing the Dodd-Frank Act to build a more efficient, transparent, 
and stable financial system--one that supports this country's long-term 
economic strength and leadership, rather than jeopardizes it.
    Congress designed the Dodd-Frank Act's reforms to address the key 
failures in our financial system that precipitated and prolonged the 
financial crisis. Its core elements include:

    Tougher constraints on excessive risk-taking and leverage. 
        To lower the risk of failure of large financial institutions 
        and reduce the damage to the broader economy if a failure 
        occurs, the Dodd-Frank Act provides authority for regulators to 
        impose more conservative limits on risks that could threaten 
        the stability of the financial system.

    An orderly liquidation authority to protect taxpayers. The 
        Dodd-Frank Act creates a new orderly liquidation authority to 
        break up and wind down a failing financial firm so that 
        taxpayers and the economy are protected.

    Comprehensive oversight of derivatives. The Dodd-Frank Act 
        creates a new regulatory framework for the over-the-counter 
        (OTC) derivatives market to increase oversight, transparency, 
        and stability in this previously unregulated area.

    Stronger consumer protections. The Dodd-Frank Act created 
        the Consumer Financial Protection Bureau (CFPB) to concentrate 
        authority and accountability in a single Federal agency for 
        consumer financial products and services.

    Increased transparency and market integrity. The Dodd-Frank 
        Act includes a number of measures that increase disclosure and 
        transparency in financial markets, including new reporting 
        rules for hedge funds, trade repositories to collect 
        information on derivatives markets, and improved disclosures on 
        asset-backed securities.

    Accountability for stability and oversight across the 
        financial system. The Dodd-Frank Act created the Financial 
        Stability Oversight Council (the Council) to identify risks to 
        the financial stability of the United States, promote market 
        discipline, and respond to emerging threats to the stability of 
        the U.S. financial system. To support the Council, the Office 
        of Financial Research (OFR) collects and improves the quality 
        of financial data and develops tools to evaluate risks to the 
        financial system.

    Our current economic challenges only increase our commitment to 
meeting our responsibility to the American public to implement these 
reforms fully, quickly, and carefully. As the President has said, ``We 
have a responsibility to write and enforce these rules to protect 
consumers of financial products, taxpayers, and our economy as a whole 
. . . History cannot be allowed to repeat itself.''
    Going forward, the Dodd-Frank Act aims to mitigate the effect of 
future stresses in the financial system on our economy and provides the 
Government with new tools in times of crisis. It aligns the boundaries 
of our regulatory structure with the risks presented by our modern-day 
financial system. It restores the balance between innovative financial 
markets and financial stability. And it meets our responsibility to the 
American people to learn the lessons of this crisis, and to act upon 
them.

                                      * * *

Implementation Principles
    Several key principles continue to guide our implementation of the 
Dodd-Frank Act.
1.  Balancing Speed with Quality and Consistency
    Treasury and the independent regulatory agencies responsible for 
writing most of the Dodd-Frank Act's rules are working to provide 
clarity to the public and the markets as quickly as possible.
    However, a regulatory system that addresses the substantial flaws 
that led to the financial crisis should not be built in haste. The 
Dodd-Frank Act is designed to help protect our economy for generations. 
Many of its reforms involve some of the most complex areas of finance.
    As a result, Treasury and the independent agencies are committed to 
balancing speed and certainty with adequate time for broad public 
engagement and dialogue, coordination among U.S. regulators and our 
international counterparts to help achieve a level playing field, and 
analyses of costs and benefits to help ensure rules build a stronger, 
more resilient financial system without placing unnecessary burdens on 
industry.
    Substantial progress has been made since the Dodd-Frank Act was 
passed less than 18 months ago. Since July 2010, financial regulators 
have publicly proposed or finalized nearly all the major rules related 
to the core elements of reform. The ultimate shape of both individual 
requirements and overall reform is becoming clearer by the week. 
Increasingly, financial firms are in a position to adjust their 
business models in anticipation of final rules.

    Rules proposed or finalized include:

    the Volcker Rule;

    rules for designating nonbanks and financial market 
        utilities for enhanced supervision and prudential standards;

    rules governing the orderly resolution of large failing 
        financial firms;

    the majority of OTC derivative market regulations;

    risk retention requirements;

    reporting requirements for large hedge fund and private 
        equity funds;

    and rules enhancing protections for investors.

Treasury will continue to work with the independent regulators in 
pursuit of final rules that are both timely and fully considered.
2.  Transparency and Public Engagement
    An open and ongoing public dialogue is critical to the rule-writing 
process. Regulators have gone above and beyond statutory requirements 
to engage broadly with interested parties prior to issuing proposed 
rules, review and consider comments on proposed rules carefully, and 
pursue public rulemakings in cases where the Dodd-Frank Act does not 
require them, such as with respect to the process for the designation 
of nonbank financial companies.
    Over a year ago, the Financial Stability Oversight Council released 
an integrated Dodd-Frank Act implementation roadmap to provide the 
public with a general guide to the rule-writing agencies' anticipated 
timelines and sequencing for the implementation of Dodd-Frank Act 
rules. Many of the Council's member agencies have provided the public 
with notice of anticipated rulemaking timelines significantly in 
advance of the rulemaking activity itself.
    To bolster their efforts, the Council has also made available on 
its Web site links to each member agency's Dodd-Frank Act 
implementation Web page, providing the public with a single portal to 
updated agency timelines, proposed rules, key studies, final rules, 
public comments, and other implementation materials.
    Through the comment process and public forums, member agencies have 
also sought the public's input on how rules interrelate and how, and in 
what sequence, they can best be implemented. Agency efforts have 
included sponsoring multi-agency public forums, including SEC and CFTC 
joint roundtables regarding implementation of derivatives reform, to 
hear the public's views on the substance and implementation of rules 
involving parallel or overlapping issues.
    Transparency and public input informs and strengthens the reform 
process, helping to ensure new rules foster healthy and dynamic 
markets. Treasury will continue to encourage and prioritize maximum 
transparency and public engagement as reform moves forward.
3.  Strengthening Coordination
    Strong coordination is essential for implementing the Dodd-Frank 
Act in a way that creates a coherent, efficient, and effective 
financial regulatory system. Coordination is important for closing gaps 
and minimizing opportunities for regulatory arbitrage, which could 
leave the U.S. and global financial system more vulnerable to future 
crises. Coordination is also important to avoid overlapping or 
conflicting regulations that may create inefficiencies or unnecessary 
compliance burdens within the financial industry.
    The Dodd-Frank Act provides for coordination of various kinds and 
with various degrees of specificity. One of the duties of the Financial 
Stability Oversight Council is to facilitate information sharing and 
coordination among its independent member agencies, both during the 
implementation of the Dodd-Frank Act and as it carries out its broader 
responsibilities.
    Congress granted specific authority to the Secretary of the 
Treasury, as the Chairperson of the Council, to coordinate the work of 
the agencies on two important Dodd-Frank rulemakings: the Volcker Rule, 
which limits banks' ability to take excessive risks, and the risk 
retention rule, which improves the alignment of incentives among 
financial institutions involved in securitization.
    Congress did not provide Treasury or the Secretary of the Treasury, 
as Chairperson of the Council, the authority to force coordination 
among its independent member agencies. Yet even without this authority, 
Treasury is encouraged by the efforts the Council's member agencies 
have made over the past 18 months, and their unanimous recognition of 
the importance of coordination, even when not statutorily required, in 
the Council's first annual report.
    Treasury, along with the Council's other member agencies, is 
committed to going beyond the coordination requirements in the Dodd-
Frank Act, and will continue to seek opportunities to improve and 
increase coordination going forward.
4.  Working Toward Simple, Streamlined, and Balanced Reform
    As Dodd-Frank implementation moves forward, Treasury believes that 
it is important for agencies to streamline, simplify, and consider the 
economic effects of significant rulemakings. Implementation must strike 
the right balance between shaping a financial system that is safer and 
more resilient and one that is innovative and dynamic. Analyzing new 
regulations' costs and benefits, both in terms of individual rules and 
rules in the aggregate, is an important part of getting the balance 
right.
    The Dodd-Frank Act made several important institutional changes to 
help streamline regulations and the regulatory process more broadly. It 
consolidated prudential supervision of federally chartered depository 
institutions by folding the Office of Thrift Supervision's prudential 
responsibilities into the Office of the Comptroller of the Currency's 
mandate. It created the Consumer Financial Protection Bureau, which is 
now responsible for rulemakings under Federal consumer financial 
protection laws that were previously spread among seven Federal 
agencies. It also created the Financial Stability Oversight Council in 
part to facilitate information sharing and strengthen coordination 
among its member agencies.
    In addition to these institutional reforms, agencies have also made 
efforts to streamline supervisory requirements and new regulations as 
the rule-writing process moves forward. Last week, the CFPB requested 
public input on ways to streamline regulations under the consumer 
financial protection laws that it has inherited from seven Federal 
agencies. The CFPB is asking the public to identify provisions that it 
should put the highest priority on updating, modifying, or eliminating, 
and is also seeking suggestions for making compliance easier for firms, 
especially smaller ones.
    Another example is last month's joint statement from the CFPB, 
along with the Federal Deposit Insurance Corporation, Federal Reserve 
Board, Office of the Comptroller of the Currency, National Credit Union 
Administration (together, the prudential regulators). The statement 
provided greater clarity regarding how the agencies expect to carry out 
supervisory and enforcement responsibilities with respect to consumer 
protection. Since the prudential regulators oversee compliance with 
Federal consumer financial laws for depository institutions and credit 
unions with assets below $10 billion, while the CFPB oversees all 
institutions above that limit, the agencies jointly agreed on common 
standards and intervals for measuring financial institutions' asset 
sizes and determining supervisory authority.
    The CFPB has also begun carrying out its mission to streamline and 
simplify rules and requirements with regard to consumer financial 
products and services. One of its first initiatives was to combine two 
federally required mortgage disclosure forms into one clear, simple 
document. The CFPB is currently soliciting public feedback on two 
potential designs, while also working with the Department of Education 
to develop a straightforward new form for colleges and universities to 
use to communicate student aid offers.
    As new rules are designed to strengthen our financial system, the 
Administration is leading a Governmentwide effort to streamline, 
simplify, and review the costs and benefits of new and existing 
regulations. In January, the President issued an Executive Order 
directing executive agencies to develop a plan to streamline 
regulations, including carrying out a review of existing regulations 
and assessing the costs and benefits--both qualitative and 
quantitative--of any new rules or requirements. In June, Secretary 
Geithner requested independent member agencies of the Financial 
Stability Oversight Council to adopt the principles and guidelines of 
the President's Executive Order. In July, the President issued a second 
Executive Order encouraging all independent regulatory agencies, to the 
extent permitted by law, to follow the key provisions of the January 
order, including eliminating or fixing rules that are outdated or 
unjustifiably costly, and making sure that new regulations undergo 
vigorous review. The President asked that they publish written plans 
describing their efforts within 120 days.
    All independent agencies, including those responsible for Dodd-
Frank Act rulemakings, are expected to submit plans, and many have 
already done so. The Federal Reserve, for example, is increasing 
efforts to review all regulatory matters from the perspective of 
community depository organizations, alongside regular zero-base reviews 
of its regulations roughly every 5 years. In addition to its ongoing 
review of rules affected by the Dodd-Frank Act, the FDIC is also 
undertaking a community bank initiative that includes a review of its 
examination process and rulemaking process to further our understanding 
of the challenges and opportunities for community banks. The CFTC has 
also submitted a plan describing its efforts, and is examining and 
revising a number of existing regulations as part of its implementation 
of the Dodd-Frank Act. It plans to begin periodic, retrospective 
reviews of regulations not reviewed as part of the Dodd-Frank Act work 
as soon as that work is complete.
    In their plans, independent agencies have stressed the importance 
of understanding the costs and benefits of new rulemakings, their 
methods for doing so, and their compliance with statutes designed to 
ensure that regulatory agencies consider and minimize regulatory 
burdens.
    However, it is important to ensure that analyzing the costs and 
benefits of reforms is balanced with their full and timely 
implementation. As reform moves forward, we should not lose sight of 
the continuing costs of the financial crisis this country experienced--
millions of jobs, trillions of dollars, and countless lost 
opportunities--or the potential costs of stalled or incomplete reform 
on our economy in the future.
5.  Building a Level Playing Field for Strong Global Reform
    Through the G-20, the Financial Stability Board, and regular 
bilateral engagement, the United States continues to lead and foster 
consensus on key areas of financial reform to help strengthen global 
financial stability, build more resilient financial markets, and 
promote greater consistency and convergence in regulatory outcomes.
    In 2009, the G-20 leaders agreed to a set of objectives in pursuit 
of a stronger and more internationally consistent supervisory and 
regulatory framework. Among other issues, the G-20 leaders pledged to 
reshape their regulatory systems to identify and take account of 
macroprudential risks; to extend regulation and oversight to all 
systemically important financial institutions, instruments and markets; 
to work to improve the quality, quantity, and international consistency 
of capital in the banking system; and to create greater transparency 
and alignment in frameworks for OTC derivatives.
    Between the G-20 meetings in London and Pittsburgh in 2009 and last 
month's meeting in Cannes, notable progress has been made with our 
counterparts around the world on these and other issues critical to 
global financial stability.
    Following the G-20 leaders call at the Pittsburgh Summit, in 2011 
regulators reached agreement on the new Basel III framework for bank 
capital and liquidity that is designed to allow institutions to absorb 
a level of losses comparable to what we faced at the peak of the 
financial crisis without turning to taxpayer support. These heightened 
standards phase in gradually, so that banks can adjust while continuing 
to provide credit to households and businesses. Basel III will also 
help to ensure that the level and definition of capital will be uniform 
across borders, and for the first time, outlines mandatory leverage and 
liquidity ratios.
    At the Cannes Summit, the G-20 leaders endorsed measures to address 
challenges posed by global systemically important financial 
institutions. These measures include requirements for higher loss 
absorbency capacity, new tools to facilitate orderly resolution, and 
more intensive and effective supervision. The largest firms will be 
required to hold additional capital buffers to reduce the risks of 
potential disruptions caused by the failure of one of these firms.
    In addition to international work on systemically important firms, 
G-20 leaders have also adopted principles aligned with the Dodd-Frank 
Act to promote international consistency across derivatives markets. 
These principles are fully consistent with those included in the Dodd-
Frank Act.
    Two years ago in Pittsburgh, the G-20 leaders reached agreement on 
requiring increased clearing, trading on exchanges, and reporting for 
over-the-counter trade. In Cannes, the G-20 leaders also agreed to 
pursue a U.S. proposal for a new global margin standard on uncleared 
derivatives trades to create uniform incentives for central clearing, 
while also pushing forward on efforts supported by policymakers and 
industry alike to develop an international legal entity identifier 
system, which will help precisely identify parties to financial 
transactions. That is important, for example, for trading in 
derivatives, where it will help shine a spotlight on counterparty 
exposures and thus interconnectedness, a key factor in assessing 
threats to financial stability. These efforts are critical to ensure 
international coherence and greater oversight of capital markets. 
Treasury is working with our G-20 counterparts to synchronize 
implementation.
    As the world's leading economy, financial reform in the United 
States should set a strong, clear example for the international 
community. Treasury will remain committed to fully implementing the 
Dodd-Frank Act at home, while working with our counterparts around the 
world to strengthen global reform.

                                      * * *

    The Dodd-Frank Act made Treasury responsible for standing up 
several important new institutions to help ensure our financial system 
is stronger and more resilient going forward. In addition to the 
Consumer Financial Protection Bureau and the Financial Stability 
Oversight Council, the Dodd-Frank Act created an Office of Financial 
Research (OFR) to provide the Council with critical data and analytical 
support. The Dodd-Frank Act also created the Federal Insurance Office 
(FIO) to identify gaps in regulation that could contribute to a 
systemic crisis in the insurance industry or the financial system more 
broadly.
    Treasury has worked hard to stand up these important new 
institutions, and is pleased with the progress they have made.
The Consumer Financial Protection Bureau
    The CFPB's mission is to help ensure consumers have the information 
they need to make financial decisions appropriate for them, carry out 
Federal consumer financial laws, and restrict unfair, deceptive, or 
abusive acts and practices. The Dodd-Frank Act created the CFPB to 
consolidate consumer protection responsibilities for consumer financial 
products and services that had been fragmented across several Federal 
regulators into a single institution dedicated solely to that purpose.
    In July, President Obama nominated Richard Cordray to be the CFPB's 
first director. He is exceptionally qualified to lead the CFPB. 
Throughout his career, Mr. Cordray has demonstrated a strong commitment 
to consumer advocacy and public service, and possesses a deep 
understanding of both finance and consumer protection law.
    Despite Mr. Cordray's outstanding qualifications, some in the 
Senate have said they will not confirm any individual to head the CFPB 
without fundamental changes to its structure, which Congress laid out 
in the Dodd-Frank Act.
    Secretary Geithner has urged Senators to reconsider their view. 
During his last appearance before this Committee, the Secretary asked 
that Senators who have not done so meet with Mr. Cordray and learn more 
about the work of the CFPB. As Senators get to know Mr. Cordray, we 
believe they will find that he is an ideal candidate to lead the CFPB, 
and that his measured, sensible approach to the CFPB's work will allay 
concerns some Senators have expressed regarding the CFPB's operation in 
the future. Furthermore, the CFPB is subject to strong oversight 
through statutorily required hearings, reports, and audits, constraints 
that do not apply to any other Federal banking regulator, and is the 
only banking regulator with a statutory cap on its primary source of 
independent funding.
    Without a Director, the CFPB's ability to address unfair, 
deceptive, and abusive practices by payday lenders, private student 
loan providers, debt collectors, and other nonbank lenders, including 
certain mortgage originators and servicers, is constrained. It also 
limits the CFPB's ability to level the playing field so that banks and 
nonbanks play by the same rules, and to prevent the sort of imbalances 
in consumer finance markets--in particular, mortgage loans--that helped 
cause the financial crisis.
    If the CFPB is unable to exercise its full authority, not only will 
consumers lack common-sense protections, but our economy will remain 
vulnerable to some of the same critical gaps in regulation that helped 
cause the financial crisis.
    Under its current authority, in July the CFPB assumed 
responsibility for supervising depository institutions with over $10 
billion in assets and their affiliates. In October, the CFPB released 
its supervision and examination manual, which is the field guide that 
examiners will use in supervising both depository institutions and 
other consumer financial services providers. The CFPB and prudential 
regulators also agreed on common standards for measuring an 
institution's asset size for purposes of determining supervisory 
authority.
    In its supervision and examination manual, the CFPB highlighted its 
Mortgage Servicing Examination Procedures and recognized the pervasive 
problems reported in the mortgage servicing industry. As reported by 
prudential regulators, servicers lost important documentation, 
experienced problems with foreclosure processing, and failed to 
communicate with consumers--and, in some cases, borrowers who qualify 
for loan modifications did not received them in time to avoid 
foreclosure. Initially, the CFPB's examinations of mortgage servicers 
will focus on the servicing of loans in default.
    In November, the CFPB also outlined plans to provide advance notice 
of potential enforcement actions to individuals and firms under 
investigation for violating Federal consumer financial laws. The 
EarlyWarning Notice process allows the subject of an investigation to 
respond to any potential legal violations before the CFPB decides 
whether to begin legal action.
    The CFPB also created the Know Before You Owe project to simplify 
the disclosures that consumers receive. Know Before You Owe has already 
launched initiatives simplifying mortgage disclosure requirements and 
student aid offers, and will include additional initiatives in other 
areas of consumer finance in the future.
    The Know Before You Owe mortgage disclosure initiative combines two 
lengthy, complicated federally required mortgage disclosures into a 
single, simpler form that clearly presents costs and risks to 
borrowers. The CFPB is currently evaluating two potential forms, which 
they have posted on their Web site to gather public input, as well as 
conducting one-on-one interviews with consumers, lenders, and brokers.
    The Know Before You Owe's student aid project aims to help young 
people more easily understand and compare the costs and benefits of 
student loans. The CFPB partnered with the Department of Education to 
create a model format that schools can use to communicate financial aid 
offers. Currently, these offers are often difficult to understand and 
compare, and may not clearly differentiate loans from other types of 
student aid. The CFPB has also launched an online guide to help 
borrowers understand their options when repaying student loans, and 
recently requested that they share their experiences using private 
student loans to improve our understanding of this particular credit 
market.
    Credit card applications also include confusing language and fine 
print, which makes it difficult for consumers to fully understand the 
terms of these agreements. Last week, the CFPB released a report that 
highlighted the Bureau's success assisting consumers with credit card 
complaints. Very soon, the CFPB plans to launch a new initiative under 
the Know Before You Owe Project to help consumers better understand 
these agreements and make more informed decisions.
    The CFPB is also committed to helping ensure that members of the 
armed services and their families are fully informed and empowered when 
choosing consumer financial products and services. Servicemembers and 
their families face special circumstances--deployments, relocations, 
overseas assignments--that present unique challenges. To better 
understand the nature of these challenges, the CFPB's Office of 
Servicemember Affairs is collecting information from servicemembers, 
their advocates and counselors, and industry participants, as well as 
hosting town hall meetings with military families and roundtable 
discussions with financial readiness program managers and counselors, 
legal assistance lawyers, chaplains, and other professionals serving 
the military community.
    Similarly, the CFPB's Office of Older Americans will help seniors 
navigate their own unique financial challenges by helping to educate 
and clarify financial choices about long-term savings, retirement 
planning, and long-term care. The CFPB will also coordinate with senior 
groups, law enforcement, financial institutions, and other Federal and 
state agencies to identify and prevent scams targeting seniors.
    Another accomplishment is the launch of the CFPB's Consumer 
Response Center, which began taking credit card complaints in July. On 
December 1, the CFPB started to take mortgage related complaints. In 
the coming months, the CFPB will take consumer complaints about other 
types of consumer financial products and services. The CFPB's August 
information sharing agreement with the Federal Trade Commission (FTC) 
allows it to access consumer complaints within the FTC's Consumer 
Sentinel system on a range of additional consumer financial products 
and services.
The Financial Stability Oversight Council
    The Dodd-Frank Act created the Financial Stability Oversight 
Council to identify risks to the financial stability of the United 
States, promote market discipline, and respond to emerging threats to 
the stability of the U.S. financial system.
    Prior to the Dodd-Frank Act's enactment, there was no effective 
forum for the senior leadership of Treasury, the Federal financial 
regulatory agencies and other experts to share information and engage 
as a group on a regular basis. In recent months, the Council's 
principals have come together to share information in response to 
possible risks to our financial system posed by credit ratings of U.S. 
debt, the failure of MF Global, and the ongoing sovereign debt crisis 
in Europe. Since I last testified in July, the Council has held six 
principals meetings, and in between these meetings the Council has had 
numerous conference calls to discuss market developments. Deputies meet 
at least every 2 weeks and staff of member agencies is in regular 
communication.
    In July, the Council published its first annual report, which 
provided a comprehensive view of financial market developments and 
potential threats to our financial system. The report also includes 
recommendations to enhance the integrity, efficiency, competitiveness, 
and stability of the U.S. financial markets, promote market discipline, 
and maintain investor confidence.
    Although independent agencies, not the Council itself, have the 
authority to address the annual report's recommendations regarding 
structural vulnerabilities, the Council continues to share information 
and review progress on each recommendation.
    The Council has also made progress on two of its direct 
responsibilities under the Dodd-Frank Act: designating financial market 
utilities (FMUs) and nonbank financial companies for enhanced 
prudential standards and supervision.
    In July, the Council finalized rules regarding the procedure for 
designating FMUs--firms that facilitate clearing and settlement in 
bond, currency, derivatives, and other financial markets--for enhanced 
risk management standards and supervision. The final rule benefited 
from public comments the Council solicited after it released an 
Advanced Notice of Proposed Rulemaking (ANPR) in November 2010 and a 
Notice of Proposed Rulemaking (NPR) in March 2011. The Council 
currently is analyzing firms for potential designation.
    The Council is also making progress toward issuing a final rule 
that establishes quantitative and qualitative criteria and procedures 
for designations of nonbank financial companies. Prior to the financial 
crisis, these types of institutions operated largely beyond the 
boundaries of financial regulators' scope. This allowed them to take on 
excessive risks that threatened the stability of the financial system 
more broadly.
    The Council received significant public input after publishing an 
ANPR in October 2010 and an NPR in January 2010. In October 2011, the 
Council published additional guidance, including specific metrics for 
potential designation and an analytical framework, for further public 
comment.
The Office of Financial Research
    The Dodd-Frank Act established the Office of Financial Research to 
improve the quality of financial data available to policymakers and the 
public, and to facilitate more robust and sophisticated analysis of the 
financial system.
    Richard Berner, as Counselor to the Treasury Secretary, has been 
leading our efforts to stand up the OFR while the Administration 
continues to evaluate candidates to serve as its Director.
    The OFR has made progress hiring experts with deep experience in 
data management, technology, and risk management to support its work. 
Leading academics and quantitative finance experts are also lending 
their experience and knowledge to help establish the OFR's research 
operation, including its structure, agenda, and fellowship programs.
    Treasury is committed to providing this implementation team with 
needed support and guidance, and I, along with other senior Treasury 
officials, meet with the team weekly to make sure the OFR's stand up is 
well-executed, priorities are identified, and progress is measured.
    As the OFR continues to build its data infrastructure, it has also 
begun working on specific research projects to support the Council's 
monitoring of risks to the financial system. Just last week, the OFR 
and the Council hosted a conference that brought together thought 
leaders from the financial regulatory community, academia, public 
interest groups, and the financial services industry to discuss new 
technologies and analytical approaches for assessing, monitoring, and 
mitigating threats to financial stability. The OFR's research on 
financial stability and its projects to improve the quality of 
financial data were discussed at that conference.
    Over the past year, the OFR's leadership has helped gain strong 
private sector support and international regulatory backing for the 
Legal Entity Identifier (LEI) initiative. This public-private 
initiative, which the OFR launched in November 2010, will create a 
global standard for the identification of parties to financial 
transactions. Such a standard will improve data quality and thus the 
abilities of regulators and firms to manage counterparty risk, assure 
the integrity of business practices, and lower processing costs for 
financial transactions.
    Over the past few months, the LEI initiative has won a number of 
key endorsements, including from the G-20 and the Financial Stability 
Board (FSB), which both released public statements affirming their 
support for industry and financial regulators' efforts to establish an 
LEI.
    To further progress on establishing an LEI globally, the OFR worked 
closely with the FSB and other international authorities to hold a 
workshop this past September to discuss how to coordinate on steps 
going forward. Representatives from international market participants 
and regulators voiced support for greater cooperation on the LEI 
initiative. Earlier this year, a global coalition of market 
participants and their members published recommendations for how to 
best adopt the LEI, and the International Organization for 
Standardization (ISO) developed a draft technical specification for the 
identifier.
    The OFR has also begun working to facilitate interagency 
coordination on data collection efforts. The process leading to the 
adoption of Form PF shows the benefits that come from collaboration 
between the OFR and other members of the Financial Stability Oversight 
Council. The SEC and CFTC worked collaboratively with the Council and 
the OFR to harmonize Form PF and a related CFTC form to increase 
transparency for certain participants in the commodities market. 
Because of this alignment, the Council will be in a better position to 
aggregate the information gathered from private fund advisers and these 
commodity market participants for use in assessing systemic risk.
    The OFR is working with regulators to catalogue the data they 
already collect to ensure the OFR relies on existing data whenever 
possible and to identify opportunities for efficiencies in contracting, 
collecting, processing, and distributing data. With this catalogue, the 
OFR will work with regulators to identify redundant data collection and 
reduce the reporting burden on financial institutions, while also 
strengthening and improving protections throughout the financial 
system.
Federal Insurance Office
    The Dodd-Frank Act created the Federal Insurance Office to monitor 
all aspects of the insurance industry, identify issues or gaps in 
regulation that could contribute to a systemic crisis in the insurance 
industry or financial system, assess the accessibility and 
affordability of insurance products, coordinate and develop Federal 
policy on prudential aspects of international insurance matters, and 
contribute expertise to the Financial Stability Oversight Council.
    In March, Treasury named Michael McRaith, former head of the 
Illinois Department of Insurance, as the FIO's Director and, in 
September, FIO announced 15 individuals drawn from industry, academia 
and consumer advocacy organizations to serve on the Federal Advisory 
Committee on Insurance, which advises FIO.
    FIO is playing an increasingly important role both domestically and 
internationally as regulatory reform moves forward. In addition to 
advising the Council, FIO is currently drafting a report on modernizing 
U.S. insurance regulation, on which it is currently seeking public 
comments. On December 9, FIO is hosting a conference to solicit 
additional public input. Among other subjects, panelists will focus on 
international regulatory developments, consumer protection, and 
solvency oversight.
    In October, FIO became a full member of the International 
Association of Insurance Supervisors, which is currently working to 
designate globally significant insurers and develop a common framework 
for the supervision of internationally active insurance groups. FIO's 
membership in this group helps to ensure the U.S. position on insurance 
matters are represented with a single voice as regulators work on 
international insurance issues.

                                      * * *

    As the economy continues to recover from the worst financial crisis 
in generations, the Dodd-Frank Act will help protect Americans from the 
excess risk, fragmented oversight, and poor consumer protections that 
played such leading roles in bringing about the crisis. Our goal is a 
financial system that is not prone to panic and collapse; that helps 
Americans save for retirement and borrow to finance an education or a 
home without experiencing deception or abuse; and that helps businesses 
finance growth and investment and strengthen our economy.
    We appreciate the leadership and support of this Committee 
throughout the reform process, and we look forward to working with 
Congress as we move forward toward this common goal.
    Thank you.
                                 ______
                                 
                PREPARED STATEMENT OF DANIEL K. TARULLO
        Member, Board of Governors of the Federal Reserve System
                            December 6, 2011
    Chairman Johnson, Ranking Member Shelby, and other Members of the 
Committee, thank you for the opportunity to testify on the Federal 
Reserve's implementation of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (Dodd-Frank Act).
The Federal Reserve's Approach to Dodd-Frank Implementation
    Needless to say, implementation of the Dodd-Frank Act has been, and 
continues to be, a formidable task. At the Federal Reserve, hundreds of 
staff members are contributing to Dodd-Frank projects. We have issued 
29 final rules, public notices, and reports already and we have another 
13 rules underway. All told, we expect the Board will issue 
approximately 60 sets of rules and formal guidelines as part of its 
implementation efforts. We are working diligently to complete the 
remaining rules. The challenge arises from the sheer number of studies, 
rules, and other implementation tasks the Act requires the Federal 
Reserve to produce in a relatively short period of time. Moreover, much 
of the work involves the more time-consuming process of joint 
rulemakings or coordination with other agencies, all of which are 
facing similar demands.
    For all the variation and complexity in our Dodd-Frank 
implementation responsibilities, we have several unifying goals.
    First and foremost, we want to get it right. This means 
implementing the statute faithfully, in a manner that maximizes 
financial stability and other social benefits at the least cost to 
credit availability and economic growth. To achieve this balance, we 
have assembled interdisciplinary teams for our significant rulemakings, 
bringing together economists, supervisors, legal staff, and other 
specialists to help develop sensible policy alternatives and to help 
avoid unintended consequences.
    Second, in addition to a thorough internal analytic process, we 
also are committed to soliciting and considering the comments of 
others. We are, of course, consulting extensively with other financial 
regulatory agencies, both bilaterally and through the Financial 
Stability Oversight Council. The interagency consultation process has 
included staff discussions during the initial policy development stage, 
sharing of draft studies and regulatory text in the interim phases, and 
dialogue among agency principals in the advanced stages of several 
rulemakings.
    Along with the other agencies testifying today, we have gone well 
beyond the formal consultation requirements of Dodd-Frank. Members of 
the Board, as well as staff at senior levels, have regular meetings 
with their counterparts at other agencies to discuss implementation 
issues of common interest. Consultations at multiple levels and across 
agencies help to improve the consistency of regulation across the 
banking industry and reduce the potential for overlapping regulatory 
requirements. In addition, these consultations help highlight the 
interaction among different rules under development by these agencies, 
as well as the interplay between proposed policy alternatives and 
existing regulations.
    We are also trying to make our rulemaking process as fair and 
transparent as possible, with ample opportunity for the public to 
comment. During the proposal stage, we specifically seek comment from 
the public on the costs and benefits of our proposed approach, as well 
as on alternative approaches to our proposal. We believe strongly that 
public participation in the rulemaking process improves our ability to 
identify and resolve issues raised by our regulatory proposals. We 
generally provide the public a minimum of 60 days to comment on all 
significant rulemaking proposals, with longer periods permitted for 
especially complex or significant proposals.
    Federal Reserve staff have participated in more than 300 meetings 
with outside parties and their representatives, including community and 
consumer groups. To promote transparency in the rulemaking process, we 
include in the public record a memorandum describing the attendees and 
subjects covered in any meetings involving nongovernmental participants 
at which Dodd-Frank rulemakings are discussed. These summaries are 
posted on the Federal Reserve Board's Web site on a weekly basis, as 
are updates on Board rulemakings and other Dodd-Frank initiatives.
    Third, in drafting regulations, we have made special efforts to 
identify and, to the degree possible consistent with statutory 
requirements, minimize the regulatory burden on smaller entities. We 
conduct an assessment that takes appropriate account of the potential 
impact a rule may have on small businesses, small governmental 
jurisdictions, and small organizations affected by the rule, in 
accordance with the Regulatory Flexibility Act. We have paid particular 
attention to reducing the regulatory burden on community banking 
organizations. For example, the Federal Reserve has established 
community depository institution advisory councils at each of the 12 
Federal Reserve banks. These councils gather input from community 
depository organizations on ways to reduce regulatory burden and 
improve the efficiency of our supervision, and also collect information 
about the economy from the perspective of community organizations 
throughout the Nation. A representative from each of these 12 advisory 
councils serves on a national Community Depository Institution Advisory 
Council that meets semiannually with the Board of Governors to bring 
together the ideas of all the advisory groups.
    The Board of Governors has also established a subcommittee of our 
regulatory and supervisory oversight committee for the express purpose 
of reviewing all regulatory matters from the perspective of community 
depository organizations. These reviews are intended to find ways to 
reduce the burden on community depository organizations arising from 
our regulatory policies without reducing the effectiveness of those 
policies in improving the safety and soundness of depository 
organizations of all sizes.
    Fourth, we are working to complete our Dodd-Frank projects as 
quickly as possible while meeting the three objectives already stated. 
There is obviously considerable value in providing as much clarity as 
possible as soon as possible to financial markets and the public about 
the post-crisis financial regulatory landscape.
Capital Regulation after Dodd-Frank
    The breadth of Dodd-Frank's provisions reflects in part that the 
pre-crisis regulatory regime had been insufficiently attentive to a 
variety of risks from a variety of sources. But we should not forget 
that strong capital requirements remain the most supple form of 
prudential regulation, because they can provide a buffer against bank 
losses from any source. To put it simply, the best way to avoid another 
TARP is for our large regulated institutions to have adequate capital 
buffers, reflecting the damage that would be done to the financial 
system were such institutions to fail.
    Implicitly, passage of Dodd-Frank was a criticism of the specific 
features of capital regulation that prevailed during the pre-crisis 
period. Basel I capital requirements relied almost exclusively on 
capital ratios that were snapshots of balance sheets and thus 
frequently a lagging indicator of a bank's condition. The kind of 
capital that qualified for regulatory purposes was not uniformly 
reliable as a buffer against losses. Moreover, capital requirements 
were set solely with reference to the balance sheet of each firm 
individually, with little attention to the economy-wide impact of 
financial stress at large institutions. And, most fundamentally, 
capital requirements had simply been too low, in general and with 
respect to the risk-weightings of certain assets.
    Strong capital requirements must be at the center of the post-
crisis period regulatory regime. The Federal Reserve is integrating the 
specific capital-related provisions of Dodd-Frank into its overall 
capital program. That program has three basic components: improving 
capital regulation at the level of individual firms; introducing a 
macroprudential or system-wide element to capital regulation; and 
conducting regular stress testing and capital planning. I will discuss 
each of the three areas briefly.
    The first component is to improve the traditional, firm-based 
approach to capital regulation. This work is mostly related to 
standards developed in cooperation with other supervisors in the Basel 
Committee on Banking Supervision, but there is also a Dodd-Frank 
element. The ``Collins amendment'' in Dodd-Frank provided a safeguard 
against declines in minimum capital requirements in a capital regime 
based on bank internal modeling. The so-called Basel 2.5 agreement 
strengthened the market risk capital requirements of Basel II. Basel 
III upgraded the quality of regulatory capital, increased the quantity 
of minimum capital requirements, created a capital conservation buffer, 
and introduced an international leverage ratio requirement. In the 
coming months the banking agencies will be jointly proposing 
regulations consistent with Basel 2.5 and Basel III.
    The second component of our capital program is to introduce a 
macroprudential element to capital regulation. Section 165 of the Dodd-
Frank Act mandated that the Board establish enhanced risk-based capital 
standards for large bank-holding companies. This mandate complements 
the Basel Committee's effort to develop a framework for assessing a 
capital surcharge on the largest, most interconnected banking 
organizations based on their global systemic importance. Both the Dodd-
Frank provision and the Basel systemic surcharge framework are 
motivated by the fact that the failure of a systemically important firm 
would have dramatically greater negative consequences on the financial 
system and the economy than the failure of other firms. In addition, 
stricter capital requirements on systemically important firms should 
help offset any funding advantage these firms derive from their 
perceived status as too-big-to-fail and provide an incentive for such 
firms to reduce their systemic footprint.
    Of course, Dodd-Frank requires the Federal Reserve to impose more 
stringent capital requirements on all bank-holding companies with 
assets of $50 billion or more, not just the U.S. firms that will appear 
on the Basel Committee's list of global systemic banks. No decision has 
yet been made as to whether the more stringent capital requirement to 
be applied to large U.S. banking firms that are not on the eventual 
list of global systemic banks will be in the form of a quantitative 
surcharge. However, analysis of the systemic footprints of these other 
U.S. bank-holding companies suggests that even if surcharges were to 
apply, their amounts would be quite modest, at least based on the 
current characteristics of these bank-holding companies.
    The third component of the Federal Reserve's capital program is to 
establish regular, firm-specific stress testing and capital planning. 
Dodd-Frank creates two kinds of stress-testing requirements. First, it 
mandates that the Federal Reserve Board conduct annual stress tests on 
all bank-holding companies with $50 billion or more in assets to 
determine whether they have the capital needed to absorb losses in 
baseline, adverse, and severely adverse economic conditions. Second, it 
requires both these companies and certain other regulated financial 
firms with between $10 billion and $50 billion in assets to conduct 
internal stress tests.
    We will be implementing the specific stress-testing requirements of 
Dodd-Frank beginning later in 2012. However, in the interim we are 
using a modified form of stress testing as part of the annual capital 
planning process we have established for large bank-holding companies. 
Last month we announced the parameters and process for this year's 
capital review, which will be completed in March, at which time the 
results of the stress test will be publicly reported for the 19 largest 
firms.
Conclusion
    For all the work that has already gone into implementing Dodd-
Frank, both at the Federal Reserve and at the other regulatory 
agencies, there is still considerable work to do. Final regulations 
implementing some of the Act's most important provisions, such as the 
``living will'' requirement and the Collins amendment, are now in 
place. Measures to implement other prominent provisions, such as the 
Volcker rule, have been proposed, but are not yet in final form. Still 
others, such as the section 165 requirements, have not yet been 
proposed. Whether completing work on proposed regulations, or moving 
forward with those yet to be proposed, the Federal Reserve will 
continue to pursue the four goals I noted earlier.
    Thank you very much for your attention. I would be pleased to 
answer any questions you might have for me.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 ______
                                 
                 PREPARED STATEMENT OF MARY L. SCHAPIRO
              Chairman, Securities and Exchange Commission
                            December 6, 2011
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee:

    Thank you for inviting me to testify regarding the Securities and 
Exchange Commission's ongoing implementation of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (``Dodd-Frank Act'' or 
``Act'').\1\
---------------------------------------------------------------------------
    \1\ The views expressed in this testimony are those of the Chairman 
of the Securities and Exchange Commission and do not necessarily 
represent the views of the full Commission.
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    The Dodd-Frank Act makes significant changes in the regulatory 
landscape for the SEC. Among other things, the Act brings hedge fund 
and other private fund advisers under the regulatory umbrella of the 
Investment Advisers Act of 1940 (``Advisers Act''), creates a new 
whistleblower program, establishes an entirely new regime for the over-
the-counter (``OTC'') derivatives market, enhances the SEC's authority 
over nationally recognized statistical rating organizations 
(``NRSROs'') and clearing agencies, and heightens regulation of asset-
backed securities (``ABS'').
    To implement the Act, the SEC was tasked with writing a large 
number of new rules and conducting over 20 studies and reports. Over 
the past 16 months, we have made great progress toward completing those 
tasks. Of the more than 90 provisions in the Act that require SEC 
rulemaking, the SEC already has proposed or adopted rules for over 
three-fourths of those that are required. Additionally, the SEC has 
finalized 12 of the more than 20 studies and reports that the Act 
directs us to complete. While we have had much success, we continue our 
work to implement all provisions of the Act for which we have 
responsibility--even as we also perform our longstanding core 
responsibilities of pursuing securities violations, reviewing public 
company disclosures and financial statements, inspecting the activities 
of investment advisers, investment companies, broker-dealers and other 
registered entities, and maintaining fair and efficient markets.
    In my prior opportunities to testify before this Committee about 
Dodd-Frank Act implementation, I outlined our efforts to modernize our 
internal processes to enable us to better accomplish both our 
preexisting responsibilities and those added by the Act. Among others, 
these efforts include the creation of new cross-disciplinary working 
groups; our focus on increasing transparency, consultation and public 
input; and the forging and strengthening collaborative relationships 
with other Federal regulators and our international counterparts. To 
date, we have participated in scores of interagency and working group 
meetings, conducted seven public roundtables, met with hundreds of 
interested groups and individuals including investors, academics and 
industry participants, and received, reviewed and considered thousands 
of public comments.
    The considerable progress we have made so far is the result of the 
exceptional work of my fellow Commissioners and our staff, whose 
extraordinary efforts have enabled us to accomplish so much in a 
relatively short time. While the Dodd-Frank Act added significantly to 
their workload, they have been implementing the Act in a thoughtful, 
thorough, and professional manner.
    My testimony today will provide an overview of these activities, 
emphasizing the Commission's efforts since I last testified before this 
Committee on Dodd-Frank Act implementation in July.
Hedge Fund and Other Private Fund Adviser Registration and Reporting
    The Dodd-Frank Act mandated that the Commission require private 
fund advisers (including hedge and private equity fund advisers) to 
confidentially report information about the private funds they manage 
for the purpose of the assessment of systemic risk by the Financial 
Stability Oversight Council (``FSOC''). On October 31, 2011, in a joint 
release with the CFTC, based on staff consultation with staff 
representing members of FSOC, the Commission adopted a new rule that 
requires hedge fund advisers and other private fund advisers registered 
with the Commission to report systemic risk information on a new form 
(``Form PF'').\2\ Under the new rule, Commission registered investment 
advisers managing at least $150 million in private fund assets will 
periodically file Form PF. The data collection will dovetail with the 
enhanced private fund reporting discussed below.
---------------------------------------------------------------------------
    \2\ See Release No. IA-3308, Reporting by Investment Advisers to 
Private Funds and Certain Commodity Pool Operators and Commodity 
Trading Advisors on Form PF (October 31, 2011), http://www.sec.gov/
rules/final/2011/ia-3308.pdf.
---------------------------------------------------------------------------
    The Form PF reporting requirements are scaled to the adviser. 
Advisers with less than a certain amount of hedge fund, liquidity fund 
or private equity fund assets under management will report only very 
basic information on an annual basis. Advisers with assets under 
management over specified thresholds will report more information, and 
large hedge fund and liquidity fund advisers also will report on a 
quarterly basis. This approach is intended to provide FSOC with a broad 
picture of the industry while relieving smaller advisers from much of 
the reporting requirements. In addition, the reporting requirements are 
tailored to the types of funds that an adviser manages and the 
potential risks those funds may present, meaning that an adviser will 
respond only to questions that are relevant to its business model. The 
Dodd-Frank Act provides special confidentiality protections for this 
data. The initial stages of this reporting will begin next year.
    In addition to this important reporting rule, the Commission 
already has completed many of the rulemakings required by the Dodd-
Frank Act amendments to the Advisers Act.
    In June, the Commission adopted rules that: require the 
        registration of, and reporting by, advisers to hedge funds and 
        other private funds and other advisers previously exempt from 
        SEC registration; require reporting by investment advisers 
        relying on certain new exemptions from SEC registration; and 
        reallocate regulatory responsibility to the state securities 
        authorities for advisers that have between $25M and $100M in 
        assets under management.\3\
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    \3\ See Release No. IA-3221, Rules Implementing Amendments to the 
Investment Advisers Act (June 22, 2011), http://www.sec.gov/rules/
final/2011/IA-3221.pdf.

    Concurrently, the Commission adopted rules to implement new 
        adviser registration exemptions created by the Dodd-Frank Act. 
        The new rules implement new exemptions for: (i) advisers solely 
        to venture capital funds; (ii) advisers solely to private funds 
        with less than $150 million in assets under management in the 
        United States; and (iii) certain foreign advisers without a 
        place of business in the United States and with only a de 
        minimis amount of U.S. business.\4\
---------------------------------------------------------------------------
    \4\ See Release No. IA-3222 Exemptions for Advisers to Venture 
Capital Funds, Private Fund Advisers With Less Than $150 Million in 
Assets Under Management, and Foreign Private Advisers (June 22, 2011), 
http://www.sec.gov/rules/final/2011/IA-3222.pdf.

    The Commission also adopted a new rule defining ``family 
        offices''--a group that historically has not been required to 
        register as advisers--that will be excluded from the definition 
        of an investment adviser under the Advisers Act.\5\
---------------------------------------------------------------------------
    \5\ See Release No. IA-3220, Family Offices (June 22, 2011), http:/
/www.sec.gov/rules/final/ia-3220.pdf.

    In May, the Commission proposed changes to the rule that 
        permits investment advisers to charge certain clients 
        performance fees.\6\ The rule's conditions already include 
        minimum standards, such as net worth, that clients must satisfy 
        for the adviser to charge these fees. The proposed amendments 
        would incorporate the revised dollar amount levels that the 
        Commission adjusted by order this past July to account for the 
        effects of inflation, as required by the Dodd-Frank Act. The 
        amendments also would remove the value of a client's primary 
        residence from the calculation of net worth.
---------------------------------------------------------------------------
    \6\ See Release No. IA-3198, Investment Adviser Performance 
Compensation (May 10, 2011), http://www.sec.gov/rules/proposed/2011/ia-
3198.pdf.
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Staff Studies Regarding Investment Advisers and Broker-Dealers
    In January 2011, the Commission submitted to Congress two staff 
studies in the investment management area as required under the Dodd-
Frank Act.
    The first study, mandated by Section 914, analyzed the need for 
enhanced examination and enforcement resources for investment advisers 
that are registered with the Commission.\7\ It found that the 
Commission likely will not have sufficient capacity in the near or long 
term to conduct effective examinations of registered investment 
advisers with adequate frequency. Therefore, the study stated that the 
Commission's examination program requires a source of funding that is 
adequate to permit the Commission to meet new examination challenges 
and sufficiently stable to prevent adviser examination resources from 
continuously being outstripped by growth in the number of registered 
investment advisers.
---------------------------------------------------------------------------
    \7\ See Study on Enhancing Investor Adviser Examinations (January 
2011), http://www.sec.gov/news/studies/2011/914studyfinal.pdf; see also 
Commissioner Elisse B. Walter, Statement on Study Enhancing Investment 
Adviser Examinations (Required by Section 914 of Title IX of the Dodd-
Frank Wall Street Reform and Consumer Protection Act) (Jan. 2010), 
http://www.sec.gov/news/speech/2011/spch011911ebw.pdf.
---------------------------------------------------------------------------
    The study highlighted the following three options to strengthen the 
Commission's investment adviser examination program: (1) imposing user 
fees on Commission-registered investment advisers to fund their 
examinations; (2) authorizing one or more self-regulatory organizations 
that assess fees on their members to examine, subject to Commission 
oversight, all Commission-registered investment advisers; or (3) 
authorizing FINRA to examine a subset of advisers--i.e., dually 
registered investment advisers and broker-dealers--for compliance with 
the Advisers Act.
    The second staff study, required by Section 913 of the Dodd-Frank 
Act (the ``IA/BD Study''), addressed the obligations of investment 
advisers and broker-dealers.\8\ This study reviewed the broker-dealer 
and investment adviser industries, the regulatory landscape surrounding 
each, issues raised by stakeholders who commented during the 
preparation of the report, and other considerations.
---------------------------------------------------------------------------
    \8\ See Study on Investment Advisers and Broker-Dealers (January 
2011), http://www.sec.gov/news/studies/2011/913studyfinal.pdf; see also 
Statement by SEC Commissioners Kathleen L. Casey and Troy A. Paredes 
Regarding Study on Investment Advisers and Broker-Dealers (January 21, 
2011), http://www.sec.gov/news/speech/2011/spch012211klctap.htm.
---------------------------------------------------------------------------
    The IA/BD Study made two primary recommendations: that the 
Commission (1) exercise its discretionary rulemaking authority to 
implement a uniform fiduciary standard of conduct for broker-dealers 
and investment advisers when they are providing personalized investment 
advice about securities to retail investors; and (2) consider 
harmonization of broker-dealer and investment adviser regulation when 
broker-dealers and investment advisers provide the same or 
substantially similar services to retail investors and when such 
harmonization adds meaningfully to investor protection.
    Under Section 913, the uniform fiduciary standard to which broker-
dealers and investment advisers would be subject would be ``no less 
stringent'' than the standard that applies to investment advisers 
today.
    As the IA/BD Study notes, the distinction between an investment 
adviser and a broker-dealer is often lost on investors, and it remains 
difficult to justify why there should be different rules and standards 
of conduct for the two roles--especially when the same or substantially 
similar services are being provided. Investment professionals' first 
duty must be to their clients, and we are giving serious consideration 
to the study's recommendations.
    The staff is currently considering the contours of rulemaking 
following on the study, including the costs and benefits of options for 
rulemaking. The staff also is continuing to meet with academics, and 
industry and investor representatives who have an interest in or 
insights into the results and recommendations of the study. In 
addition, the Commission's economists are considering available data 
that would help inform any potential rule recommendation.
Whistleblower Program
    Section 922 of the Dodd-Frank Act established a whistleblower 
program that requires the SEC to pay an award to eligible 
whistleblowers who voluntarily provide the agency with original 
information about a violation of the Federal securities laws that leads 
to a successful SEC enforcement action. The Act also required the 
Commission to promulgate rules to implement the program.
    Our final rules, adopted in May, became effective on August 12, 
2011. Since then, the Commission has received hundreds of tips through 
the whistleblower program from individuals all over the country and in 
many parts of the world. That, of course, is in addition to the tens of 
thousands of tips, complaints, and referrals the agency receives every 
year. Our new Office of the Whistleblower is reviewing these 
submissions and working with whistleblowers. The office recently filed 
its Annual Report to Congress detailing its many activities since its 
creation. These include, among other things, the establishment of an 
outreach program, internal training programs, development of policies 
and procedures, meeting with whistleblowers and their counsel, and 
coordination on investigations with Commission staff.
    We already are reaping the early benefits of the whistleblower 
program through active and promising investigations utilizing crucial 
whistleblower information, some of which we hope may lead to rewards in 
the near future. In addition, the quality of the information we are 
receiving has, in many instances, enabled our investigative staff to 
work more efficiently, thereby allowing us to better utilize our 
resources.
Additional Investor Protection Provisions
    The Commission continues to exercise its expanded enforcement 
authority by utilizing many of the other investor protection provisions 
contained in the Dodd-Frank Act. For example, we use our new 
``collateral bar'' authority to bar or suspend persons who have engaged 
in serious misconduct in one segment of the financial services industry 
that the Commission regulates from other segments that the Commission 
also regulates.
    In addition, the Commission has used its authority granted in 
Section 929P(a) to impose penalties in administrative cease and desist 
actions against nonregulated individuals and entities. Although the 
Commission could impose penalties against regulated persons 
administratively prior to Dodd-Frank, it could obtain penalties against 
nonregulated persons only in enforcement actions filed in district 
court. The Act now permits the Commission to obtain penalties against 
nonregulated violators of the Federal securities laws in either forum. 
In one recent example of our exercise of this authority, the Commission 
imposed a $3 million administrative penalty against an alcoholic 
beverage producer for violations of the Foreign Corrupt Practices Act 
involving more than $2.7 million in illicit payments to government 
officials in India, Thailand and South Korea.\9\ Prior to the Dodd-
Frank Act, the Commission would not have been able to impose a penalty 
against the company in a cease-and-desist proceeding; that sanction 
would only have been available in a district court action. Accordingly, 
to obtain full relief, the Commission would have had to either file the 
entire action in district court or, alternatively, file two separate 
actions--one administrative and one civil. With the new authority 
granted in Section 929P(a), the Commission no longer has to file 
multiple actions or abandon what may be the more appropriate forum in 
order to obtain an appropriate penalty.
---------------------------------------------------------------------------
    \9\ See In the Matter of Diageo Plc, Release No. 34-64978 (July 27, 
2011) http://www.sec.gov/litigation/admin/2011/34-64978.pdf
---------------------------------------------------------------------------
    Section 929E of the Dodd-Frank Act allowed for nationwide service 
of process so that the SEC could compel a witness to appear at trial 
anywhere in the United States. This new tool has enhanced our 
enforcement efforts by providing our trial attorneys with greater 
access to key witnesses and documents at trial.
    These are just a few examples of the many ways in which we are 
utilizing our expanded authority to more effectively protect investors. 
And, these new tools are augmenting our Enforcement Division's own, 
proactive initiatives to enhance its effectiveness by bringing more 
cases--and more significant cases--more swiftly and more efficiently. 
Indeed, in recently ended fiscal year 2011, the SEC filed 735 
enforcement actions--more enforcement actions than ever filed in a 
single year in SEC history. As a result of our aggressive enforcement 
activity, we obtained more than $2.8 billion in penalties and 
disgorgement ordered in fiscal year 2011.
OTC Derivatives
    Among the key provisions of the Dodd-Frank Act are those that will 
establish a new oversight regime for the OTC derivatives marketplace. 
Title VII of the Dodd-Frank Act requires the Commission to work with 
other regulators--the CFTC in particular--to write rules that:

    Address, among other things, mandatory clearing, the 
        operation of trade execution facilities and data repositories, 
        business conduct standards for certain market intermediaries, 
        capital and margin requirements, and public transparency for 
        transactional information;

    Improve transparency and facilitate the centralized 
        clearing of swaps, helping, among other things, to reduce 
        counterparty risk and systemic risk that results from exposures 
        by market participants to uncleared swaps;

    Enhance investor protection by increasing security-based 
        swap transaction disclosure and helping to mitigate security-
        based swap conflicts of interest; and

    Allow the OTC derivatives market to continue to develop in 
        a more transparent, efficient, and competitive manner.
Title VII Implementation to Date
    To date, the Commission has proposed rules in 13 areas required by 
Title VII:

    Rules prohibiting fraud and manipulation in connection with 
        security-based swaps;\10\
---------------------------------------------------------------------------
    \10\ See Release No. 34-63236, Prohibition Against Fraud, 
Manipulation, and Deception in Connection with Security-Based Swaps 
(November 3, 2010), http://www.sec.gov/rules/proposed/2010/34-
63236.pdf.

    Rules regarding trade reporting, data elements, and real-
        time public dissemination of trade information for security-
        based swaps that would lay out who must report security-based 
        swaps, what information must be reported, and where and when it 
        must be reported;\11\
---------------------------------------------------------------------------
    \11\ See Release No. 34-63346, Regulation SBSR--Reporting and 
Dissemination of Security-Based Swap Information (November 19, 2010), 
http://www.sec.gov/rules/proposed/2010/34-63346.pdf.

    Rules regarding the obligations of security-based swap data 
        repositories that would require them to register with the 
        Commission and specify the extensive confidentiality and other 
        requirements with which they must comply;\12\
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    \12\ See Release No. 34-63347, Security-Based Swap Data Repository 
Registration, Duties, and Core Principles (November 19, 2010), http://
www.sec.gov/rules/proposed/2010/34-63347.pdf.

    Joint rules with the CFTC regarding the definitions of swap 
        and security-based swap dealers, and major swap and security-
        based swap participants;\13\
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    \13\ See Release No. 34-63452, Further Definition of ``Swap 
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap Participant,'' 
``Major Security-Based Swap participant'' and ``Eligible Contract 
Participant'' (December 7, 2010), http://www.sec.gov/rules/proposed/
2010/34-63452.pdf.

    Rules relating to mandatory clearing of security-based 
        swaps that would establish a process for clearing agencies to 
        provide information to the Commission about security-based 
        swaps that the clearing agencies plan to accept for 
        clearing;\14\
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    \14\ See Release No. 63557, Process for Submissions for Review of 
Security-Based Swaps for Mandatory Clearing and Notice Filing 
Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 
and Form 19b-4 Applicable to All Self-Regulatory Organizations 
(December 15, 2010), http://www.sec.gov/rules/proposed/2010/34-
63557.pdf.

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

    Rules regarding the confirmation of security-based swap 
        transactions that would govern the way in which certain of 
        these transactions are acknowledged and verified by the parties 
        who enter into them;\16\
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    \16\ See Release No. 34-63727, Trade Acknowledgment and 
Verification on Security-Based Swap Transactions (January 14, 2011), 
http://www.sec.gov/rules/proposed/2011/34-63727.pdf.

    Rules defining and regulating security-based swap execution 
        facilities, which specify their registration requirements, and 
        establish the duties and implement the core principles for 
        security-based swap execution facilities specified in the Dodd-
        Frank Act;\17\
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    \17\ See Release No. 34-63825, Registration and Regulation of 
Security-Based Swap Execution Facilities (February 2, 2011), http://
www.sec.gov/rules/proposed/2011/34-63825.pdf.

    Rules regarding certain standards that clearing agencies 
        would be required to maintain with respect to, among other 
        things, their risk management and operations;\18\
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    \18\ See Release No. 34-64017, Clearing Agency Standards for 
Operation and Governance (March 2, 2011), http://www.sec.gov/rules/
proposed/2011/34-64017.pdf.

    Joint rules with the CFTC regarding further definitions of 
        the terms ``swap,'' ``security-based swap,'' and ``security-
        based swap agreement;'' the regulation of mixed swaps; and 
        security-based swap agreement recordkeeping;\19\
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    \19\ See Release No. 33-9204, Further Definition of ``Swap,'' 
``Security-Based Swap,'' and ``Security-Based Swap Agreement''; Mixed 
Swaps; Security-Based Swap Agreement Recordkeeping (April 27, 2011), 
http://www.sec.gov/rules/proposed/2011/33-9204.pdf.

    Rules regarding business conduct that would establish 
        certain minimum standards of conduct for security-based swap 
        dealers and major security-based swap participants, including 
        in connection with their dealings with ``special entities,'' 
        which include municipalities, pension plans, endowments and 
        similar entities;\20\
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    \20\ See Release No. 34-64766, Business Conduct Standards for 
Security-Based Swaps Dealer and Major Security-Based Swap Participants 
(June 29, 2011), http://www.sec.gov/rules/proposed/2011/34-64766.pdf.

    Rules regarding the registration process for security-based 
        swap dealers and major security-based swap participants;\21\ 
        and
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    \21\ See Release No. 34-65543, Registration of Security-Based Swap 
Dealers and Major Security-Based Swap Participants (October 12, 2011), 
http://www.sec.gov/rules/proposed/2011/34-65543.pdf.

    Rules intended to address conflicts of interest at 
        security-based swap clearing agencies, security-based swap 
        execution facilities, and exchanges that trade security-based 
        swaps.\22\
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    \22\ See Release No. 34-63107, Ownership Limitations and Governance 
Requirements for Security-Based Swap Clearing Agencies, Security-Based 
Swap Execution Facilities, and National Securities Exchanges with 
Respect to Security-Based Swaps under Regulation MC (October 14, 2010), 
http://www.sec.gov/rules/proposed/2010/34-63107.pdf.

    The Commission adopted an interim final rule regarding the 
reporting of outstanding security-based swaps entered into prior to the 
date of enactment of the Dodd-Frank Act.\23\ This interim final rule 
notifies certain security-based swap dealers and other parties of the 
need to preserve and report to the Commission or a registered security-
based swap data repository certain information pertaining to any 
security-based swap that was entered into prior to the July 21, 2010 
passage of the Dodd-Frank Act and whose terms had not expired as of 
that date.
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    \23\ See Release No. 34-63094, Reporting of Security-Based Swap 
Transaction Data (October 13, 2010), http://www.sec.gov/rules/interim/
2011/34-63094.pdf.

    In addition, to facilitate clearing of security-based swaps, the 
Commission has proposed rules providing exemptions under the Securities 
Act of 1933, the Securities Exchange Act of 1934, and the Trust 
Indenture Act of 1939 for security-based swaps transactions involving 
certain clearing agencies satisfying certain conditions.\24\ We also 
readopted certain of our beneficial ownership rules to preserve their 
application to persons who purchase or sell security-based swaps.\25\
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    \24\ See Release No. 33-9222, Exemptions for Security-Based Swaps 
Issued by Certain Clearing Agencies (June 9, 2011), http://www.sec.gov/
rules/proposed/2011/33-9222.pdf.
    \25\ See Release No. 34-64628, Beneficial Ownership Reporting 
Requirements and Security-Based Swaps (June 8, 2011), http://
www.sec.gov/rules/final/2011/34-64628.pdf.
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    Moreover, the Commission has taken a number of steps to provide 
legal certainty and avoid unnecessary market disruption that might 
otherwise have arisen as a result of final rules not having been 
enacted by the July 16 effective date of Title VII. Specifically, we 
have:

    Provided guidance regarding which provisions in Title VII 
        governing security-based swaps became operable as of the 
        effective date and provided temporary relief from several of 
        these provisions;\26\
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    \26\ See Release No. 34-64678, Temporary Exemptions and Other 
Temporary Relief, Together with Information on Compliance Dates for New 
Provisions of the Securities Exchange Act of 1934 Applicable to 
Security-Based Swaps (June 15, 2011), http://www.sec.gov/rules/
exorders/2011/34-64678.pdf.

    Provided guidance regarding--and where appropriate, interim 
        exemptions from--the various pre-Dodd-Frank provisions that 
        would otherwise have applied to security-based swaps on July 
        16;\27\ and
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    \27\ See Release No. 34-64795, Order Granting Temporary Exemptions 
under the Securities Exchange Act of 1934 in Connection with the 
Pending Revision of the Definition of ``Security'' to Encompass 
Security-Based Swaps, and Request for Comment (July 1, 2011), http://
sec.gov/rules/exorders/2011/34-64795.pdf; and Release No. 33-9231, 
Exemptions for Security-Based Swaps (July 1, 2011), http://www.sec.gov/
rules/interim/2011/33-9231.pdf.

    Taken other actions to address the effective date, 
        including extending certain existing temporary rules and relief 
        to continue to facilitate the clearing of certain credit 
        default swaps by clearing agencies functioning as central 
        counterparties.\28\
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    \28\ See Release No. 34-64796, Order Pursuant to Section 36 of the 
Securities Exchange Act of 1934 Granting Temporary Exemptions from 
Clearing Agency Registration Requirements under Section 17A(b) of the 
Exchange Act for Entities Providing Certain Clearing Services for 
Security-Based Swaps (July 1, 2011), http://sec.gov/rules/exorders/
2011/34-64796.pdf; and Release No. 33-9232 Extension of Temporary 
Exemptions for Eligible Credit Default Swaps to Facilitate Operation of 
Central Counterparties to Clear and Settle Credit Default Swaps (July 
1, 2011), http://www.sec.gov/rules/interim/2011/33-9232.pdf.
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Next Steps for Implementation of Title VII
    While the Commission has made significant progress to date, much 
remains to be done to fully implement Title VII. First, we need to 
complete the core elements of our proposal phase, in particular, rules 
related to the financial responsibility of security-based swap dealers 
and major security-based swap participants.
    In addition, because the OTC derivatives market has grown to become 
a truly global market in the last three decades, we must continue to 
evaluate carefully the international implications of Title VII. Rather 
than deal with these implications piecemeal, we intend to address the 
relevant international issues holistically in a single proposal. The 
publication of such a proposal would give investors, market 
participants, foreign regulators, and other interested parties an 
opportunity to consider as an integrated whole our proposed approach to 
the registration and regulation of foreign entities engaged in cross-
border transactions involving U.S. parties.
    After proposing all of the key rules under Title VII, we intend to 
seek public comment on an implementation plan that will facilitate a 
roll-out of the new securities-based swap requirements in a logical, 
progressive, and efficient manner that minimizes unnecessary disruption 
and costs to the markets. Many market participants have advocated that 
the Commission adopt a phased-in approach, whereby compliance with 
Title VII's requirements would be sequenced. Commission staff is 
actively engaged in developing an implementation proposal that takes 
into consideration market participants' recommendations with regard to 
such sequencing.
Clearing Agencies
    Title VIII of the Dodd-Frank Act provides for increased regulation 
of financial market utilities and financial institutions that engage in 
payment, clearing and settlement activities that are designated as 
systemically important. Clearing agencies play a critical role in the 
financial markets by ensuring that transactions settle on time and on 
agreed-upon terms. The purpose of Title VIII is to mitigate systemic 
risk in the financial system and promote financial stability.
    To promote the integrity of clearing agency operations and 
governance, the Commission proposed certain enhanced requirements for 
clearing agencies.\29\ Specifically, the proposed rules would require 
clearing agencies to maintain certain standards with respect to risk 
management and operations, have adequate safeguards and procedures to 
protect the confidentiality of trading information, have procedures 
that identify and address conflicts of interest, require minimum 
governance standards for boards of directors, designate a chief 
compliance officer, and disseminate pricing and valuation information 
if the clearing agency performs central counterparty services for 
security-based swaps. Many of the proposed requirements would apply to 
all clearing agencies, while others would focus more specifically on 
clearing agencies that clear security-based swaps.
---------------------------------------------------------------------------
    \29\ See Release No. 34-64017, Clearing Agency Standards for 
Operation and Governance (March 3, 2011), http://www.sec.gov/rules/
proposed/2011/34-64017.pdf.
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    The proposal was the result of close work between the Commission 
staff and staffs of the CFTC and the Federal Reserve Board (``Board''). 
The proposed requirements are consistent with--and build on--current 
international standards, and they are designed to further strengthen 
the Commission's oversight of securities clearing agencies, promote 
consistency in the regulation of clearing organizations generally, and 
thereby help to ensure that clearing agency regulation reduces systemic 
risk in the financial markets. The comment period for the proposal 
ended on April 29, 2011 and we received approximately 25 comments. We 
expect to consider final rules and revisions in light of comments 
received in the near future.\30\
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    \30\ The CFTC adopted final rules regarding standards for 
derivatives clearing organizations based on the applicable core 
principles on October 18, 2011. See Derivatives Clearing Organization 
General Provisions and Core Principles, 76 FR 69334 (November 8, 2011), 
http://www.cftc.gov/ucm/groups/public/@lrFederalregister/documents/
file/2011-27536a.pdf.
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    In addition, as directed by Title VIII, the SEC staff worked 
jointly with the staffs of the CFTC and the Board over the past year to 
develop a report to Congress reflecting recommendations regarding risk 
management supervision of clearing entities designated as systemically 
important by the FSOC--each called a ``designated clearing entity'' or 
``DCE''. The staffs of the agencies met regularly and engaged in 
constructive dialogue to develop a framework for improving consistency 
in the DCE oversight programs of the SEC and CFTC, promoting robust 
risk management by DCEs, promoting robust risk management oversight by 
DCE regulators, and improving regulators' ability to monitor the 
potential effects of DCE risk management on the stability of the 
financial system of the United States. The joint report was submitted 
to Congress in July and recommended finalizing rulemakings to establish 
enhanced risk management for DCEs, formalizing the process for 
consultations and information sharing regarding DCEs, enhancing DCE 
examinations, and developing ongoing consultative mechanisms to promote 
understanding of systemic risk. The report should establish a strong 
framework for ongoing consultation and cooperation in clearing agency 
oversight among the Commission, the CFTC, and the Board, which in turn 
should help to mitigate systemic risk and promote financial stability.
Credit Rating Agencies
    Under the Dodd-Frank Act, the Commission is required to undertake 
approximately a dozen rulemakings related to nationally recognized 
statistical rating organizations (``NRSROs''). The Commission adopted 
the first of these required rulemakings in January 2011,\31\ and in 
May, the Commission published for public comment a series of proposed 
rules that would further implement this requirement.\32\ The proposed 
rules are intended to strengthen the integrity of credit ratings by, 
among other things, improving their transparency. Under the 
Commission's proposals, NRSROs would, among other things, be required 
to:
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    \31\ See Release No. 33-9175, Disclosure for Asset-Backed 
Securities Required by Section 943 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (January 20, 2011), http://www.sec.gov/
rules/final/2011/33-9175.pdf.
    \32\ See Release No. 34-64514, Proposed Rules for Nationally 
Recognized Statistical Rating Organizations (May 18, 2011), http://
www.sec.gov/rules/proposed/2011/34-64514.pdf.

---------------------------------------------------------------------------
    Report on their internal controls;

    Better protect against conflicts of interest;

    Establish professional standards for their credit analysts;

    Publicly provide--along with the publication of any credit 
        rating--disclosure about the credit rating and the methodology 
        used to determine it; and

    Provide enhanced public disclosures about the performance 
        of their credit ratings.

In addition, the proposals would require disclosure concerning third-
party due diligence reports for asset-backed securities.
    The Dodd-Frank Act requires the SEC to conduct three studies 
relating to credit rating agencies. In December 2010, the Commission 
requested public comment on the feasibility and desirability of 
standardizing credit rating terminology.\33\ The Commission received 16 
comment letters in response to this request, and Commission staff has 
reviewed the comments received and is working toward producing a final 
product. The Dodd-Frank Act also requires (1) a study, due in July 
2012, about alternative compensation models for rating structured 
finance products and (2) a study, due in 2013, about NRSRO 
independence.
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    \33\ See Release No. 34-63573, Credit Rating Standardization Study 
(December 17, 2010), http://sec.gov/rules/other/2010/34-63573.pdf.
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    With respect to alternative compensation models, the Dodd-Frank Act 
directs the Commission to study the credit rating process for 
structured finance products and the conflicts associated with the 
``issuer-pay'' and the ``subscriber-pay'' models. The Commission also 
must study the feasibility of establishing a system in which a public 
or private utility or a self-regulatory organization would assign 
NRSROs to determine the credit ratings for structured finance products. 
Accordingly, in May 2011 the Commission published a request for public 
comment on the feasibility of such a system, asking interested parties 
to provide comments, proposals, data and analysis.\34\ The comment 
period ended on September 13, 2011. The Commission received 29 comment 
letters in response to its request for comments, which Commission staff 
is currently reviewing.
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    \34\ See Release No. 34-64456, Solicitation of Comment to Assist in 
Study on Assigned Credit Ratings (May 10, 2011), http://www.sec.gov/
rules/other/2011/34-64456.pdf.
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    The Dodd-Frank Act also requires every Federal agency to review its 
regulations that require use of credit ratings as an assessment of the 
credit-worthiness of a security and undertake rulemakings to remove 
these references and replace them with other standards of credit 
worthiness that the agency determines are appropriate. The Commission 
has taken the following steps to fulfill this requirement:

    In July 2011, the Commission adopted rule amendments 
        removing credit ratings as conditions for companies seeking to 
        use short-form registration when registering nonconvertible 
        securities for public sale. Under the new rules, the test for 
        eligibility to use Form S-3 or Form F-3 short-form registration 
        is tied to the amount of debt and other nonconvertible 
        securities (other than equity) a particular company has sold in 
        registered primary offerings within the previous 3 years, or 
        that the company has outstanding that were issued in registered 
        primary offerings.\35\ In addition, prior to adoption of the 
        Act, in April 2010 the Commission proposed new requirements to 
        replace the current credit rating references in shelf 
        eligibility criteria for asset-backed security issuers with new 
        shelf eligibility criteria.\36\
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    \35\ See Release No. 33-9245, Security Ratings (July 27, 2011), 
http://www.sec.gov/rules/final/2011/33-9245.pdf.
    \36\ See Release No. 33-9117, Asset-Backed Securities (April 7, 
2010), http://www.sec.gov/rules/proposed/2010/33-9117.pdf.

    In April 2011, the Commission proposed to remove references 
        to credit ratings in rules concerning broker-dealer financial 
        responsibility, distributions of securities, and confirmations 
        of transactions.\37\
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    \37\ See Release No. 34-64352, Removal of Certain References to 
Credit Ratings under the Securities Exchange Act of 1934 (April 27, 
2011), http://www.sec.gov/rules/proposed/2011/34-64352.pdf.

    In March 2011, the Commission proposed to remove credit 
        ratings from rules relating to the types of securities in which 
        a money market fund can invest.\38\ This proposal includes 
        amendments to Rule 2a-7, which governs the operation of money 
        market funds and requires these funds to invest only in highly 
        liquid, short-term investments of the highest quality. These 
        proposed amendments would replace the current requirement that 
        rated portfolio securities have received a first or second tier 
        rating. They are designed to offer protections comparable to 
        those provided by NRSRO ratings and to retain a degree of risk 
        limitation similar to the current rule.
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    \38\ See Release Nos. 33-9193; IC-29592, References to Credit 
Ratings in Certain Investment Company Act Rules and Forms (March 3, 
2011), http://www.sec.gov/rules/proposed/2011/33-9193.pdf.

    In September 2010, the Commission also adopted a rule amendment to 
remove communications with credit rating agencies from the list of 
excepted communications in Regulation FD, as required by Section 939B 
of the Dodd-Frank Act.\39\
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    \39\ See Release No. 33-9146, Removal from Regulation FD of the 
Exemption for Credit Rating Agencies (September 29, 2010), http://
www.sec.gov/rules/final/2010/33-9146.pdf.
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    Finally, the Dodd-Frank Act requires the SEC to conduct staff 
examinations of each NRSRO at least annually and to issue an annual 
report summarizing the exam findings. Our staff recently successfully 
completed the first cycle of these exams, and the Commission approved 
the publication of the staff's summary report of the examinations.\40\ 
The staff will continue to focus on completing the statutorily mandated 
annual examinations of each NRSRO, including follow-up from prior 
examinations, and making public the summary report of those 
examinations.
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    \40\ See 2011 Summary Report of Commission Staff's Examinations of 
Each Nationally Recognized Statistical Rating Organization (September 
2011), http://www.sec.gov/news/studies/2011/
2011_nrsro_section15e_examinations_summary_report.pdf.
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Volcker Rule
    In October 2011, the Commission proposed a rule jointly with the 
Federal banking agencies to implement Section 619 of the Dodd-Frank 
Act, commonly referred to as the ``Volcker Rule.''\41\ This proposal 
reflects an extensive, collaborative effort by the Federal banking 
agencies, the SEC, the CFTC, and their respective staffs to design a 
rule to implement the Volcker Rule's prohibitions and restrictions in a 
manner that is consistent with the language and purpose of this complex 
statute. In developing this proposal, interagency staffs gave close and 
thoughtful consideration to the FSOC's January 2011 study and its 
recommendations for implementing Section 619.\42\ As a result, the 
joint proposal builds upon many of the recommendations set forth in the 
FSOC study, including the use of quantitative measurements to 
distinguish prohibited proprietary trading from permitted market-
making-related activity and the requirement that banking entities 
develop robust programmatic compliance regimes.
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    \41\ See Release No. 34-65545, Prohibitions and Restrictions on 
Proprietary Trading and Certain Interests in, and Relationships With, 
Hedge Funds and Private Equity Funds (October 12, 2011), http://
www.sec.gov/rules/proposed/2011/34-965545.pdf.
    \42\ The FSOC Volcker Rule study and recommendations can be found 
at http://www.treasury.gov/initiatives/Documents/
Volcker%20sec%20%20619%20study%20final%2018%
2011%20rg.pdf.
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    As required by the statute, the joint proposal generally prohibits 
banking entities from engaging in proprietary trading and having 
certain interests in, and relationships with, hedge funds and private 
equity funds. The proposed rule also provides certain exceptions to 
these general prohibitions, consistent with the statute. For example, 
the proposal permits a banking entity to engage in underwriting, 
market-making-related activity, risk-mitigating hedging, and organizing 
and offering a private equity fund or hedge fund, among other permitted 
activities, provided that specific requirements set forth in the 
proposed rule are met. Further, as established by Section 619, an 
otherwise-permitted activity would be prohibited under the proposed 
rule if it involved a material conflict of interest, high-risk assets 
or trading strategies, or a threat to the safety and soundness of the 
banking entity or to the financial stability of the United States. The 
proposal defines ``material conflict of interest,'' ``high-risk 
asset,'' and ``high-risk trading strategy'' for these purposes. As set 
forth in the Dodd-Frank Act, the Commission's rule would apply to 
banking entities for which the Commission is the primary financial 
regulatory agency. These banking entities include, among others, 
certain registered broker-dealers, investment advisers, and security-
based swap dealers.
    The joint proposal requests comment on a wide range of issues due, 
in part, to the complexity of the issues presented by the statute and 
the proposal. The comment period for this proposal ends on January 13, 
2012. We look forward to receiving and considering public comment on 
this proposal and continuing to work with the other regulators to 
further refine the rule prior to adoption.
Municipal Advisors
    Section 975 of the Dodd-Frank Act creates a new class of regulated 
persons, ``municipal advisors,'' and requires these advisors to 
register with the Commission. This new registration requirement, which 
became effective on October 1, 2010, makes it unlawful for any 
municipal advisor, among other things, to provide advice to a municipal 
entity unless the advisor is registered with the Commission. In 
September 2010, the Commission adopted an interim final rule 
establishing a temporary means for municipal advisors to satisfy the 
registration requirement.\43\ In December 2010, the Commission proposed 
a permanent rule that would create a new process by which municipal 
advisors must register with the SEC.\44\ We have received over 1,000 
comment letters on the proposal, including many that express concerns 
regarding the treatment of appointed officials and traditional banking 
products and services. We are giving these comments careful 
consideration before adopting a final rule. In addition, we are 
continuing to discuss many interpretive issues with other regulators 
and interested market participants so that the final rule will strike 
an appropriate balance by ensuring that parties engaging in municipal 
advisory activities are appropriately registered, without unnecessarily 
imposing additional regulation.
---------------------------------------------------------------------------
    \43\ See Release No. 34-62824, Temporary Registration of Municipal 
Advisors (September 1, 2010), http://www.sec.gov/rules/interim/2010/34-
62824.pdf.
    \44\ See Release No. 34-63576, Registration of Municipal Advisors 
(December 20, 2010), http://sec.gov/rules/proposed/2010/34-63576.pdf.
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Asset-Backed Securities
    The Commission has been active in implementing Subtitle D of Title 
IX of the Dodd-Frank Act, entitled ``Improvements to the Asset-Backed 
Securitization Process.'' In August 2011, the Commission adopted rules 
in connection with Section 942(a) of the Dodd-Frank Act, which 
eliminated the automatic suspension of the duty to file reports under 
Section 15(d) of the 1934 Act for ABS issuers and granted the 
Commission authority to issue rules providing for the suspension or 
termination of this duty to file reports. The new rules permit 
suspension of the reporting obligations for ABS issuers when there are 
no longer asset-backed securities of the class sold in a registered 
transaction held by non-affiliates of the depositor.\45\
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    \45\ See Release No. 34-65148, Suspension of the Duty to File 
Reports for Classes of Asset-Backed Securities under Section 15(d) of 
the Securities Exchange Act of 1934 (August 17, 2011), http://
www.sec.gov/rules/final/2011/34-65148.pdf.
---------------------------------------------------------------------------
    On March 30, 2011, the Commission joined its fellow regulators in 
issuing for public comment proposed risk retention rules to implement 
Section 941 of the Act. \46\ Section 941, which is codified as new 
Section 15G of the Securities Exchange Act of 1934, generally requires 
the Commission, the Board, Federal Deposit Insurance Corporation, 
Office of the Comptroller of the Currency, and, in the case of the 
securitization of any ``residential mortgage asset,'' the Federal 
Housing Finance Agency and Department of Housing and Urban Development, 
to jointly prescribe regulations that require a securitizer to retain 
not less than 5 percent of the credit risk of any asset that the 
securitizer--through the issuance of an asset-backed security--
transfers, sells, or conveys to a third party. Section 15G also 
provides that the jointly prescribed regulations must prohibit a 
securitizer from directly or indirectly hedging or otherwise 
transferring the credit risk that the securitizer is required to 
retain.\47\
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    \46\ See Release No. 34-64148, Credit Risk Retention (March 30, 
2011), http://www.sec.gov/rules/proposed/2011/34-64148.pdf.
    \47\ See  78o-11(c)(1)(A).
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    Under the proposed rules, a sponsor generally would be permitted to 
choose from a menu of four risk retention options to satisfy its 
minimum 5 percent risk retention requirement. These options were 
designed to provide sponsors with flexibility while also ensuring that 
they actually retain credit risk to align incentives. The proposed 
rules also include three transaction-specific options related to 
securitizations involving revolving asset master trusts, asset-backed 
commercial paper conduits, and commercial mortgage-backed securities. 
Also, as required by Section 941, the proposal provides a complete 
exemption from the risk retention requirements for ABS collateralized 
solely by ``qualified residential mortgages'' (or QRMs) and establishes 
the terms and conditions under which a residential mortgage would 
qualify as a QRM. We have received a number of comments regarding the 
QRM exemption, which we will carefully consider as we move forward with 
the interagency rulemaking process. Although the original comment 
period was scheduled to close on June 10, 2011, in light of requests 
from various sources for an extension to allow sufficient time for data 
gathering and impact analyses related to the provisions of the proposed 
rule, we extended the comment period to August 1, 2011.
    The Commission also adopted rules in January 2011 implementing 
Section 943, on the use of representations and warranties in the market 
for ABS,\48\ and Section 945, which requires an asset-backed issuer in 
a Securities Act registered transaction to perform a review of the 
assets underlying the ABS and disclose the nature of such review.\49\
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    \48\ See Release No. 33-9175, Disclosure for Asset-Backed 
Securities Required by Section 943 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (January 20, 2011), http://www.sec.gov/
rules/final/2011/33-9175.pdf.
    \49\ See Release No. 33-9176, Issuer Review of Assets in Offerings 
of Asset-Backed Securities (January 20, 2011), http://www.sec.gov/
rules/final/2011/33-9176.pdf.
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    We also are working on rules requiring the disclosure of asset-
level information regarding the assets backing each tranche or class of 
security.\50\
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    \50\ See Section 942(b) of the Dodd-Frank Act. In April 2010, the 
Commission proposed, among other things, to require that, with some 
exceptions, prospectuses for public offerings of ABS and ongoing 
Exchange Act reports contain specified asset-level information about 
each of the assets in the pool. See Release No. 33-9117, Asset-Backed 
Securities (April 7, 2010), http://www.sec.gov/rules/proposed/2010/33-
9117.pdf. In July 2011, the Commission requested additional comment on 
the 2010 proposals relating to asset-level data in light of Section 
942(b) and comments received on the 2010 proposals. See Release No. 33-
9244, Re-proposal of Shelf Eligibility Conditions for Asset-Backed 
Securities and Other Additional Requests for Comment (July 26, 2011), 
http://www.sec.gov/rules/proposed/2011/33-9244.pdf. The proposals, if 
adopted, would implement the requirements for registered offerings of 
Section 942(b).
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Prohibition against Conflicts of Interest in Certain Securitizations
    In September 2011, the Commission proposed a rule to implement the 
prohibition under Section 621 of the Dodd-Frank Act, which prohibits 
entities that create and distribute asset-backed securities from 
engaging in transactions that involve or result in material conflicts 
of interest with respect to the investors in such asset-backed 
securities.\51\ The proposed rule would implement this provision by 
prohibiting underwriters, placement agents, initial purchasers, 
sponsors of an asset-backed security, or any affiliate or subsidiary of 
such entity from engaging in any transaction that would involve or 
result in any material conflicts of interest with respect to any 
investor in the relevant asset-backed security. These entities, 
referred to as ``securitization participants,'' assemble, package and 
distribute asset-backed securities, and so may benefit from the 
activity that Section 621 is designed to prohibit. The prohibition 
would apply to both nonsynthetic and synthetic asset-backed securities 
and would apply to both registered and unregistered offerings of asset-
backed securities.
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    \51\ See Release No. 34-65355, Prohibition against Conflicts of 
Interest in Certain Securitizations (September 19, 2011), http://
www.sec.gov/rules/proposed/2011/34-65355.pdf.
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    Under the proposal, a conflict of interest would arise if a 
securitization participant would benefit directly or indirectly from 
either the actual, anticipated, or potential (a) adverse performance of 
the asset pool supporting or referenced by the relevant asset-backed 
security, (b) loss of principal, monetary default or early amortization 
event on the asset-backed security, or (c) decline in the market value 
of the asset-backed security; or as a result of allowing a third party, 
directly or indirectly, to structure the relevant asset-backed security 
or select assets underlying the asset-backed security in a way that 
facilitates or creates an opportunity for that third party to benefit 
from a short transaction. The conflict would be material if there is a 
substantial likelihood that a reasonable investor would consider the 
conflict important to his or her investment decision.
    The proposed rule contains three exceptions mandated by the statute 
for bona fide market-making, liquidity commitments and risk-mitigating 
hedging activities. In developing the proposal, we considered comments 
received in response to the Commission's general solicitation of 
comments on the implementation of the Dodd-Frank Act. Commenters 
suggested that applying the statutory prohibition in a broad manner 
might impair the asset-backed securities market. The proposal is not 
intended to prohibit legitimate securitization activities, but rather, 
to prohibit the type of conduct at which Section 621 is aimed. We asked 
many questions in the release to ensure that we strike the right 
balance of prohibiting the type of conduct at which the statute is 
targeted without restricting other securitization activities.
    The Commission looks forward to public comment regarding this 
proposal, including comment on the potential interplay between this 
proposal and Section 619 of the Dodd-Frank Act. The 90-day comment 
period for this rule ends on December 19, 2011.
Corporate Governance and Executive Compensation
    The Dodd-Frank Act includes an array of corporate governance and 
executive compensation provisions that require Commission rulemaking. 
Among others, such rulemakings include:

    Say on Pay. The Commission adopted rules in January 2011 
        that require, in accordance with Section 951 of the Act, public 
        companies subject to the Federal proxy rules to provide a 
        shareholder advisory ``say-on-pay'' vote on executive 
        compensation, a separate shareholder advisory vote on the 
        frequency of the say-on-pay vote, and disclosure about, and a 
        shareholder advisory vote to approve, compensation related to 
        merger or similar transactions, known as ``golden parachute'' 
        arrangements.\52\ The Commission also proposed rules to 
        implement the Section 951 requirement that institutional 
        investment managers report their votes on these matters at 
        least annually.\53\
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    \52\ See Release No. 33-9178, Shareholder Approval of Executive 
Compensation and Golden Parachute Compensation (January 25, 2011), 
http://www.sec.gov/rules/final/2011/33-9178.pdf.
    \53\ See Release No. 34-63123, Reporting of Proxy Votes on 
Executive Compensation and Other Matters (October 18, 2010), http://
www.sec.gov/rules/proposed/2010/34-63123.pdf.

    Compensation Committee and Adviser Requirements. Section 
        952 requires the Commission to, by rule, direct the national 
        securities exchanges and national securities associations to 
        prohibit the listing of any equity security of an issuer that 
        does not comply with new compensation committee and 
        compensation adviser requirements. In March 2011, the 
        Commission issued a proposal to implement Section 952 that 
        would require the exchanges to establish listing standards that 
        require each member of a listed issuer's compensation committee 
        to be a member of the board of directors and to be 
        ``independent.''\54\
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    \54\ See Release No. 33-9199, Listing Standards for Compensation 
Committees (March 30, 2011), http://www.sec.gov/rules/proposed/2011/33-
9199.pdf.

    The proposed rules also would direct the exchanges to prohibit the 
        listing of any equity security of any issuer that is not in 
        compliance with certain requirements relating to compensation 
        committees and compensation advisers. The proposal also would 
        amend the Commission's existing compensation consultant 
        disclosure rules to require disclosure about whether the 
        issuer's compensation committee retained or obtained the advice 
        of a compensation consultant; whether the work of the 
        compensation consultant has raised any conflicts of interest; 
        and, if so, the nature of any such conflict and how it is being 
        addressed. The comment period for the proposal ended on May 19, 
        2011, and the staff is currently developing recommendations for 
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        final rules.

    Incentive-Based Compensation Arrangements. Section 956 of 
        the Dodd-Frank Act requires the Commission along with six other 
        financial regulators to jointly adopt regulations or guidelines 
        governing the incentive-based compensation arrangements of 
        certain financial institutions, including broker-dealers and 
        investment advisers with $1 billion or more of assets. Working 
        with the other regulators, in March the Commission published 
        for public comment a proposed rule that would address such 
        arrangements. The Commission has received voluminous comment 
        letters on the proposed rule, and the Commission staff, 
        together with staff from the other regulators, is carefully 
        considering the issues and concerns raised in those comments 
        before adopting final rules.

    Prohibition on Broker Voting of Uninstructed Shares. 
        Section 957 of the Act requires the rules of each national 
        securities exchange to be amended to prohibit brokers from 
        voting uninstructed shares on the election of directors (other 
        than uncontested elections of directors of registered 
        investment companies), executive compensation matters, or any 
        other significant matter, as determined by the Commission by 
        rule. To date, the Commission has approved changes to the rules 
        with regard to director elections and executive compensation 
        matters for most of the national securities exchanges,\55\ and 
        we anticipate that corresponding changes to the rules of the 
        remaining national securities exchanges will be considered by 
        the Commission in the near future.
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    \55\ See Release No. 34-62874 (September 9, 2010), http://
www.sec.gov/rules/sro/nyse/2010/34-62874.pdf (New York Stock Exchange); 
Release No. 34-62992 (September 24, 2010), http://www.sec.gov/rules/
sro/nasdaq/2010/34-62992.pdf (NASDAQ Stock Market LLC); Release No. 34-
63139 (October 20, 2010), http://www.sec.gov/rules/sro/ise/2010/34-
63139.pdf (International Securities Exchange); Release No. 34-63917 
(February 16, 2011), http://www.sec.gov/rules/sro/cboe/2011/34-
63917.pdf (Chicago Board Options Exchange); Release No. 34-63918 
(February 16, 2011), http://www.sec.gov/rules/sro/c2/2011/34-63918.pdf 
(C2 Options Exchange, Incorporated); Release No. 34-64023 (March 3, 
2011), http://www.sec.gov/rules/sro/bx/2011/34-64023.pdf (NASDAQ OMX 
BX, Inc.); Release No. 34-64121 (March 24, 2011), http://www.sec.gov/
rules/sro/chx/2011/34-64121.pdf (Chicago Stock Exchange); Release No. 
34-64122 (March 24, 2011), http://www.sec.gov/rules/sro/phlx/2011/34-
64122.pdf (NASDAQ OMX PHLX LLC); Release No. 34-64186 (April 5, 2011), 
http://www.sec.gov/rules/sro/edgx/2011/34-64186.pdf (EDGX Exchange); 
Release No. 34-64187 (April 5, 2011), http://www.sec.gov/rules/sro/
edga/2011/34-64187.pdf (EDGA Exchange); Release No. 34-65804 (November 
22, 2011), http://www.sec.gov/rules/sro/nsx/2011/34-65804.pdf (National 
Stock Exchange, Inc.).
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    The Commission also is required by the Act to adopt several 
additional rules related to corporate governance and executive 
compensation, including rules mandating new listing standards relating 
to specified ``clawback'' policies,\56\ and new disclosure requirements 
about executive compensation and company performance,\57\ executive pay 
ratios,\58\ and employee and director hedging.\59\ These provisions of 
the Act do not contain rulemaking deadlines, but the staff is working 
on developing recommendations for the Commission concerning the 
implementation of these provisions of the Act.
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    \56\ See Section 954 of the Dodd-Frank Act.
    \57\ See Section 953(a) of the Dodd-Frank Act.
    \58\ See Section 953(b) of the Dodd-Frank Act.
    \59\ See Section 955 of the Dodd-Frank Act.
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Specialized Disclosure Provisions
    Title XV of the Act contains specialized disclosure provisions 
related to conflict minerals, coal or other mine safety, and payments 
by resource extraction issuers to foreign or U.S. Government entities. 
The Commission published rule proposals for the three specialized 
disclosure requirements in December 2010, and the comment period ended 
on March 2, 2011.\60\ In October, the Commission hosted a public 
roundtable to discuss key issues related to the conflict mineral 
rulemaking, including what is covered by the rule, what steps will be 
required to comply with the rule, and reporting under the rule. In 
connection with the roundtable, the Commission reopened the comment 
period until November 1, 2011 to allow comments to be submitted on the 
matters discussed at the roundtable. On all three of these rulemakings, 
the staff is developing recommendations for the Commission's 
consideration.
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    \60\ See Release No. 34-63547, Conflict Minerals (December 15, 
2010), http://www.sec.gov/rules/proposed/2010/34-63547.pdf; Release No. 
33-9164, Mine Safety Disclosure (December 15, 2010), http://
www.sec.gov/rules/proposed/2010/33-9164.pdf, Release No. 34-63549, 
Disclosure of Payments by Resource Extraction Issuers (December 15, 
2010), http://www.sec.gov/rules/proposed/2010/34-63549.pdf.
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Exempt Offerings
    Under Section 926 of the Act, the Commission is required to adopt 
rules that disqualify securities offerings involving certain ``felons 
and other `bad actors' '' from relying on the safe harbor from 
Securities Act registration provided by Rule 506 of Regulation D. The 
Commission proposed rules to implement the requirements of Section 926 
on May 25, 2011.\61\ Under the proposal, the disqualifying events 
include certain criminal convictions, court injunctions and restraining 
orders; certain final orders of state securities, insurance, banking, 
savings association or credit union regulators, Federal banking 
agencies or the National Credit Union Administration; certain types of 
Commission disciplinary orders; suspension or expulsion from membership 
in, or from association with a member of, a securities self-regulatory 
organization; and certain other securities-law related sanctions. The 
comment period for this rule proposal ended on July 14, 2011 and the 
staff is currently developing recommendations for final rules.
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    \61\ See Release No. 33-9211, Disqualification of Felons and Other 
``Bad Actors'' from Rule 506 Offerings (May 25, 2011), http://
www.sec.gov/rules/proposed/2011/33-9211.pdf.
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    In addition, the Commission proposed rule amendments in January 
that would implement Section 413(a) of the Act, which requires the 
Commission to exclude the value of an individual's primary residence 
when determining if that individual's net worth exceeds the $1 million 
threshold required for ``accredited investor'' status.\62\ The comment 
period on this proposal ended on March 11, 2011 and the staff is 
preparing final rule recommendations for the Commission. This section 
was effective on the date of enactment of the Dodd-Frank Act; the 
implementing rules are designed to clarify the requirements and codify 
them in the Commission's rules.
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    \62\ See Release No. 33-9177, Net Worth Standard for Accredited 
Investors (January 25, 2011), http://www.sec.gov/rules/proposed/2011/
33-9177.pdf.
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Financial Stability Oversight Council
    In addition to the rulemaking activity described above, Title I of 
the Dodd-Frank Act created the FSOC, and with it, a formal structure 
for coordination among the various financial regulators to monitor 
systemic risk and to promote financial stability across our Nation's 
financial system. FSOC has the following primary responsibilities:

    Identifying risks to the financial stability of the United 
        States that could arise from the material financial distress or 
        failure--or ongoing activities--of large, interconnected bank-
        holding companies or nonbank financial holding companies, or 
        that could arise outside the financial services marketplace;

    Promoting market discipline by eliminating expectations on 
        the part of shareholders, creditors, and counterparties of such 
        companies that the Government will shield them from losses in 
        the event of failure (i.e., addressing the moral hazard problem 
        of ``too big to fail''); and

    Identifying and responding to emerging threats to the 
        stability of the United States financial system.\63\
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    \63\ See Dodd-Frank Act Sec.  112(a)(1).

    As Chairman of the SEC, I am a voting member of FSOC. Senior SEC 
staff and I have actively participated in the FSOC and found its focus 
on identifying and addressing risks to the financial system to be 
important and helpful to the SEC as a capital markets regulator. The 
FSOC also has fostered a healthy and positive sense of collaboration 
among the financial regulators, facilitating cooperation and 
coordination for the benefit of investors and our overall financial 
system. Since passage of the Dodd-Frank Act, the FSOC has taken steps 
to create an organizational structure, coordinate interagency efforts, 
and build the foundation for meeting its statutory responsibilities.
    For example, SEC staff worked with staff at other FSOC agencies on 
the October release of FSOC's second notice of proposed rulemaking 
regarding systemically important nonbank financial institutions 
(``nonbank SIFIs''). This release proposes the processes and 
considerations by which FSOC will designate nonbank SIFIs for 
heightened supervision by the Board. As proposed, nonbank financial 
companies will generally be assessed in a three-stage process:

    Stage 1: FSOC will apply uniform quantitative thresholds 
        using publicly available data to identify those nonbank 
        financial companies that will be subject to further evaluation.

    Stage 2: FSOC will further analyze the nonbank financial 
        companies identified in Stage 1 using a broader range of 
        information available primarily through existing public and 
        regulatory sources.

    Stage 3: FSOC will contact each nonbank financial company 
        that FSOC believes merits further review to collect information 
        directly from the company that was not available in the earlier 
        stages. At the end of Stage 3, based on the results of the 
        analyses conducted during each stage of review, FSOC may vote 
        to make a determination regarding the company.

    Financial Market Utilities (``FMUs'') are essential to the proper 
functioning of the Nation's financial markets.\64\ These utilities form 
critical links among marketplaces and intermediaries that can 
strengthen the financial system by reducing counterparty credit risk 
among market participants, creating significant efficiencies in trading 
activities, and promoting transparency in financial markets. However, 
FMUs by their nature create and concentrate new risks that could affect 
the stability of the broader financial system. To address these risks, 
Title VIII of the Dodd-Frank Act provides important new enhancements to 
the regulation and supervision of FMUs designated as systemically 
important by FSOC (``DFMUs'') and of payment, clearance and settlement 
activities. This enhanced authority in Title VIII should provide 
consistency, promote robust risk management and safety and soundness, 
reduce systemic risks, and support the stability of the broader 
financial system.\65\ Importantly, the enhanced authority in Title VIII 
is designed to be in addition to the authority and requirements of the 
Securities Exchange Act and Commodity Exchange Act that may apply to 
FMUs and financial institutions that conduct designated activities.\66\
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    \64\ Section 803(6) of the Dodd-Frank Act defines a financial 
market utility as ``any person that manages or operates a multilateral 
system for the purpose of transferring, clearing, or settling payments, 
securities, or other financial transactions among financial 
institutions or between financial institutions and the person.''
    \65\ See Dodd-Frank Act Sec.  802.
    \66\ See Dodd-Frank Act Sec.  805.
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    FSOC established an interagency DFMU committee to develop a 
framework for the designation of systemically important FMUs, in which 
staff from the SEC has actively participated. The FSOC finalized the 
rule establishing a designation process for FMUs in July,\67\ after 
first publishing an advanced notice of proposed rulemaking seeking 
public comment on the designation process generally, and a notice of 
proposed rulemaking seeking public comment on the specific process it 
proposed to follow when reviewing the systemic importance of FMUs.
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    \67\ See Release Authority to Designate Financial Market Utilities 
as Systemically Important (July 18, 2011), http://www.treasury.gov/
initiatives/Documents/Finalruledisclaimer7-18-2011.pdf.
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New Commission Offices
    In addition to the Whistleblower Office mentioned above, the Dodd-
Frank Act requires the Commission to create four new offices within the 
Commission, specifically, the Office of Credit Ratings, Office of the 
Investor Advocate, Office of Minority and Women Inclusion, and Office 
of Municipal Securities. As each of these offices is statutorily 
required to report directly to the Chairman, the creation of these 
offices has been subject to approval by the Commission's Appropriations 
subcommittees.
    As discussed below, both Congressional Appropriations committees 
approved creation of the Office of Minority and Women Inclusion in FY 
2011 in July and we created that office soon thereafter.
    As for the remaining three offices, the SEC's pending FY 2012 
request, if approved, would allow the agency to establish the offices 
at levels adequate to enable those offices to execute their new 
responsibilities. In the meantime, the initial functions of these 
offices are being performed on a limited basis by other divisions and 
offices.
Office of Minority and Women Inclusion
    Section 342 of the Act requires that we establish an Office of 
Minority and Women Inclusion. In mid-July 2011, the House and Senate 
Appropriations Committees approved the SEC's reprogramming request to 
create such an office. Shortly after, the SEC established its Office of 
Minority and Women Inclusion (OMWI). OMWI is currently staffed by two 
full-time employees and an Acting Director. A nationwide search for a 
permanent Director of the Office is underway and our hope is to be able 
to announce a selection by the end of the year. Although OMWI is a 
separate unit from the agency's EEO Office, due to budgetary 
restrictions, resource challenges, and the fact that the EEO Director 
has been designated as OMWI Acting Director, OMWI is presently housed 
in our EEO Office space. A benefit from this arrangement is that OMWI 
is able to leverage EEO Office resources to implement its requirements 
under Section 342.
    OMWI has been collaborating with a number of SEC divisions and 
offices to meet the requirements of Section 342, including, but not 
limited to, the Office of the Chairman, Division of Enforcement, 
Division of Corporation Finance, Office of Investor Education and 
Advocacy, Office of Human Resources, Office of Acquisitions, Office of 
Financial Management, Office of General Counsel, and Office of 
Information Technology. This collaboration ranges from providing 
guidance and input on the standards to be developed under Section 342, 
to supporting OMWI's infrastructural needs (data systems and data 
feeds), to actual participation in a number of diversity and pipeline 
development initiatives.
    OMWI continues to make strides to enhance the inclusion of 
minorities and women in the workforce and business activities of the 
agency. Since OMWI's establishment, the SEC has sponsored or 
participated in approximately 20 events to recruit diverse talent or 
diverse suppliers, including, but not limited to:

    Hispanic National Bar Association Annual Convention

    National Black MBA Association, DC Chapter Pre-Conference 
        Career Expo

    National Association of Asian MBAs Annual Leadership 
        Conference

    National LGBT Bar Association Lavender Law Conference

    National Association of Minority and Women Owned Law Firms 
        Annual Meeting

    Minority Corporate Counsel Association Annual Diversity 
        Conference

    Corporate Counsel Women of Color Annual Career Strategies 
        Conference
Cost-Benefit Analyses
    We are keenly aware that our rules have both costs and benefits, 
and that the steps we take to protect the investing public also impact 
financial markets and industry participants who must comply with our 
rules. This is truer than ever given the scope, significance and 
complexity of the Dodd-Frank Act requirements. Our Division of Risk, 
Strategy, and Financial Innovation (``RSFI'') directly assists in the 
rulemaking process by helping to develop the conceptual framing for, 
and assisting in the subsequent writing of, the economic analysis 
sections.
    Economic analysis of agency rules considers the direct and indirect 
costs and benefits of the Commission's proposed regulations against 
alternative approaches, including, the effects on competition, 
efficiency and capital formation. Analysis of the likely economic 
effects of proposed rules, while critical to the rulemaking process, 
can be challenging. Certain costs or benefits may be difficult to 
quantify or value with precision, particularly those that are indirect 
or intangible. In light of recent court decisions, RSFI and the rule 
writing divisions are examining potential improvements in the economic 
analysis the SEC employs in rulemaking. Although the existing 
procedures and policies are designed to provide a rigorous and 
transparent economic analysis, we are taking steps to improve this 
process so that future rules are consistent with best practices in 
economic analysis.
    When engaging in rulemaking, the Commission invites the public to 
comment on our analysis and provide any information and data that may 
better inform our decisionmaking. In adopting releases, the Commission 
responds to the information provided and revises its analysis as 
appropriate. This approach promotes a regulatory framework that strikes 
the right balance between the costs and the benefits of regulation.\68\
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    \68\ After reviewing cost benefit analyses included in six of our 
Dodd-Frank Act rulemaking releases, the SEC's Inspector General issued 
a report in June 2011. While the Office of Inspector General (``OIG'') 
is continuing to review the Commission's cost benefit analyses, this 
report concluded that ``a systematic cost-benefit analysis was 
conducted for each of the six rules reviewed. Overall, [the OIG] found 
that the SEC formed teams with sufficient expertise to conduct a 
comprehensive and thoughtful review of the economic analysis of the six 
proposed released that [the OIG] scrutinized in [its] review.'' See 
U.S. SEC Office of the Inspector General, Report of Review of Economic 
Analyses Performed by the Securities and Exchange Commission in 
Connection with Dodd-Frank Rulemakings (June 13, 2011) http://www.sec-
oig.gov/Reports/AuditsInspections/2011/Report_6_13_11.pdf at 43. We 
look forward to continuing to work with the OIG as it conducts a 
further review.
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Funding for Implementation of the Dodd-Frank Act
    The provisions of the Dodd-Frank Act expand the SEC's 
responsibilities and will require significant additional resources to 
fully implement the law. To date, the SEC has proceeded with the first 
stages of implementation without the necessary additional funding. As 
described above, implementation up to this point has largely involved 
performing studies, analysis, and the writing of rules. These tasks 
have taken staff time away from other responsibilities, and have been 
done almost entirely with existing staff and without sufficient 
investments in areas such as information technology.
    It is, of course, incumbent upon us to use our existing resources 
efficiently and effectively as we strive to fulfill statutory mandates, 
protect investors and achieve our mission. That said, the new 
responsibilities assigned to the agency under the Dodd-Frank Act are so 
significant that they cannot be achieved solely by wringing 
efficiencies out of the existing budget without also severely hampering 
our ability to meet our existing responsibilities.\69\
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    \69\ As discussed below, this resource gap was highlighted in the 
report prepared by the Boston Consulting Group pursuant to Section 967 
of the Act.
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    If the SEC does not receive additional resources, many of the 
issues highlighted by the financial crisis and which the Dodd-Frank Act 
seeks to fix will not be adequately addressed, as the SEC will not be 
able to build out the technology and hire the industry experts and 
other staff desperately needed to oversee and police these new areas of 
responsibility.\70\
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    \70\ For instance, the Dodd-Frank Act also established a $50 
million SEC Reserve Fund to allow the SEC to invest in multi-year IT 
projects and respond to unexpected market events (such as the May 6th 
market plunge). If this fund is eliminated or the SEC is not permitted 
to access the fund, it would have significant consequences for 
important IT projects, such as modernizing the SEC's EDGAR system and 
www.sec.gov to strengthen business processes, enhance their usefulness 
for the public and for SEC staff, and reduce long-term operations and 
maintenance costs. Without these investments, our ability to resolve 
longstanding inadequacies in these systems and bring important benefits 
to the investing public would be significantly hindered.
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    The Dodd-Frank Act requires that the SEC collect transaction fees 
to offset the annual appropriation to the SEC. Accordingly, regardless 
of the amount appropriated to the SEC, the appropriation will be fully 
offset by the fees that we collect and therefore will have no impact on 
the Nation's budget deficits.
Section 967 Organizational Assessment
    Section 967 of the Act directed the agency to engage the services 
of an independent consultant to study a number of specific SEC internal 
operations. Boston Consulting Group, Inc. (``BCG'') performed the 
assessment and provided recommendations earlier this spring. Since that 
time, we have undertaken a comprehensive approach to assessing the 
recommendations, with the work organized around four principal goals: 
optimizing the agency's mission and structure; strengthening 
capabilities; improving controls and efficiency; and enhancing the 
workforce. Between May and November of this year we have focused on the 
program infrastructure, and we have created 17 distinct working groups 
that have analyzed various components of the BCG recommendations. The 
work streams are led by senior SEC staff members, each tasked with 
developing the proposed agency approach to a specific BCG 
recommendation. Additionally, we have created an Executive Steering 
Committee (ESC) comprised of cross-agency senior leadership to guide 
the efforts of the work streams, expand the approaches to the broader 
Commission, and ultimately recommend approval of each approach to me. 
Many of the working groups currently are preparing recommendations for 
consideration by the ESC, and we anticipate implementing many of these 
approaches in early 2012.
    We have already made progress on implementing several of the BCG 
report recommendations, including:

    redesigning the Office of Information Technology to 
        emphasize increased alignment with internal clients, improved 
        coordination with IT groups located within the program offices, 
        and increased efficiencies through centralization of 
        application development and project management;

    establishing a Continuous Improvement Program to 
        systemically reduce unnecessary costs throughout the 
        organization;

    conducting comprehensive assessments of the Office of 
        Administrative Services, Office of Financial Management, and 
        Office of Human Resources operations;

    implementing a new performance management system and 
        conducted extensive staff training to assist with the 
        transition to the new system;

    empowering the Chief Operating Officer (OCOO) by 
        consolidating the former Office of the Executive Director under 
        the OCOO organization; and

    focusing our limited external hiring opportunities on 
        filling strategic, high priority skill vacancies, to include 
        obtaining specialized industry expertise in areas such as over 
        the counter derivatives.
    It is important to remember that the BCG study estimated that 
between $42 and $55 million would be required over an approximately 2-
year period to fully implement their recommendations. This cost 
estimate, however, also does not include the significant amount of SEC 
staff time that would be needed to accomplish this. We recognize that 
implementation of many of the ideas in the BCG study will require a 
long-term commitment and sustained effort over several years to 
successfully implement. We are committed to an open and transparent 
process, and consistent with the statute we intend to report to 
Congress on a regular basis on the actions we take in response to the 
study.
Conclusion
    Though the SEC's efforts to implement the Dodd-Frank Act have been 
extensive, we know that there is still work left to be done and we are 
committed to finishing the job. Thank you for inviting me to share with 
you our progress to date and our plans going forward. I look forward to 
answering your questions.
                                 ______
                                 
                   PREPARED STATEMENT OF GARY GENSLER
             Chairman, Commodity Futures Trading Commission
                            December 6, 2011
    Good morning Chairman Johnson, Ranking Member Shelby and Members of 
the Committee. I thank you for inviting me to today's hearing on 
implementation of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. I also thank my fellow Commissioners and CFTC staff for 
their hard work and commitment on implementing the legislation.
Lessons of 2008
    Three years ago, the financial system failed, and the financial 
regulatory system failed as well. We are still feeling the aftershocks 
of these twin failures.
    There are many lessons to be learned from the crisis. Foremost, 
when financial institutions fail, real people's lives are affected. 
More than eight million jobs were lost, and the unemployment rate 
remains stubbornly high. Millions of Americans lost their homes. 
Millions more live in homes that are worth less than their mortgages. 
And millions of Americans continue struggling to make ends meet.
    Second, it is only with the backing of the Government and taxpayers 
that many financial institutions survived the 2008 crisis. A perverse 
outcome of this crisis may be that people in the markets believe that a 
handful of large financial firms will--if in trouble--have the backing 
of taxpayers. We can never ensure that all financial institutions will 
be safe from failure. Surely, some will fail in the future because that 
is the nature of markets and risk. When these challenges arise though, 
it is critical that taxpayers are not forced to pick up the bill--
financial institutions must have the freedom to fail.
    Third, high levels of debt--and particularly short-term funding at 
financial institutions--was at the core of the 2008 crisis. When market 
uncertainty grows, firms quickly find that their challenges in securing 
financing, so called problems of ``liquidity,'' threaten their 
solvency.
    Fourth, the financial system is very interconnected--both here at 
home and abroad. Sober evidence from 2008 was AIG's swaps affiliate, 
AIG Financial Products, which had its major operations in London. When 
it failed, U.S. taxpayers paid the price. We must ensure that Europe's 
ongoing debt crisis does not pose a similar risk to the U.S. economy.
    Lastly, while the 2008 crisis had many causes, it is evident that 
swaps played a central role.
    Swaps added leverage to the financial system with more risk being 
backed by less capital. They contributed, particularly through credit 
default swaps, to the bubble in the housing market. They contributed to 
a system where large financial institutions were considered not only 
too big to fail, but too interconnected to fail. Swaps--developed to 
help manage and lower risk for end users--also concentrated and 
heightened risk in the financial system and to the public.
Dodd-Frank Reform
    Congress and the President responded to the lessons of the 2008 
crisis--they came together to pass the historic Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act).
    The law gave the Commodity Futures Trading Commission (CFTC) and 
the Securities and Exchange Commission (SEC) oversight of the more than 
$300 trillion swaps market. That's over $20 of swaps for every dollar 
of goods and services produced in the U.S. economy. At such size and 
complexity, it is essential that these markets work for the benefit of 
the American public; that they are transparent, open and competitive; 
and that they do not allow excessive risk to spread through the 
economy.
    The CFTC has benefited from significant public input throughout the 
rule-writing process. We have received more than 25,000 comment 
letters. CFTC staff and Commissioners have met more than 1,100 times 
with market participants and members of the public to discuss the 
rules, and have held more than 600 meetings with domestic and foreign 
regulators. We also have conducted 14 public roundtables on Dodd-Frank, 
many of them with the SEC.
    The CFTC has substantially completed the proposal phase of Dodd-
Frank rules. We have held 21 public meetings and issued more than 50 
proposed rules on the many important areas of reform called for by the 
new law, including transparency, lowering risk through clearing, market 
integrity and regulating swap dealers.
    The agency turned the corner this summer and began finalizing rules 
to make the swaps marketplace more open and transparent for 
participants and safer for taxpayers. To date, we have finished 20 
rules, and we have a full schedule of public meetings into next year.
FSOC
    To help protect the public, the Dodd-Frank Act included the 
establishment of the Financial Stability Oversight Council (FSOC). This 
Council is an opportunity for regulators--now and in the future--to 
ensure that the financial system works better for all Americans. There 
has been a tremendous amount of coordination and consultation amongst 
the eight FSOC agencies on the Dodd-Frank rule-writing process, and the 
CFTC will continue to work closely with other FSOC members as we 
finalize additional important rules.
    In July, the FSOC approved a rule enabling the Council to identify 
and designate systemically important financial market utilities, 
including clearinghouses. Comprehensive and robust regulatory oversight 
of clearinghouses, in particular their risk management activities, is 
essential to our country's financial stability. This rule complements 
the CFTC's final rule establishing risk management and other regulatory 
requirements for derivatives clearing organizations.
Promoting Transparency
    The more transparent a marketplace is, the more liquid it is and 
the more competitive it is. When markets are open and transparent, 
prices are more competitive, markets are more efficient, and costs are 
lowered for companies and their customers. Transparency benefits the 
entire economy.
    To increase market transparency, we have completed rules that, for 
the first time, provide a detailed and up-to-date view of the physical 
commodity swaps markets so regulators can police for fraud, 
manipulation and other abuses. The large trader reporting rule we 
finalized establishes that clearinghouses and swap dealers must report 
to the CFTC information about large trader activity in the physical 
commodity swaps markets. The rule went into effect November 21. For 
decades, the American public has benefited from the Commission's 
gathering of large trader data in the futures market, and now will 
benefit from the CFTC's new ability to monitor swaps markets for 
agricultural, energy and metal products.
    We also finished a rule, which became effective October 31, 
establishing registration and regulatory requirements for Swap Data 
Repositories, which will gather data on all swaps transactions. By 
contrast, in the fall of 2008, there was no required reporting about 
swaps trading.
    Moving forward, we are working to finish rules relating to the 
specific data that will have to be reported to the CFTC. These reforms 
will provide the Commission with a comprehensive view of the entire 
swaps market, furthering our ability to monitor market participants and 
to protect against systemic risk.
    We also are looking to soon finalize real-time reporting rules, 
which will give the public critical information on transactions--
similar to what has been working for decades in the securities and 
futures markets.
    In addition, we are working on final regulations for trading 
platforms, such as Designated Contract Markets, Swap Execution 
Facilities and Foreign Boards of Trade--all of which will help make the 
swaps market more open and transparent. Yesterday, the Commission 
approved a final rule implementing the Dodd-Frank provision for 
registration of Foreign Boards of Trade.
Lowering Risk Through Clearing
    Another significant Dodd-Frank reform is lowering risk to the 
economy by mandating central clearing of standardized swaps. 
Centralized clearing will protect banks and their customers from the 
risk of a default by one of the parties to a swap. Clearinghouses 
reduce the interconnectedness between financial entities. They have 
lowered risk for the public in the futures markets since the late 19th 
century. In October, we finalized a significant rule establishing risk 
management and other regulatory requirements for derivatives clearing 
organizations.
    Yesterday, the CFTC approved a final rule enhancing customer 
protections regarding where clearinghouses and futures commission 
merchants can invest customer funds. We also are looking to soon 
finalize a rule on segregation for cleared swaps. Segregation of funds 
is the core foundation of customer protection. Both of these rules are 
critical for the safeguarding of customer funds.
    In addition, after the first of the year, we hope to consider 
finalizing rules that will broaden access to the markets, including 
straight-through processing, or sending transactions immediately to the 
clearinghouse upon execution; and the exemption for nonfinancial end 
users. The Dodd-Frank Act does not require nonfinancial end users that 
are using swaps to hedge or mitigate commercial risk to bring their 
swaps into central clearing. The law leaves that decision to individual 
end users. In addition, the CFTC's proposal on margin states that 
nonfinancial end users will not be required to post margin for their 
uncleared swaps. Last, the Dodd-Frank Act maintains a company's ability 
to hedge particularized risk through customized transactions.
Market Integrity
    To enhance market integrity, we finished an important rule Congress 
included in the Dodd-Frank Act giving the Commission more authority to 
effectively prosecute wrongdoers who recklessly manipulate the markets. 
The rule, which went into effect August 15, broadens the types of 
enforcement cases the Commission can pursue and improves the agency's 
chances of prevailing over wrongdoers. The new authority expands the 
CFTC's arsenal of enforcement tools so the Commission can be a more 
effective cop on the beat.
    We also finalized a rule to reward whistleblowers for their help in 
catching fraud, manipulation and other misconduct in the financial 
markets, which will enhance our ability to protect the public. It went 
into effect October 24.
    In addition, we recently completed speculative position limit rules 
that, for the first time, limit aggregate positions in the futures and 
swaps market.
    To further enhance market integrity, we are looking to finalize 
guidance on disruptive trading practices, as well as regulations for 
trading platforms.
Regulating Dealers
    It is also crucial that swap dealers are comprehensively regulated 
to protect their customers and lower risk to taxpayers.
    The CFTC is working closely with the SEC and other regulators to 
finalize a rule further defining the term swap dealer. We also are 
planning to finalize a rule on the registration process for swap 
dealers and major swap participants. The agency is looking to soon 
consider final external business conduct rules to establish and enforce 
robust sales practices in the swaps markets. We also will consider 
final internal business conduct rules, which will lower the risk that 
dealers pose to the economy. In addition, we have been working closely 
with other regulators, both domestic and international, on capital and 
margin rules.
Implementation Phasing
    The CFTC has reached out broadly on what we call ``phasing of 
implementation,'' which is the timeline that our rules will take effect 
for various market participants. We held a roundtable with the SEC in 
May to hear directly from the public about the timing of 
implementation. Prior to the roundtable, CFTC staff released a document 
that set forth concepts the Commission may consider on effective dates 
of final rules, and we offered a 60-day public comment file to hear 
specifically on this issue. The roundtable and public comment letters 
helped inform the Commission as to what requirements can be met sooner 
and which ones will take a bit more time.
    In September, the Commission issued for public comment a proposal 
for phasing in compliance with the swap clearing and trading mandates. 
We also proposed an implementation schedule for previously proposed 
rules on swap trading documentation requirements and margin 
requirements for uncleared swaps. These proposals are designed to 
smooth the transition from an unregulated market structure to a safer 
market structure. As we progress in finishing major rules, we will 
continue looking at appropriate timing for compliance, which balances 
the Commission's desire to protect the public while providing adequate 
time for industry to comply with these new rules.
    In addition, much like we did on July 14, we will soon consider 
further exemptive relief regarding the effective dates of certain Dodd-
Frank Act provisions. Commission staff is working very closely with the 
SEC on rules relating to entity and product definitions. Staff is 
making great progress, and we anticipate taking up the further 
definition of entities in the near term and product definitions shortly 
thereafter. As these definitional rulemakings have yet to be finalized, 
the order would provide relief beyond December 31, 2011.
International Coordination
    The global nature of the swaps markets makes it imperative that the 
United States consults and coordinates with foreign authorities. The 
Commission is actively communicating internationally to promote robust 
and consistent standards and avoid conflicting requirements, wherever 
possible. CFTC staff is sharing many of our comment summaries and 
drafts of final rules with international regulators. We are engaged in 
bilateral discussions with foreign authorities, and have ongoing 
dialogues with regulators in the European Union (EU), Japan, Hong Kong, 
Singapore and Canada. On Thursday, Chairman Schapiro and I will meet 
with the CFTC's counterparts from these four countries and the EU to 
discuss how to regulate the global swaps market in a consistent, 
comprehensive and coordinated manner.
    The Commission also participates in numerous international working 
groups regarding swaps, including the International Organization of 
Securities Commissions Task Force on OTC Derivatives, which the CFTC 
co-chairs. In August, the CFTC and SEC staff held a daylong, joint 
roundtable to discuss international issues related to implementation of 
Title VII of the Dodd-Frank Act. I anticipate that the Commission will 
explicitly seek public input on the extraterritorial application of 
Title VII of the Dodd-Frank Act.
Resources
    As the CFTC finalizes these Dodd-Frank rules, the agency will need 
additional resources consistent with the CFTC's significantly expanded 
mission and scope. The swaps market is seven times the size of the 
futures market that we currently oversee.
    The agency has the necessary funding to complete rules called for 
in the Dodd-Frank Act. Moving forward though, the CFTC will need 
greater resources to protect the public. With just over 700 staff 
members, we are but 10 percent larger than our peak in the 1990s. Since 
then, though, the futures market has grown more than fivefold, and 
Congress added oversight of the swaps market, which is far more complex 
and seven times the size of the futures market we currently oversee.
    Without sufficient funding for the Commission, the Nation cannot be 
assured that this agency can oversee the swaps market and enforce rules 
that promote transparency, lower risk and protect against another 
crisis.
Conclusion
    The CFTC is working to complete our rule-writing under the Dodd-
Frank Act thoughtfully--not against a clock.
    But until the agency implements and enforces these new rules, the 
public remains unprotected.
    This is why the CFTC is working so hard to ensure that swaps-market 
reforms promote more open and transparent markets, lower costs for 
companies and their customers, and protect taxpayers.
    Thank you, and I would be happy to take questions.
                                 ______
                                 
               PREPARED STATEMENT OF MARTIN J. GRUENBERG
         Acting Chairman, Federal Deposit Insurance Corporation
                            December 6, 2011
     Chairman Johnson, Ranking Member Shelby and Members of the 
Committee, thank you for the opportunity to testify on the Federal 
Deposit Insurance Corporation's continued implementation of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
    It has now been nearly 17 months since enactment of the Dodd-Frank 
Act. The Act gives financial regulators important authorities to 
enhance financial stability and to manage the regulatory challenges 
posed by large, complex systemically important financial institutions 
(SIFIs). The Act also provides for a new SIFI resolution framework that 
includes an orderly liquidation authority and a requirement for SIFIs 
to submit resolution plans that demonstrate how they can be resolved 
through the bankruptcy process. These changes give regulators better 
tools to manage the potential risks and failure of complex financial 
institutions. A credible capacity to place a SIFI into an orderly 
resolution process is essential to subjecting these companies to 
meaningful market discipline.
    The Act specifically provides the FDIC new enhanced authority to 
manage the deposit insurance fund (DIF) as well as to oversee the 
orderly resolution of systemically important financial institutions. My 
testimony today will focus on the progress the FDIC has made in 
implementing these important provisions of the Dodd-Frank Act, 
including international efforts on systemic resolution planning. The 
testimony will also provide an update on implementation of bank capital 
provisions of the Dodd-Frank Act, as well as an overview of progress on 
important interagency rulemaking efforts.
Core FDIC Rulemakings
    The Dodd-Frank Act granted the FDIC sole rulemaking authority in 
two primary areas: orderly liquidation authority and deposit insurance 
reforms. Within a year after passage of the Dodd-Frank Act, the FDIC 
had completed five major final rules for which the Act granted it sole 
rulemaking authority.\1\ I will discuss these completed rules in more 
detail below.
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    \1\ Two remaining rules have been postponed for practical reasons. 
First, the rule defining the criteria for consolidated revenues for 
financial companies predominantly engaged in financial activities has 
been postponed to ensure consistency with a similar rule being issued 
by the Board of Governors of the Federal Reserve. Second, the FDIC has 
postponed the rule offsetting the effect on institutions with less than 
$10 billion in assets of requiring that the DIF reserve ratio reach 
1.35 percent by September 30, 2020 (rather than 1.15 percent by 2016, 
as previously required) to better enable the FDIC to take into account 
prevailing industry conditions at the time of the offset.
---------------------------------------------------------------------------
Deposit Insurance Reforms and Strengthening the Deposit Insurance Fund
    The FDIC moved expeditiously to implement changes to the FDIC's 
deposit insurance program required by the Dodd-Frank Act. In August 
2010, the FDIC issued a final rule to make permanent the increase in 
the standard coverage limit to $250,000. In December 2010, the FDIC 
adopted a final rule amending its deposit insurance regulations to 
provide for unlimited deposit insurance for ``noninterest-bearing 
transaction accounts'' through December 31, 2012.
    Changing the Assessment Base. In February 2011, the FDIC adopted a 
final rule redefining the deposit insurance assessment base as average 
consolidated total assets minus average tangible equity. The deposit 
insurance assessment base was previously defined as domestic deposits.
    As Congress intended, the change in the assessment base reduced the 
share of assessments paid by community banks compared to the largest 
institutions, which rely less on domestic deposits for their funding 
than do smaller institutions. Second quarter 2011 assessments for banks 
with less than $10 billion in assets were about a third (about $340 
million) lower in aggregate than first quarter assessments. This shift 
in the share of assessments better reflects each group's share of 
industry assets. The change in the assessment base did not materially 
affect the overall amount of assessment revenue collected. In fact, 
assessments for the second quarter of 2011 (the quarter when the new 
rule took effect) were nearly the same as assessments for the prior 
quarter.
    Deposit Insurance Fund Management. Since year-end 2007, 412 FDIC-
insured institutions failed resulting in total estimated losses of $86 
billion to the DIF. The DIF balance hit a low of negative $20.9 billion 
in the fourth quarter of 2009. The FDIC took a number of actions to 
stabilize the DIF and deal with the losses associated with the high 
volume of failures, including increasing assessment rates, imposing a 
special assessment and requiring that the industry prepay assessments.
    The DIF balance increased throughout 2010 and turned positive again 
as of June 30 of this year. As of September 30, 2011, the fund balance 
was $7.8 billion (0.12 percent of estimated insured deposits). The 
Dodd-Frank Act requires that the DIF reserve ratio reach 1.35 percent 
by September 30, 2020.
    The actions undertaken to stabilize the DIF were taken before 
passage of the Dodd-Frank Act. The Dodd-Frank Act, however, gave the 
FDIC enhanced authority to manage the DIF. In particular, the Act gave 
the FDIC substantial flexibility to set reserve ratio targets and pay 
dividends. Using this flexibility, the FDIC has adopted a long-term 
fund management plan designed to maintain a positive fund balance even 
during a banking crisis while preserving steady and predictable 
assessment rates through economic and credit cycles. In December 2010, 
the FDIC set a long-term reserve ratio target of 2 percent. In February 
2011, also pursuant to the plan, the FDIC adopted lower assessment 
rates that will take effect when the DIF reserve ratio reaches 1.15 
percent, with progressively lower assessment rates if the reserve ratio 
exceeds 2 percent or 2.5 percent.
Orderly Resolution of Failed Systemically Important Financial 
        Institutions
    In addition to issuing rules to implement deposit insurance and DIF 
management reforms, the FDIC has made significant progress in adopting 
regulations and in conducting ongoing planning to facilitate 
implementation of its new orderly liquidation authority for 
systemically important financial institutions (SIFIs). These 
responsibilities include a requirement for firms to maintain resolution 
plans that will give regulators additional tools to manage the failure 
of large, complex enterprises, and an orderly liquidation authority to 
resolve bank-holding companies and, if necessary, nonbank financial 
institutions.
    Orderly Liquidation Authority. Title II of the Dodd-Frank Act vests 
the FDIC with orderly liquidation authority (OLA) that is similar in 
many respects to the authorities it already has for insured depository 
institutions. On July 6, 2011, the FDIC issued a final rule on OLA that 
provides the regulatory framework defining how creditors will be 
treated and how claims will be resolved in an FDIC receivership under 
the Dodd-Frank Act. Many aspects of the process are similar to that in 
bankruptcy--and creditors will be exposed to losses under the statutory 
priority of claims. However, unlike bankruptcy, an orderly resolution 
under the Dodd-Frank Act allows continuity of critical operations both 
to prevent a freezing-up of the financial system and to maximize the 
value recoverable from the assets of the failed company. These rules 
provide the key elements of the framework for implementing OLA, if it 
is ever necessary.
    While the adoption of the final rule completes a large portion of 
the rulemaking required with respect to the exercise of OLA under the 
Dodd-Frank Act, there is still work to be done. The FDIC is currently 
working on other rules and guidance:

    The FDIC is completing a proposed rule to be issued in 
        consultation with the Department of the Treasury regarding 
        certain key definitions for determining which organizations are 
        financial companies within the meaning of the Dodd-Frank Act.

    The FDIC is working with the Securities and Exchange 
        Commission (SEC) on a joint regulation implementing the Title 
        II authority to resolve covered broker-dealers.

    The FDIC is working toward a joint rule ensuring that 
        appropriate records are available with respect to all of a 
        financial institution's derivative transactions. The FDIC's 
        similar existing regulation requiring troubled insured 
        institutions to maintain records on derivative contracts is 
        being used as a template for this new joint rule.

    The FDIC is working on other rulemakings required by Title 
        II of the Act, including a rule governing eligibility of 
        prospective purchasers of assets of failed financial 
        institutions.

    The FDIC is working on additional guidance to the industry 
        in response to questions and comments received on areas such as 
        the creation, operation, and termination of bridge financial 
        companies, and the implementation of certain minimum recovery 
        requirements established under the Act.
Financial Stability for Systemically Important Financial Institutions
    In addition to the FDIC's OLA, the Dodd-Frank Act provided 
regulators with tools to assist in ensuring financial stability, 
including the requirement for companies to provide resolution plans, 
and the authority for certain firms to be designated for oversight by 
the Board of Governors of the Federal Reserve (FRB).
    The Act's provisions are designed so that the OLA would be used 
only as a last resort. SIFIs and large bank-holding companies are 
required to prepare a resolution plan that would detail how the firm 
could be resolved under the Bankruptcy Code. If the firms are 
successful in their resolution planning, then the OLA would only be 
used in the rare instance where resolution under the Bankruptcy Code 
would have serious adverse effects on U.S. financial stability.
    Resolution Plans. The FDIC has adopted two rules regarding 
resolution plans. The first resolution plan rule, jointly issued with 
the FRB, with an effective date of November 30, 2011, implements the 
requirements of Section 165(d) of the Dodd-Frank Act. This section 
requires bank-holding companies with total consolidated assets of $50 
billion or more and certain nonbank financial companies that the 
Financial Stability Oversight Council (FSOC) designates as systemic, to 
develop, maintain and periodically submit resolution plans to 
regulators. The plans will detail how each covered company would be 
resolved under the U.S. Bankruptcy Code, including information on their 
credit exposure, cross-guarantees, organizational structures, and a 
strategic analysis describing the company's plan for rapid and orderly 
resolution.
    The resolution planning undertaken in connection with the two rules 
will complement the internal planning process that the FDIC began upon 
enactment of the Dodd-Frank Act to prepare for the orderly resolution 
of a systemically significant institution under the OLA. While the OLA 
planning process is well underway, and those plans are in an advanced 
stage of development, they continue to be refined. The information 
obtained as a result of the resolution plan submissions under the two 
rules will serve as a significant source of information for the further 
development of the FDIC's OLA plans.
    Submission of resolution plans will be staggered based on the asset 
size of a covered company's U.S. operations. Companies with $250 
billion or more in nonbank assets must submit plans on or before July 
1, 2012; companies with $100 to $250 billion or more in total nonbank 
assets must submit plans on or before July 1, 2013; and all other 
covered companies that predominantly operate through one or more 
insured depository institutions must submit plans on or before December 
31, 2013. A company's plan is required to be updated annually as well 
as after a company experiences a material event.
    Following submission of a plan, the FDIC and the FRB will review 
the plan to determine if it is not credible or would not facilitate an 
orderly resolution of the covered company under the Bankruptcy Code. If 
a resolution plan does not meet the statutory standards, after an 
opportunity to remedy its deficiencies, the agencies may jointly decide 
to impose more stringent regulatory requirements on the covered 
company. Further, if, after 2 years following the imposition of the 
more stringent standards, the resolution plan still does not meet the 
statutory standards, the FDIC and the FRB may, in consultation with the 
appropriate FSOC member, direct a company to divest certain assets or 
operations.
    The FDIC also issued an Interim Final Rule in September 2011 
requiring any FDIC-insured depository institution with assets of $50 
billion or more to develop, maintain and periodically submit 
contingency plans outlining how the FDIC would resolve the depository 
institution through the FDIC's traditional resolution powers under the 
Federal Deposit Insurance Act. While not required by the Dodd-Frank 
Act, this complements the joint final rule on resolution plans for 
SIFIs.
    These two resolution plan rulemakings are designed to ensure 
comprehensive and coordinated resolution planning for both the insured 
depository and its holding company and affiliates in the event that an 
orderly liquidation is required. Both of these resolution plan 
requirements will improve efficiencies, risk management and contingency 
planning at the institutions themselves. We expect that the process of 
developing these plans will be a dialogue between the regulators and 
the firm. It is not a simple ``check-the-box'' exercise, and it must 
take into account each firm's unique characteristics. The planning 
process must be an interactive dialogue, especially for the largest and 
most complicated firms. Ultimately, the goal is to have an integrated 
process of supervision and resolution that will reduce the risk of 
failure, but that will enable the FDIC to prepare to carry out an 
orderly resolution if necessary.
    The FDIC has initiated with the FRB a series of joint 
communications that will provide institutions with additional guidance 
on how initial resolution plans should be drafted. Covered companies 
have been informed that the planning process will be iterative and that 
frequent communications are expected as resolution plans are developed.
    Implementation of Joint Rules on SIFI Designation. Some of the key 
purposes of the FSOC, chaired by the Secretary of the Treasury, is to 
facilitate regulatory coordination and information sharing among its 
member agencies, to identify and respond to emerging risks to financial 
stability, and to promote market discipline. The FSOC is also 
responsible for designating SIFIs for heightened supervision by the 
FRB.
    In October of 2010, the FSOC issued an advanced notice of proposed 
rulemaking and, in January of 2011, followed up with a notice of 
proposed rulemaking describing the processes and procedures that will 
inform the FSOC's designation of nonbank financial companies under the 
Dodd-Frank Act. In response to concerns raised by commenters, the FSOC 
issued a second notice of proposed rulemaking and proposed interpretive 
guidance on October 18, 2011 to clarify the process for SIFI 
designations, to specify additional details, and to enhance the 
transparency of the designation process.
    The second notice of proposed rulemaking and interpretive guidance 
supersedes the prior notice of proposed rulemaking, and describes the 
manner in which the FSOC intends to apply the statutory standards and 
considerations and the process and procedures that the FSOC intends to 
follow in making SIFI designations. Under the second notice of proposed 
rulemaking, nonbank financial companies will generally be assessed 
using a three-stage process where each stage will involve an 
increasingly in depth evaluation and analysis. The evaluation will be 
based on both quantitative thresholds and qualitative factors. The 
designation process will also analyze the extent to which the company 
can be resolved in bankruptcy, which is key to whether a company should 
be designated as a SIFI.
    Once designated, SIFIs will be subject to heightened supervision by 
the FRB and required to maintain detailed resolution plans as discussed 
above.
International Efforts
    In the event of a cross-border resolution of a covered financial 
company, Section 210 of the Dodd-Frank Act requires the FDIC to 
``coordinate, to the maximum extent possible'' with appropriate foreign 
regulatory authorities. An important element of the FDIC's 
implementation of the Dodd-Frank Act has been the creation of a new 
Office of Complex Financial Institutions. The international outreach 
and coordination group in this office will coordinate the FDIC's 
efforts with those in other jurisdictions charged with similar 
responsibilities.
    While no international framework currently exists for the 
insolvency and resolution of financial institutions, the FDIC and other 
U.S. regulators have taken the lead in promoting consistent best 
practices in international insolvencies and resolutions. The structures 
of international financial companies are often highly complex, and the 
issues associated with their resolution can be challenging. With 
planning and cross-border coordination, however, disruptions to global 
financial markets can be minimized.
    The crises in 2008, and the current international instability, 
demonstrate the necessity for closer cooperation in supervision and in 
the resolution of cross-border institutions. Given our responsibility 
for the resolution of a global SIFI, this is a major focus of the FDIC. 
To achieve this goal, the FDIC and other U.S. regulators are pursuing a 
number of efforts.
    First, the FDIC and its colleagues are working through the 
Financial Stability Board (FSB) and the Basel Committee on Banking 
Supervision to promote greater harmonization of national laws governing 
resolutions and improved coordination. The FDIC co-chairs the Cross-
Border Bank Resolution Group (CBRG) of the Basel Committee, which made 
specific recommendations for reforms to enhance resolution 
capabilities. These reforms focused on greater legal harmonization, 
improved information sharing, and market structure enhancements that 
would make the global financial system more resilient. Last year, the 
FSB and the G-20 leaders endorsed these recommendations and tasked the 
CBRG to assess progress. That progress report, released in July, 
identified a number of areas where significant improvements have been 
made, but also detailed areas requiring renewed national and 
international effort.
    In October, the FSB released a set of ``Key Attributes of Effective 
Resolution Regimes for Financial Institutions.'' These Key Attributes 
build on the CBRG recommendations and expand their scope to include 
nonbank financial institutions. In fact, the Key Attributes 
substantively build upon the framework included in the Dodd-Frank Act. 
Now that the Key Attributes were endorsed by the G-20 last month, all 
of the major financial centers are required to move toward a resolution 
framework to resolve systemic financial institutions in an orderly 
manner that places losses on shareholders and unsecured creditors. A 
number of key jurisdictions, including the United Kingdom and the 
European Union, have made significant progress.
    Second, the FDIC and its U.S. colleagues are working through Crisis 
Management Groups (CMGs) for all of the global SIFIs to enhance 
institution-specific planning for any future resolution. The CMGs allow 
the regulators to identify impediments to more effective resolution 
based on the unique characteristics of a particular financial 
institution. This work, initiated under the auspices of the FSB, has 
been underway for almost 2 years for the major U.S. and U.K. 
institutions; other countries are moving rapidly forward as well.
    Finally, the FDIC is actively engaged in working with individual 
foreign regulators to explore more effective means of cooperation. This 
work entails, initially, gaining a clear understanding of how U.S. and 
foreign laws governing cross-border institutions will interact in any 
crisis. The FDIC is working with these regulators to identify the most 
effective ways to implement the OLA for a U.S. cross-border institution 
under the host country's applicable laws.
    In addition to efforts to achieve harmonization of legal 
frameworks, the FDIC has been engaged in cooperative resolution 
planning with supervisory and resolution authorities in foreign 
countries. In the wake of the financial crisis, there has been an 
increased international awareness of the need for greater inter-
jurisdictional cooperation in the planning for resolution of specific 
cross-border institutions. Our initial interactions with foreign 
authorities have proven very promising, and the FDIC will continue to 
pursue these efforts vigorously.
    Similar to the United States, other countries have recognized the 
need to have a resolution regime separate from the bankruptcy process 
to resolve large, international financial companies in a manner that 
can take into account the impact on financial stability.
    Promoting Financial Stability by Strengthening Bank Capital. The 
FDIC strongly supports recent international efforts to strengthen 
banks' capital adequacy through the Basel III standards and recent 
agreements regarding capital held by so-called ``Global Systemically 
Important Banks.''
    The FDIC is working closely with the other Federal banking agencies 
to complete a notice of proposed rulemaking seeking comment on domestic 
implementation of the Basel III agreement published by the Basel 
Committee on Banking Supervision (BCBS) in December 2010. The agencies 
are also working to finalize changes to the Market Risk Capital Rule 
agreed to by the BCBS in 2009. The agencies have reached agreement on 
the notice of proposed rulemaking to implement the internationally 
agreed changes to the Market Risk Rule in a manner consistent with 
certain requirements of the Dodd-Frank Act, as described in more detail 
below. The FDIC Board of Directors is scheduled to consider this 
proposal tomorrow.
    Section 939 of the Dodd-Frank Act requires the agencies to remove 
references to credit ratings from their regulations. There are many 
references to credit ratings in the agencies' current capital 
regulations, as well as in Basel III and the 2009 BCBS reforms to the 
Market Risk Rules. The agencies' permissible investment regulations 
also reference credit ratings. Replacing these various references 
requires the development of credit risk metrics that identify 
gradations of risk in a consistent and supportable manner, and in a 
manner that can be reasonably implemented by a wide range of banks. 
Tomorrow, the FDIC Board will consider a specific proposed alternative 
to credit ratings that the agencies have developed for use by banks 
subject to the Market Risk Rule. Developing this proposal has been a 
challenging task, and marks an important step in fulfilling 
international regulatory capital agreements in a manner consistent with 
the Act. The FDIC Board will also be considering a notice of proposed 
rulemaking regarding permissible investments for savings associations, 
a rulemaking that will mirror the Office of the Comptroller of the 
Currency's (OCC) recently published proposal regarding permissible 
investments for national banks.
Other Rules in Progress
    The FDIC is also working with other regulators on implementing 
several additional important parts of the Dodd-Frank Act.
    Volcker Rule. In October, the FDIC, jointly with the FRB, the OCC, 
and the SEC, issued a notice of proposed rulemaking requesting public 
comment on a proposed regulation implementing the Volcker Rule 
requirements of section 619 of the Dodd-Frank Act. The comment period 
closes on January 13, 2012.
    Risk Retention Rule. In March 2011, six agencies, including the 
FDIC, issued a notice of proposed rulemaking seeking comment on a 
proposal to implement Section 941 of the Act.\2\ The proposed rule 
would require sponsors of asset-backed securities to retain at least 5 
percent of the credit risk of the assets underlying the securities and 
not permit sponsors to transfer or hedge that credit risk. The proposed 
rule would provide sponsors with various options for meeting the risk-
retention requirements. It also provides, as required by Section 941, 
proposed standards for a Qualified Residential Mortgage (QRM) which, if 
met, would result in exemption from the risk retention requirement. 
During the comment period, which was extended to August 1, 2011, the 
agencies received numerous comment letters. The agencies are in the 
process of evaluating those comments.
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    \2\ The rule was proposed by the Federal Reserve Board, the Office 
of the Comptroller of the Currency, the Federal Deposit Insurance 
Corporation, the U.S. Securities and Exchange Commission, the Federal 
Housing Finance Agency, and the Department of Housing and Urban 
Development.
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    Margin and Capital Requirements for Covered Swap Entities. In May, 
the FDIC, jointly with the FRB, the OCC, the Farm Credit 
Administration, and the Federal Housing Finance Agency (FHFA), 
published a notice of proposed rulemaking that would impose margin 
requirements on certain swaps entered into by regulated entities as 
required under sections 731 and 734 of the Dodd-Frank Act. Since the 
issuance of the notice of proposed rulemaking, the FSB has initiated an 
effort to develop an international convergence in margin requirements 
and has asked the BCBS, in conjunction with the International 
Organization of Securities Commissions, to develop a consultation 
document by June 2012. The FDIC, along with the other banking agencies, 
is actively participating in the FSB initiative. In order to reduce 
competitive concerns, the agencies have decided to take into 
consideration, to the extent possible, the margin recommendations 
developed by this international initiative as they work toward the 
development of a final rule by mid-2012.
    Incentive Compensation. The FDIC continues to work with other 
agencies, including the Federal banking agencies, FHFA, and the SEC, to 
implement the incentive compensation requirements in section 956 of the 
Dodd-Frank Act. Section 956 addresses a key safety and soundness issue 
that contributed to the recent financial crisis--that poorly designed 
compensation structures can misalign incentives and promote excessive 
risk-taking within financial organizations.
    In April 2011, the agencies jointly issued a notice of proposed 
rulemaking that would, among other things, prohibit compensation 
arrangements that are ``excessive'' or that ``could lead to material 
financial loss'' at a covered financial institution and enhance 
regulatory reporting of incentive-based compensation arrangements. 
Section 956 exempts approximately 7,000 institutions with less than $1 
billion in total assets from its requirements. For larger institutions, 
those with $50 billion or more in total consolidated assets, the 
proposed rule would prescribe payment deferral and other compensation 
structure requirements for senior policymakers and other key employees.
    The agencies are in the process of considering public comments 
received on the proposed rule.
    Consumer Financial Protection Bureau Transition. The FDIC has been 
working cooperatively with the Consumer Financial Protection Bureau 
(CFPB) on several transition issues, including supervision and 
enforcement cases, procedures for consultations on future rulemakings 
and consumer complaint processing. Several FDIC employees worked 
temporarily at the CFPB to assist in its startup. The FDIC continues to 
meet with CFPB officials weekly to establish processes required by the 
Act, such as the sharing of draft examination reports for institutions 
where the CFPB has jurisdiction.
    Stress Tests. The FDIC has been coordinating with the FRB to 
develop a proposed rule governing stress tests for financial companies. 
These tests, required under section 165 of the Dodd-Frank Act, are an 
essential component of the collective effort to ensure that financial 
companies have the resilience required to weather a future crisis.
    Diversity. The Director of the FDIC's Office of Minority and Women 
Inclusion is continuing work to develop diversity standards for the 
FDIC workforce and management, and for increased participation of 
minority- and women-owned businesses in FDIC programs and contracts, as 
provided in the Dodd-Frank Act. This work continues efforts begun by 
the Office's predecessor, the FDIC's Office of Diversity and Economic 
Opportunity.
FDIC Community Banking Initiatives
    Given the impact of the recent financial crisis on community banks 
and concerns raised about the potential effect of the Dodd-Frank Act on 
these institutions, the FDIC believes that there is value in taking a 
broad-based look at community banks and the issues that will affect 
their future. As the primary Federal regulator for the majority of 
community banks, the FDIC has developed a set of community banking 
initiatives to further its dialogue with the industry and better its 
understanding of the challenges and opportunities for community banks.
    As part of these initiatives, the FDIC will hold a national 
conference early next year that will focus on the future of community 
banks, their unique role in supporting our Nation's economy, and the 
challenges and opportunities that they face in this difficult economic 
environment. Following the conference, the FDIC will organize a series 
of roundtable discussions with community bankers in each of the FDIC's 
six regional offices around the country in which senior FDIC 
executives, including myself, will participate.
    The FDIC is also undertaking a major research initiative to examine 
a variety of issues related to community banks, including their 
evolution, characteristics, performance, challenges, and role in 
supporting local communities. The FDIC's research agenda will cover 
topics such as changes in community bank size and geographic 
concentration over time, measuring the performance of community banks, 
and changes in community bank business models and cost structures. The 
research will also look at how trends in technology and the small 
business economy have affected community banks and the lessons for 
community banks from the current crisis.
    Also as part of these initiatives, the FDIC is continuing to look 
for ways to improve the effectiveness of its examination and rulemaking 
processes. The FDIC will seek to identify supervisory improvements and 
efficiencies that can be made while maintaining our supervisory 
standards. In particular, the FDIC is exploring enhancements to its 
offsite reviews, pre-examination planning processes, information 
requests and examination coordination. In addition, the FDIC is 
exploring communications strategies to update the industry on upcoming 
guidance and rulemakings that affect FDIC-supervised community banks in 
an organized and understandable way so that institutions can more 
effectively plan to meet their compliance obligations. The FDIC 
continues to ensure that examination guidance takes into account the 
size, complexity, and risk profile of each institution. To that end, 
the FDIC now includes a section in each Financial Institution Letter 
sent to insured depository institutions that describes its 
applicability to institutions with total assets of less than $1 
billion.
Conclusion
    Today's testimony highlights the FDIC's progress in implementing 
financial reforms authorized by the Dodd-Frank Act. While the FDIC has 
completed the fundamental rulemakings necessary to fulfill its 
responsibilities under the Act, there is considerable work to do. 
Throughout this process, the FDIC has sought input from the industry 
and the public, has worked cooperatively with fellow regulators, and 
has been transparent in its deliberations and rulemakings. The FDIC 
believes that successful implementation of the Act will represent a 
significant step forward in providing a foundation for a financial 
system that is more stable and less susceptible to crises in the 
future, and better prepared to respond to future crises.
    Thank you. I would be glad to respond to your questions.
                                 ______
                                 
                    PREPARED STATEMENT OF JOHN WALSH
                   Acting Comptroller of the Currency
                     Comptroller of the Currency *
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    * Statement Required by 12 U.S.C. Sec.  250: The views expressed 
herein are those of the Office of the Comptroller of the Currency and 
do not necessarily represent the views of the President.
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                            December 6, 2011
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, I appreciate the opportunity to provide the Committee with a 
progress report on the initiatives the Office of the Comptroller of the 
Currency (OCC) has undertaken to implement the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act or Dodd-Frank) since 
July 21, 2011. The Committee's letter of invitation requests that I 
testify about any significant actions and rules proposed or finalized 
by the OCC since July 21, 2011. In particular, the Committee is 
interested in hearing about the OCC's progress in carrying out its 
responsibilities with respect to the Volcker Rule, the integration of 
the Office of Thrift Supervision (OTS) into the OCC pursuant to Title 
III of the Dodd-Frank Act, risk retention provisions under Title IX of 
Dodd-Frank, and the OCC's contributions to the Financial Stability 
Oversight Council (FSOC) and coordination with other member agencies.

    Accordingly, my testimony highlights the OCC's work in the 
following key areas:

    The integration of the functions of the former OTS with 
        respect to Federal savings associations, and former OTS staff, 
        into the OCC, and the companion effort to integrate, where 
        appropriate, Federal savings association regulations and 
        policies into the regulations and policies for national banks;

    Our efforts to date to work with the Bureau of Consumer 
        Financial Protection (CFPB) as it commences operations;

    An update on the OCC's contributions to, and participation 
        in, the FSOC;

    OCC efforts underway to implement the Dodd-Frank Act 
        provisions that strengthen risk-based capital, leverage, and 
        liquidity requirements; and

    Our progress in regulatory implementation of certain other 
        key Dodd-Frank Act provisions.
I. OTS/OCC Integration
General
    On July 21, 2011, Dodd-Frank transferred to the OCC all functions 
of the OTS relating to Federal savings associations, and the OCC 
assumed responsibility for the ongoing examination, supervision, and 
regulation of Federal savings associations. From an operational 
perspective, the integration of the OTS into the OCC has been 
successfully completed. We have fully integrated OTS staff into all 
departments of the OCC's organizational structure. Combined examination 
teams have begun working on exams at national banks and Federal savings 
associations. Prior to July 21, 2011, the OCC communicated extensively 
with the thrift industry to prepare for this transfer of responsibility 
from the OTS to the OCC. Since that time, we have continued to 
participate in a variety of outreach activities to maintain an active 
dialogue with Federal savings associations, including several national 
teleconferences on supervisory issues of specific interest to them. We 
also will continue and expand the former OTS advisory committees on 
mutual savings associations and minority institutions as venues for 
important input on the unique challenges facing those institutions. 
And, as new issues emerge, the OCC will continue to communicate 
regularly with the thrift industry to clarify our expectations and 
respond to its concerns.
Integration of Regulations
    As I explained in my testimony before this Committee in July 2011, 
the OCC is in the process of undertaking a comprehensive, multi-phased 
review of its regulations, as well as those of the OTS, to eliminate 
duplication and reduce unnecessary regulatory burden. On July 21, 2011, 
the OCC issued a final rule revising certain OCC rules that are central 
to internal agency functions and operations to take into account the 
transfer to the OCC of jurisdiction over Federal savings associations. 
The final rule also conformed the OCC's preemption and visitorial 
powers regulations to the Dodd-Frank Act provisions that became 
effective on July 21st. The OCC also issued an interim final rule, 
effective on July 21, 2011, that republished most OTS regulations in 
the OCC's chapter of the Code of Federal Regulations and renumbered 
them accordingly as OCC rules, with nomenclature and other technical 
amendments to reflect the OCC's responsibilities for Federal savings 
associations. This action consolidates the regulations applicable to 
national banks and Federal savings associations in the regulations of 
the OCC.
    We are now in the process of further integrating and consolidating 
OCC and republished OTS regulations. We are considering more 
comprehensive substantive amendments to republished OTS regulations, as 
well as existing OCC rules, with the continuing objective of reducing 
duplication and providing consistent treatment, where appropriate, for 
both national banks and Federal savings associations. We expect this 
process to result in a more streamlined set of regulations that aims to 
reduce unnecessary regulatory burden. Throughout this process, the OCC 
is mindful that the Federal savings association charter has certain 
unique statutory attributes that are necessary to preserve. In all 
instances where revisions are undertaken, we will seek public comment 
to assist in making the regulations workable and effective for both 
national banks and Federal savings associations.
    A similar effort is underway to integrate the more than 1,000 OTS 
supervisory policies into a consolidated OCC policy framework. The goal 
is to produce a consistent supervisory approach and integrated policy 
platform for both national banks and Federal savings associations, 
while recognizing differences anchored in statute. As part of this 
process, the OCC plans to rescind several hundred OTS documents that 
are duplicative or obsolete. The OCC will then focus on policy guidance 
documents that require substantive revision or combination, as well as 
policy guidance documents that are considered unique to savings 
associations. Upon completion, this process will result in a more 
streamlined set of policies for national banks and Federal savings 
associations that should eliminate confusion associated with 
duplicative or obsolete policy documents.
    Finally, the OCC has worked with the other Federal banking agencies 
to move savings associations to common financial reporting forms by 
discontinuing the Thrift Financial Report (TFR), currently used by most 
savings associations to report financial data, and requiring these 
institutions to use instead the Consolidated Reports on Income and 
Condition (Call Reports) filed by banks. The OCC worked with the other 
banking agencies to reduce confusion and potential burden on savings 
associations by publishing a number of Federal Register notices, 
posting on the FFIEC and OTS Web sites a ``mapping'' document that 
links TFR data items to the appropriate line items in the Call Report, 
and participating in various industry panel discussions and 
teleconferences to discuss issues associated with the conversion. 
Although the agencies recognize that there will be some initial 
adjustment for savings associations related to this conversion, going 
forward having a common reporting form and platform provides long-term 
efficiencies to the agencies and savings associations.
II. Coordination with the Bureau of Consumer Financial Protection
    In my previous testimony, I discussed the transition of certain OCC 
functions and staff to the CFPB, as well as our efforts to assist the 
CFPB in standing up its operations as of the designated transfer date. 
We continue to be actively engaged with the CFPB on a number of fronts 
relating to our respective roles and responsibilities in connection 
with supervision of compliance by national banks and Federal savings 
associations with Federal consumer financial laws, processing of 
related consumer complaints, and consultation on CFPB rulemakings.
    There have been significant developments since the last hearing on 
this matter. Since that time, the CFPB commenced its operations, added 
staff, and engaged in a number of activities implementing the Dodd-
Frank Act. For example, the CFPB has assumed responsibility for 
conducting examinations for compliance with Federal consumer financial 
laws at national banks and Federal savings associations with total 
assets greater than $10 billion and, as of the designated transfer 
date, the OCC is no longer responsible for such examinations at these 
institutions. The CFPB also has begun to develop and promulgate certain 
regulations.
    In the last several months, the OCC has assisted the CFPB in a 
number of areas related to their operations. We have been providing the 
CFPB with significant staff and infrastructure support by processing 
consumer complaints on behalf of the CFPB. We entered into a Memorandum 
of Understanding (MOU) with the CFPB under which the OCC's Customer 
Assistance Group is performing intake, processing, analysis, and 
resolution of consumer complaints about national banks and Federal 
savings associations with total assets of more than $10 billion. The 
CFPB is currently handling complaints that concern credit cards offered 
by these large institutions, and plans call for them to begin handling 
those relating to mortgage lending and servicing this week. The OCC is 
handling all other complaints, but the MOU provides that the consumer 
complaint function for large institutions will be assumed in its 
entirety by the CFPB for all Federal consumer financial laws over the 
course of the next several months as the CFPB develops the capacity to 
handle these obligations.
    In addition, we recently issued a joint policy statement to clarify 
how the prudential regulators and the CFPB will measure the total 
assets of an insured depository institution for purposes of determining 
supervisory and enforcement responsibilities under the Dodd-Frank Act. 
Under section 1025 of the Dodd-Frank Act, the CFPB is given primary 
authority to examine an insured depository institution for compliance 
with Federal consumer financial laws if the institution has total 
assets greater than $10 billion. The prudential regulators retain 
exclusive supervisory and enforcement authority for insured depository 
institutions with total assets of $10 billion or less. The interagency 
policy statement describes the agreed-upon measure and a schedule for 
determining asset size for these purposes by using the total assets 
reported in four consecutive quarterly Call Reports.
    There is much that remains to be done, however. The OCC has 
established an internal Consumer Issues Steering Committee (CISC) to 
act as liaison with the CFPB on the coordination of supervisory and 
regulatory matters. CISC members have scheduled weekly meetings, and 
have more frequent informal communications with CFPB staff on 
examination coordination, information sharing, rulemakings, and 
consumer compliance issues.
    One important project concerns the requirements for consultation by 
the CFPB with prudential regulators in connection with CFPB 
rulemakings. Under the Dodd-Frank Act, the CFPB has exclusive authority 
to prescribe regulations administering certain enumerated Federal 
consumer financial laws. With respect to this rulemaking authority, the 
CFPB is required to consult with the prudential regulators prior to 
proposing a rule and during the rulemaking process ``regarding 
consistency with prudential, market, or systemic objectives'' 
administered by the prudential regulators. The law states that if, 
during the consultation process, a prudential regulator provides a 
written objection to all or any part of a proposed CFPB rule under 
consideration, the CFPB must describe the objection and how it 
addressed it in its adopting release. This consultation process is 
important to ensure meaningful input by prudential supervisors on CFPB 
regulations. The CFPB currently has in process several rulemakings 
where interagency coordination and consultation will be critical. These 
include the ``ability to repay'' requirements for ``qualified 
mortgages,'' which should be carefully coordinated with the ``qualified 
residential mortgage'' criteria in the interagency risk retention 
rulemaking so that the interplay of the two standards is appreciated 
and unintended consequences do not result.
    The OCC and the other prudential regulators are currently working 
to develop an agreement on a consultation process that will meet these 
statutory objectives and provide the prudential regulators with 
reasonable time to effectively review, discuss, and comment on CFPB 
rulemakings.
    Another area of current discussion concerns implementation of the 
Dodd-Frank Act requirements that the CFPB coordinate its activities 
with the supervisory activities conducted by the prudential regulators 
in order to minimize regulatory burden on an institution. Section 1025 
requires the CFPB to consult with the prudential regulators regarding 
respective schedules for examining an institution. Similarly, the CFPB 
and the prudential regulators are required to conduct their respective 
examinations simultaneously in an insured depository institution and to 
share and comment on related draft reports of examination that result 
from the simultaneous examinations. The law also provides that the 
regulated institution may opt out of a simultaneous examination by the 
prudential regulator and the CFPB.
    Candidly, aspects of this portion of the Dodd-Frank Act do not mesh 
well with how bank examination activities are actually conducted. 
Therefore, the OCC and the other prudential regulators have initiated 
efforts to develop a MOU that will implement these coordination 
requirements in a realistic and practical manner and prevent 
unnecessary regulatory burden on insured depository institutions--which 
we believe to have been the Congressional intent. We hope that 
uncertainty among regulated institutions about when and how they will 
be examined by the CFPB relative to their examinations by the 
prudential regulators can be clarified.
III. Activities of the Financial Stability Oversight Council
General
    The OCC continues to be an active participant in the activities of 
the FSOC as it carries out its mission to identify and respond to 
emerging risks that threaten the financial stability of the United 
States, to promote market discipline, and to facilitate coordination 
and information sharing among the various financial regulators.
    Since my last update to this Committee in July, the FSOC issued its 
2011 Annual Report to Congress, which includes a summary of both the 
state of the U.S. financial system as a result of the 2007-09 market 
recession and some of the major forces that will shape the financial 
system's future development. The report also details the progress of 
key domestic regulatory reforms resulting from the implementation of 
the Dodd-Frank Act. In addition, the FSOC has held two formal meetings 
and convened several conference calls among its members to discuss 
current market developments. As described in more detail below, formal 
actions that the FSOC has taken during this period include the 
publication of an enhanced notice of proposed rulemaking and guidance 
on the process the FSOC proposes to use for designating systemically 
important nonbank financial firms for enhanced supervision by the 
Federal Reserve Board (FRB).
    Equally important, however, have been the deliberations and 
information exchanges among agency principals and staff on market and 
regulatory developments that could have potential systemic risk 
implications for the U.S. financial sector and broader economy. These 
discussions have included updates on the agencies' ongoing assessments 
and analyses of the situation in the European financial markets and 
their potential ramifications for the United States and deliberations 
on various structural issues confronting the U.S. financial system that 
were identified in the FSOC's annual report, including money market 
fund reform, the tri-party repo market, and efforts to address and 
reform the U.S. housing market. Facilitating these types of candid, 
confidential exchanges of information is, I believe, one of the most 
critical functions of the FSOC.
Designations of Nonbank Financial Firms for Heightened Supervision
    The FSOC also is continuing its work under the provisions of the 
Dodd-Frank Act that require the designation of nonbank financial firms 
for enhanced supervision by the FRB. Based on feedback received on an 
initial notice of proposed rulemaking issued in January 2011, the FSOC 
determined that there was a need to seek comment on additional details 
regarding the standards for this designation process before issuing a 
final rule. On October 11, 2011, the FSOC issued a second notice of 
proposed rulemaking and proposed interpretive guidance (NPRM). The NPRM 
lays out the analytical and procedural framework that the FSOC proposes 
to use to determine whether a nonbank financial company could pose a 
threat to the financial stability of the United States.
    The NPRM sets forth a three-stage process by which nonbank 
financial companies generally will be assessed. The FSOC will apply 
uniform quantitative thresholds in stage 1, as described in the 
proposed interpretive guidance, to identify companies for further 
consideration. In stage 2, the FSOC will use information that is 
available from primary regulators and public information to further 
analyze the nonbank financial companies identified in stage 1. In stage 
3, the FSOC will contact each nonbank financial company that the FSOC 
believes merits further review to collect information directly from the 
company that was not available in the earlier stages. At the end of 
stage 3, based on the results of the analyses conducted during each 
stage of review, the FSOC may vote to make a determination regarding 
the company. The comment period for the NPRM closes on December 19, 
2011.
IV. Strengthening Capital, Leverage, and Liquidity Requirements
    The financial crisis resulted in broad agreement to bolster the 
quality and quantity of capital held by financial institutions. The G20 
has coordinated efforts by other international bodies, such as the 
Financial Stability Board and Basel Committee on Bank Supervision, to 
reach consensus on workable and effective enhanced standards. The OCC 
was actively involved in the development of these international 
standards through its participation on the Basel Committee and is 
working with the other U.S. Federal banking agencies to implement Dodd-
Frank Act provisions relating to risk-based capital and leverage 
requirements in a manner that is consistent with those international 
standards.
    In the United States, the Dodd-Frank Act adds heightened prudential 
standards for all bank-holding companies with more than $50 billion in 
assets and places floors under the risk-based capital requirements for 
banks and bank-holding companies. In addition, Dodd-Frank requires all 
Federal agencies to review any regulation that requires the use of an 
assessment of creditworthiness of a security or money market instrument 
and to remove any references to, or requirements of reliance on, credit 
ratings and substitute such standard of creditworthiness as each agency 
determines is appropriate. The statute further provides that the 
agencies shall seek to establish, to the extent feasible, uniform 
standards of creditworthiness, taking into account the entities the 
agencies regulate and the purposes for which those entities would rely 
on such standards.
    The Basel Committee revisions that the OCC and the other Federal 
banking agencies are working to implement in the United States include:

    A new, more rigorous definition of capital, which would 
        exclude funds raised through hybrid instruments that were 
        unable to absorb losses as the crisis deepened;

    Increased minimum risk-based capital requirements, which 
        include increased minimum Tier 1 capital requirements and a new 
        common equity requirement;

    The creation of a capital conservation ``buffer'' on top of 
        regulatory minimums that would be designed to be drawn down in 
        times of economic stress and would trigger restrictions on 
        capital distributions (such as dividends);

    Enhanced risk-based capital requirements for counterparty 
        credit risk that are meant to capture the risk that a 
        counterparty in a complex financial transaction could grow 
        weaker at precisely the time that a bank's exposure to the 
        counterparty grows larger;

    Revisions to the capital requirements applicable to traded 
        positions, which would broaden the scope of those rules to 
        better capture risks not adequately addressed under the current 
        regulatory measurement methodologies, including the risk that 
        less liquid products, such as asset-backed securities and re-
        securitizations, could default or suffer severe losses;

    The creation of a new international leverage ratio 
        requirement to serve as a backstop to the risk-based capital 
        rules. Unlike the current U.S. leverage ratio, the 
        international leverage ratio incorporates off-balance sheet 
        exposures; and

    The adoption of a capital surcharge to be applied to a 
        limited group of global, systemically important banks (G-SIBs), 
        the failure of which would impose outsized costs on the 
        financial system.

    Basel III also seeks to address global liquidity concerns arising 
from the recent financial crisis. These changes would include both a 
short- and long-term liquidity standard intended to assist a bank in 
maintaining sufficient liquidity during periods of financial stress. 
The Basel Committee included a long implementation timeline for both 
standards to provide regulators the opportunity to conduct further 
analysis and to make changes as necessary. The long-term standard, 
which is called the net stable funding ratio or NSFR, is not scheduled 
to become effective until 2018. The short-term requirement, the 
liquidity coverage ratio or LCR, is scheduled to go into effect 
earlier, in 2015. The Federal banking agencies currently are working 
together to develop and recommend changes to the LCR to ensure that it 
will produce appropriate requirements and incentives, especially during 
economic downturns, and to otherwise limit potential unintended 
consequences.
    Harmonizing the Dodd-Frank Act requirements with the revised 
international standards is one of the principal challenges the OCC and 
the other Federal banking agencies will face. For example, under the 
Dodd-Frank Act, the FRB is required to develop and implement heightened 
prudential standards for bank-holding companies with total consolidated 
assets over $50 billion, while the Basel Committee's G-SIB surcharge 
will, in all likelihood, apply to a much smaller subset of much larger 
banking institutions. In our discussions with the FRB, the OCC has 
stressed the need to ensure that the heightened prudential standards 
being developed, including liquidity, and the Basel Committee reforms 
are carried out in a coordinated, mutually reinforcing manner, so as to 
enhance the safety and soundness of the U.S. and global banking 
systems, while not damaging competitive equity or restricting access to 
credit. Balancing these interests presents a number of challenges that 
the agencies are continuing to work through.
    The Federal banking agencies expect to soon publish proposed 
revisions to their regulations for determining market risk capital 
requirements for traded positions. This will be the first risk-based 
capital proposal to incorporate new nonratings based alternatives 
developed in response to section 939A.\1\ Interweaving all these 
national and international requirements, and meeting our statutory 
mandates and our commitments in Basel will be the challenge of the next 
6-12 months.
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    \1\  In addition, on November 29, 2011 the OCC published a notice 
of proposed rulemaking seeking comment on revisions to its regulations 
pertaining to investment securities, securities offerings, and foreign 
bank capital equivalency deposits to replace references to credit 
ratings with alternative standards of creditworthiness. The comment 
period closes on December 29, 2011. 76 FR 73526.
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V. Other Rulemakings
    The OCC has issued a number of important proposed rules required 
under the Dodd-Frank Act. This portion of my testimony briefly 
highlights these proposals and discusses the key issues to be addressed 
in developing final rules.
Credit Risk Retention Rulemaking
    Section 941 of the Dodd-Frank Act requires the OCC, together with 
the other Federal banking agencies and the Department of Housing and 
Urban Development, the Federal Housing Finance Agency (FHFA), and the 
Securities and Exchange Commission (SEC), to require sponsors of asset-
backed securities to retain at least 5 percent of the credit risk of 
the assets they securitize. The purpose of this new regulatory regime 
is to correct adverse market incentive structures by giving 
securitizers direct financial disincentives against packaging loans 
that are underwritten poorly.
    Pursuant to this requirement, the interagency group issued a joint 
proposal. The proposal includes a number of options by which 
securitization sponsors could satisfy the statute's central requirement 
to retain at least 5 percent of the credit risk of securitized assets. 
This aspect of the proposal was designed to recognize that the 
securitization markets have evolved over time to foster liquidity in a 
variety of diverse credit products, using different types of 
securitization structures.
    The proposal would also establish certain exemptions from the risk 
retention requirement, most notably, an exemption for securitizations 
backed entirely by ``qualified residential mortgages'' (QRMs). 
Consistent with the statutory provision, the definition of QRM includes 
underwriting and product features that historical loan performance data 
indicate result in a low risk of default.
    The proposal was published in the Federal Register on April 29, 
2011, and comments were due by June 10, 2011. However, the agencies 
extended the comment period until August 1, 2011, due to the complexity 
of the rulemaking and to allow parties more time to consider the impact 
of the proposal.
    The proposal generated substantial interest and attracted thousands 
of comments on a number of key issues from loan originators, 
securitizers, consumers, and policymakers. Foremost among these was the 
role of risk retention, the QRM exemption, and the future role of 
Fannie Mae and Freddie Mac in the residential mortgage market. Most 
commenters on the QRM criteria expressed great concern that the QRM 
criteria were too stringent, particularly the 80 percent loan-to-value 
requirement for purchase money mortgages. Some commenters also focused 
on the fact that the proposal would not directly alter the current risk 
retention practices of Fannie Mae and Freddie Mac, under which they 
retain 100 percent of the credit risk on their sponsored 
securitizations in the form of a guarantee and opposed the difference 
in treatment from private securitizers. Other commenters favored it in 
recognition of the market liquidity Fannie Mae and Freddie Mac 
presently provide. The proposed menu of risk retention alternatives 
also attracted significant comment, supporting the overall approach but 
also raising numerous specific concerns on the part of securitizers as 
to whether the particular options would accommodate established 
structures for risk retention in differing types of securitization 
transactions.
    The agencies are carefully evaluating all of the comments received 
and are now actively engaged in considering the many issues raised as 
we determine how best to proceed with the risk retention rulemaking.
Margin and Capital Requirements for Covered Swap Entities
    During the financial crisis, the lack of transparency in 
derivatives transactions among dealer banks and between dealer banks 
and their counterparties created uncertainty about whether market 
participants were significantly exposed to the risk of a default by a 
swap counterparty. To address this uncertainty, sections 731 and 764 of 
the Dodd-Frank Act require the OCC, together with the FRB, Federal 
Deposit Insurance Corporation (FDIC), FHFA, and Farm Credit 
Administration (FCA), to impose minimum margin requirements on 
noncleared derivatives.
    Under the provisions of the Dodd-Frank Act, the OCC, together with 
the FRB, FDIC, FHFA, and FCA, published a proposal to establish minimum 
margin and capital requirements for registered swap dealers, major swap 
participants, security-based swap dealers, and major security-based 
swap participants (swap entities) subject to agency supervision. The 
agencies proposed to require swap entities to collect margin for all 
uncleared transactions with other swap entities and with financial 
counterparties. However, for low-risk financial counterparties, the 
agencies proposed that swap entities would not be required to collect 
margin as long as its margin exposure to a particular low-risk 
financial counterparty does not exceed a specific threshold amount of 
margin. Consistent with the minimal risk that derivatives with 
commercial end users pose to the safety and soundness of swap entities 
and the U.S. financial system, the proposal also included a margin 
threshold approach for these end users, with the swap entity setting a 
margin threshold for each commercial end user in light of the swap 
entity's assessment of credit risk of the end user. This approach was 
premised on current market practice, under which derivatives dealers 
view the question whether to require margin from commercial end users 
as a credit decision.
    The proposal was published in the Federal Register on May 11, 2011, 
and comments were due June 24, 2011. However, due to the complexity of 
the rulemaking, to allow parties more time to consider the impact of 
the proposed rule, and so that the comment period on the proposed rule 
would run concurrently with the comment period for similar margin and 
capital requirements proposed by the Commodity Futures Trading 
Commission, the agencies extended the comment period until July 11, 
2011.
    With very limited exception, commenters strenuously opposed the 
agencies' proposed treatment of commercial end users. They urged the 
agencies to implement a categorical exemption, like the statutory 
exception from clearing requirements for commercial end users. They 
also indicated that the agencies' proposal on documentation of margin 
obligations was a departure from existing practice and burdensome to 
implement. They further indicated that, as drafted, the agencies' 
proposed threshold-based approach was inconsistent with the current 
credit assessment-based practices of swap entities.
    Another key issue addressed by commenters concerns the proposal's 
application of margin requirements to foreign branches and affiliates 
of U.S. banks. The agencies requested comment about a number of 
specific issues surrounding this topic, including whether it would 
affect competitive equality with foreign firms. Commenters also 
strenuously opposed this aspect of the proposal and indicated it would 
have a severe effect on their competitive position. These commenters 
noted that U.S. regulators are ahead of their G20 counterparts in 
formulating margin requirements, and imposition of U.S. margin rules on 
their foreign derivatives business at a time when their foreign 
competitors are not required to collect margin from their customers 
will effectively terminate this aspect of their business. They called 
for the agencies to delay imposition of this aspect of the proposal and 
work with foreign authorities to harmonize margin requirements 
internationally, phasing them in on a coordinated basis.
    The agencies are carefully considering all of these issues as we 
proceed with the design of the rule.
Incentive Compensation Rulemaking
    On April 14, 2011, the Federal banking agencies, the National 
Credit Union Administration (NCUA), the SEC, and the FHFA issued a 
proposal to implement the incentive-based compensation provisions in 
Section 956 of the Dodd-Frank Act. The proposal applies to ``covered 
financial institutions'' (those with at least $1 billion in assets that 
offer incentive-based compensation) and has three main components: (1) 
a requirement that a ``covered financial institution'' disclose to its 
regulator the structure of its incentive-based compensation 
arrangements; (2) standards for incentive-based compensation that are 
comparable to the safety and soundness standards required under the 
Federal Deposit Insurance Act; and (3) a prohibition on incentive-based 
payment arrangements that encourage inappropriate risks by a covered 
financial institution by providing an executive officer, employee, 
director, or principal shareholder with compensation that is excessive 
or that could lead to a material financial loss to the institution.
    The material financial loss provision of the proposed rule 
establishes general requirements applicable to all covered institutions 
and additional requirements applicable to larger covered financial 
institutions (which for the Federal banking agencies, NCUA, and the SEC 
means those covered financial institutions with total consolidated 
assets of $50 billion or more). The general requirements provide that 
an incentive-based compensation arrangement, or any feature of any such 
arrangement, established or maintained by any covered financial 
institution for one or more covered persons must balance risk and 
financial rewards and be compatible with effective controls and risk 
management and supported by strong corporate governance. For larger 
financial institutions, the proposed rule also mandates deferral and 
includes a provision concerning individuals who have the ability to 
expose the institution to possible substantial losses (so called 
``material risk takers''). These institutions must defer 50 percent of 
incentive-based compensation for executive officers for at least 3 
years, and their boards of directors must identify, and approve, the 
incentive-based compensation arrangements for material risk takers.
    The comment period on the proposed rule closed on May 31, 2011, and 
the agencies collectively received thousands of comments--approximately 
9,700 comments were received by the OCC alone. Among the major issues 
the agencies are facing are whether to continue to mandate deferral as 
proposed and whether to revise the material risk taker provision to 
more clearly delineate the individuals encompassed by the provision and 
the board of director's responsibilities with respect to these 
individuals.
Volcker Rule Proposal
    On November 7, 2011, the banking agencies and the SEC jointly 
published a proposal to implement section 619 of Dodd-Frank, also known 
as the Volcker Rule. Section 619 prohibits ``banking entities'' 
(insured depository institutions and any company that controls an 
insured depository institution) from engaging in proprietary trading 
and from acquiring or retaining an ownership interest in, sponsoring, 
or entering into certain relationships with hedge funds and private 
equity funds. Section 619 expressly exempts certain permitted 
activities from these prohibitions, including trading in certain 
Government obligations, underwriting, market-making-related activities, 
risk-mitigating hedging, trading on behalf of customers, public welfare 
investments, organizing and offering funds for trust, fiduciary and 
advisory customers, and trading and fund activities solely outside of 
the United States. All permitted activities are subject to statutory 
backstops, regardless of the size of the institution involved, and 
compliance program requirements may apply as well.
    The proposal is the result of months of intensive study and 
analysis by the agencies of the statutory language of section 619, its 
legislative history, the FSOC report on the implementation of the 
Volcker Rule, existing regulatory guidance, and the business practices 
of banking entities covered by the rule.
    The proposal implements the statutory prohibitions and restrictions 
on proprietary trading and covered fund activities and investments, the 
related statutory exemptions for permitted activities, and the 
statutory backstops that apply to all permitted activities. The 
proposal establishes requirements for engaging in the statutorily 
permitted activities and interprets many of the exceptions 
conservatively, including, in particular, the exceptions for 
underwriting, market-making-related activities, and risk-mitigating 
hedging. The proposal also defines two key statutory backstops: the 
prohibitions on engaging in an activity that would involve or result in 
either a material conflict of interest between the banking entity and 
its customers, or in a material exposure by the banking entity to a 
high-risk asset or trading strategy. Banking entities with significant 
trading activities also are required to report quantitative metrics to 
help evaluate the extent to which these activities are consistent with 
permissible market-making-related activities and whether they expose 
the institution to high-risk assets or trading strategies.
    The proposal further requires banking entities engaged in 
proprietary trading and covered fund activities and investments to 
develop and implement a compliance program that must address internal 
policies and procedures, internal controls, a management framework, 
independent testing, training, and making and keeping of records. The 
extent of these requirements escalates depending on the volume of the 
activity. Banking entities with significant trading or covered fund 
activities or investments must adopt a more detailed compliance 
program. Banking entities that solely are engaged in activities or in 
making investments that are permissible under the proposal will still 
need to satisfy certain compliance requirements designed to assure that 
their activities are permissible and do not violate any of the 
statutory backstop standards. Banking entities that do not engage in 
activities or make investments that are prohibited or restricted by the 
proposal must also put in place policies and procedures that are 
designed to prevent them from becoming engaged in such activities or 
from making such investments without establishing a compliance program 
required by the proposal.
    The proposed rule is open for public comment through January 13, 
2012.
Cost-Benefit Analysis
    The OCC recognizes the importance of considering the burdens 
associated with approaches to implementation of Dodd-Frank Act 
regulatory requirements and the impact of different approaches on 
smaller institutions. In conjunction with all its rulemakings, the OCC 
is subject to several standards that require the agency to consider the 
costs and burdens of the proposed regulation. Since the Committee's 
last hearing, the Department of the Treasury's Office of Inspector 
General (IG) completed its review, done at the request of the Ranking 
Member and other Members of this Committee, of OCC's processes for 
performing economic analyses in support of our rulemakings and how 
those processes considered the costs, benefits, and economic impact of 
certain proposed rules promulgated as a result of the Dodd-Frank Act. 
On June 13, 2011, the IG issued an informational report on the economic 
analyses performed by the OCC with respect to three proposed rules. 
Among other findings, the IG report concluded that ``OCC has processes 
in place to ensure that required economic analyses are performed 
consistently and with rigor in connection with its rulemaking 
authority. Furthermore, we found that those processes were followed for 
the three proposed rules we reviewed.''
    The OCC conducts analyses to determine the effects and impact of 
its regulations in accordance with the following three key statutes: 
the Unfunded Mandates Reform Act, the Congressional Review Act, and the 
Regulatory Flexibility Act.
    Consistent with the Unfunded Mandates Reform Act,\2\ the OCC 
prepares a written statement containing certain information and 
analysis specified in the statute if a rule contains a Federal mandate 
that may result in the expenditure by state, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any 1 year.
---------------------------------------------------------------------------
    \2\ 2 U.S.C. Sec. Sec.  1501 et seq.
---------------------------------------------------------------------------
    The Congressional Review Act,\3\ generally provides a mechanism for 
Congressional review of agency regulations by requiring agencies to 
report to Congress and the General Accountability Office (GAO) when 
they issue a final rule and by establishing timeframes within which 
Congress may act to disapprove a rule. The statute requires the Office 
of Management and Budget (OMB) to determine whether the final rule is a 
major rule for purposes of filing a report to Congress (Report to 
Congress); the OCC provides its views to OMB for consideration as the 
determination is made. Once this determination is made, the OCC must 
submit to Congress and the GAO a Report to Congress. As part of the 
Report to Congress, the OCC must state whether the rule is a ``major 
rule'' for Congressional Review Act purposes and must indicate whether 
the OCC prepared an analysis of costs and benefits.
---------------------------------------------------------------------------
    \3\ 5 U.S.C. Sec. Sec.  801 et seq.
---------------------------------------------------------------------------
     Finally, with certain exceptions, the Regulatory Flexibility Act 
\4\ generally requires the OCC to review proposed regulations for their 
impact on small entities and, in certain cases, to consider less 
burdensome alternatives. After conducting this review, the OCC is 
required either to prepare and publish a Regulatory Flexibility 
Analysis or to certify that a Regulatory Flexibility Analysis is not 
required because the rule will not have a ``significant economic impact 
on a substantial number of small entities.''
---------------------------------------------------------------------------
    \4\ 5 U.S.C. Sec. Sec.  601 et seq.
---------------------------------------------------------------------------
    The OCC also recently responded to a letter from Chairman Johnson 
requesting, among other things, a description of the OCC's rulemaking 
process and the economic impact factors considered in OCC rulemakings. 
Our response to that request includes more detailed information about 
the procedures staff uses to assess the economic impact in accordance 
with the statutes described above.
VI. Conclusion
    I appreciate the opportunity to update the Committee on the work we 
have done to implement the provisions of the Dodd-Frank Act, in 
particular, the completion of a smooth and workable integration of the 
OTS into the OCC and our progress on the numerous regulatory projects 
that are ongoing. Much has been accomplished and we will continue to 
move forward to complete these projects and look forward to keeping the 
Committee advised of our progress. I am happy to answer your questions.
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM NEAL S. 
                             WOLIN

Q.1. In October of last year, the FSOC issued an Integrated 
Implementation Roadmap for implementing the Wall Street Reform 
Act. While being respectful of the regulators independence, and 
the need for quality rules, will FSOC consider issuing an 
updated roadmap to provide more clarity on when we should 
expect various important rules to be finalized?

A.1. The integrated Dodd-Frank Act implementation roadmap 
provided the public with a general guide to the agencies' 
anticipated timelines and sequence for implementation of Dodd-
Frank Act rules. Since the roadmap's release, the Financial 
Stability Oversight Council's (Council) independent member 
agencies have engaged extensively with the public to provide 
further detailed information about the status of their 
rulemakings, including frequently updating their Web sites as 
the status of a particular rule or anticipated timeline 
changes. The Council also has made available on its Web site 
links to each member agency's Dodd-Frank Act implementation Web 
page. The Council member agency Web site portal is available 
at: http://www.treasury.gov/initiatives/fsoc/Pages/Member-
Agency-Dodd-Frank-Act-Portal.aspx. We expect that agencies will 
continue to update their implementation timelines as they 
develop or change.

Q.2. How has financial oversight and the implementation of Wall 
Street Reform benefited from the formal and informal 
coordination being done by FSOC?

A.2. The Council has usefully played both formal and informal 
roles in coordinating the implementation of Wall Street Reform. 
Most of its members are independent regulators who have 
specific responsibilities to implement elements of Wall Street 
reform. In some cases the statute provides a formal role for 
the Council to consult with rulemaking agencies or for the 
Secretary, as Chairperson of the Council, to coordinate. For 
example, the Secretary, as Chairperson of the Council had a 
coordination role among the six agencies that released a joint 
rule proposal on credit risk retention and the five agencies 
that released substantially identical proposals to implement 
the Volcker Rule. Further, Federal Reserve Board (FRB) staff 
consulted and coordinated with the Council as the FRB was 
developing its proposal for enhanced prudential standards and 
early remediation requirements under sections 165 and 166 of 
the Dodd-Frank Act. The Council has served as a regular forum 
for independent agencies to discuss important aspects of Wall 
Street reform and has created opportunities to share 
information on key rulemakings.
    In addition, the Council has provided a forum for its 
members to monitor financial market developments and potential 
risks to financial stability. For example, the Council has 
discussed market developments and potential risks related to 
the credit ratings of U.S. debt, the failure of MF Global, the 
sovereign debt crisis in Europe, and trading losses by JPMorgan 
Chase.

Q.3. Even as the SEC and the CFTC work to consult and harmonize 
their respective swap rules, it appears that the two agencies 
do not plan to adopt a joint, integrated and coordinated 
approach to implementing the new rules. Can the Treasury or 
FSOC assist in bringing the CFTC and SEC together on adopting a 
joint implementation plan for derivatives regulation that 
includes identical or coordinated dates for when the new swap 
rules go effective?

A.3. Coordination among rulemaking agencies is essential and a 
particular focus of the Dodd-Frank Act. The Act requires the 
CFTC and SEC to conduct joint rulemakings to implement certain 
provisions of Title VII. Other provisions do not require joint 
rulemakings, but require the SEC and CFTC to treat similar 
products and entities in a similar manner. Although the SEC and 
CFTC are independent regulators, they should, wherever 
possible, have a coordinated and consistent approach to the 
comprehensive reforms to the derivatives markets in the Dodd-
Frank Act. The Council has worked and will continue to work to 
facilitate coordination and information sharing among its 
member agencies, including with respect to Title VII 
implementation.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM NEAL S. 
                             WOLIN

Q.1. Secretary Wolin, as Chairman of the Financial Stability 
Oversight Council, the Treasury Secretary is required to 
respond to emerging threats to the stability of the U.S. 
financial system.
    What specific actions has Treasury taken to protect the 
U.S. financial system from a global financial crisis sparked by 
the ongoing problems in the European Union?

A.1. Secretary Geithner and other senior Treasury officials 
remain closely engaged with European counterparts. Since the 
onset of the eurozone crisis, Treasury officials have offered 
our perspective about the dangers it poses for the global 
recovery, and we have tried to share the lessons of our own 
financial crisis about the importance of responding to market 
challenges decisively and with overwhelming force. U.S. 
regulators are in active dialogue with our financial 
institutions to ensure that exposures are being monitored 
appropriately and to improve their ability to withstand a 
variety of possible financial contagion stress scenarios 
emanating from Europe. The Council and its member agencies will 
continue to carefully monitor the potential risks that could 
emerge from the European sovereign debt crisis.
    The United States has taken a number of actions since the 
crisis to increase the resiliency of our financial system to 
shocks from both domestic and external sources. In February 
2009, U.S. financial regulators put into place a set of 
comprehensive stress tests for the 19 largest U.S. bank-holding 
companies and required 10 of these bank-holding companies to 
improve the quality and quantity of their capital. As a result, 
Tier 1 common equity at large bank-holding companies increased 
by more than $400 billion to $960 billion from the first 
quarter of 2009 through the fourth quarter of 2011, a more than 
70 percent increase. The Dodd-Frank Act also provides the 
United States with a new, strong resolution regime for 
financial companies, and authorizes the FDIC to establish a 
bridge financial company to facilitate the FDIC's orderly wind 
down of a failed financial company. We are working through the 
G-20 and Financial Stability Board to help ensure that major 
global banks and regulators across the globe develop cross-
border recovery and resolution plans by the end of 2012.

Q.2. In questions for the record following the July 21, 2011 
Dodd-Frank hearing, I asked you to specify which regulators you 
were referring to in your Politico op-ed, where you stated that 
``For years regulators in Washington failed to make use of 
their authority to protect the system.'' In your response, you 
did not identify specific regulators that had failed to use the 
authority that they had to protect the system.
    Please identify the specific regulators that you were 
referring to in your Politico op-ed.

A.2. The failure of regulators prior to the crisis to make use 
of their authority to protect the financial system was not 
isolated to a specific agency. Risky practices were allowed 
that ultimately resulted in a significant cost to our financial 
system and the broader economy. The financial regulators 
responsible for consumer financial protection failed both to 
adopt appropriate rules and to enforce sufficiently existing 
rules and therefore allowed harmful mortgage lending practices 
to contribute to the crisis. These authorities have now been 
consolidated into a single agency with a dedicated consumer 
focus in the Consumer Financial Protection Bureau.

Q.3. Secretary Wolin, the Dodd-Frank Act requires the Bureau of 
Consumer Financial Protection to follow Small Business 
Regulatory Enforcement Fairness Act process known as SBREFA. 
This process requires the Bureau to convene panels of small 
businesses to receive their feedback with respect to 
rulemaking. Earlier this year, the Federal Reserve Board 
proposed a rule implementing the ability to repay requirements 
and the Qualified Mortgage exemption under Dodd-Frank. This 
proposed rule transferred to the Bureau this past July.
    Will the Bureau comply with the SBREFA process requirements 
before finalizing the QM and Ability to Repay rule?

A.3. As you know, the CFPB is an independent Federal regulator 
within the Federal Reserve System. Section 1100G of the Dodd-
Frank Act specifically requires the CFPB to comply with the 
SBREFA and therefore convene small business review panels 
before issuing a proposed rule.
    The CFPB has acknowledged the need to reach out to small 
financial service providers to understand the costs and 
benefits of regulation. One method the CFPB is using to 
accomplish this, whenever required, is the SBREFA review panel 
process. The CFPB has already initiated SBREFA review panels 
for rules to be proposed under TILA and RESPA related to 
servicing standards and mortgage originator standards.
    The ability-to-repay and QM rules were proposed by the 
Federal Reserve Board, which is not subject to SBREFA. The 
authority to complete the rulemaking was transferred from the 
Federal Reserve Board to the CFPB as required by the Dodd-Frank 
Act. As an independent regulator, the CFPB is responsible for 
determining compliance with the requirements of the SBREFA for 
the final rule to implement the ability-to-repay standard and 
QM definition.

Q.4. Secretary Wolin, you said about the Office of Financial 
Research (OFR) in testimony earlier this year, ``The 
combination of better, more granular data, and new analytic 
capabilities focused on systemic threats can help all market 
participants better understand risks within the financial 
system.''
    What sort of data and analytical tools is the OFR using 
that we did not have leading up to the last financial crisis? 
How will this help prevent the next crisis?

A.4. The financial crisis exposed critical gaps in data 
available to policymakers and regulators--for example, a shadow 
banking system that was relatively unmonitored and exposures of 
individual financial institutions to their counterparties that 
were difficult to track. The OFR is working with members of the 
Financial Stability Oversight Council (Council), their 
agencies, and their staffs to identify those gaps, recognizing 
the need to collect only those data that are necessary to 
monitor threats to financial stability, to avoid redundancies 
in data collection, and to ensure that sensitive data remain 
secure. One key step in that process has been to prepare an 
inventory of data held by the Council's member agencies.
    The OFR is also working with policymakers, regulators, and 
the private sector on establishing a global legal entity 
identifier (LEI)-a single global standard to identify parties 
to financial transactions uniquely. This will support better 
understanding of exposures and interconnections among and 
across financial institutions-knowledge of which was lacking 
prior to the crisis.
    In addition, the OFR is working with a network of 
researchers, academics, and practitioners, to strengthen tools 
for assessing threats to financial stability.
    Better data and analysis can support the design of stronger 
financial shock absorbers and guardrails to reduce the risk of 
crises. They can also enable earlier warnings and effective 
responses to mitigate the effects of crises when they do occur 
and help draw lessons for the future.

Q.5.a. The agencies have submitted a proposed Volcker rule with 
over 1,300 questions, making it more of a concept release than 
a proposed rule. Additionally, the CFTC has not yet proposed 
its version of the Volcker Rule and might offer a competing 
version.
    Given the complexity of the issues involved and that the 
CFTC has not signed on, do you anticipate extending the comment 
period?

A.5.a. The comment periods for the proposed rules of all five 
rulemaking agencies are now complete, including the CFTC's 
substantially identical proposal. The agencies are now 
reviewing over 18,000 letters submitted by public commenters. 
Treasury is actively working with the independent regulatory 
agencies in their efforts to coordinate and implement the 
statute effectively.
    The Federal Reserve recently issued guidance on the 
statutory conformance period. That guidance confirms that the 
Dodd-Frank Act provides entities covered by the Volcker Rule a 
period of 2 years from the statutory effective date, which 
would be until July 21, 2014, to fully conform their activities 
and investments to the requirements of the Volcker Rule 
provisions of the Act and any final rules implementing those 
provisions.
    The Federal Reserve's guidance states that during the 
conformance period banking entities should engage in good-faith 
planning efforts, appropriate for their activities and 
investments, to enable them to conform their activities and 
investments to the requirements of the Volcker Rule provisions 
of the Dodd-Frank Act and final implementing rules by no later 
than the end of the conformance period.

Q.5.b. Do you anticipate doing a re-proposal?

A.5.b. The five Volcker rulemaking agencies are in the process 
of reviewing comments in an effort to promulgate a strong, 
effective Volcker Rule. I am not aware of the need for 
regulators to do a re-proposal of the Volcker rulemaking.

Q.6. The agencies missed the October 18th statutory deadline 
for adopting a final Volcker rule, and despite agency delays, 
the rule is still scheduled to go into effect in July 2012. The 
Dodd-Frank Act had contemplated at least a 9-month timeframe of 
advance preparation for compliance.

   LDo you believe there will be sufficient time for 
        banking entities to adjust to all of the changes 
        imposed by the rule?

   LWould it make sense to phase in the implementation 
        of the rule, so as to identify potential market 
        disruptions caused by any single element of the rule?

   LThere is ample precedent for a phase-in, such as 
        implementation of Regulation NMS. Do you believe the 
        Volcker Rule calls for a similar phased-in approach?

A.6. The Federal Reserve recently issued guidance on the 
statutory conformance period. That guidance confirms that the 
Dodd-Frank Act provides entities covered by the Volcker Rule a 
period of 2 years from the statutory effective date, which 
would be until July 21, 2014, to fully conform their activities 
and investments to the requirements of the Volcker Rule 
provisions of the Act and any final rules implementing those 
provisions.
    The Federal Reserve's guidance states that during the 
conformance period banking entities should engage in good-faith 
planning efforts, appropriate for their activities and 
investments, to enable them to conform their activities and 
investments to the requirements of the Volcker Rule provisions 
of the Dodd-Frank Act and final implementing rules by no later 
than the end of the conformance period.
    The ``conformance period'' should provide entities covered 
by the rule sufficient time to implement the rule.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM NEAL S. 
                             WOLIN

Q.1. As currently proposed, five separate regulators would be 
responsible not just for rulemaking but also implementation and 
ongoing supervision and enforcement of the rules adopted under 
Section 619 of Dodd-Frank. In your opinion, is there potential 
for inconsistent application of the rules across different 
markets and product classes? Is any effort being made to create 
a unified supervision framework?

A.1. The five Volcker rulemaking agencies released 
substantively identical proposed rules, demonstrating a 
substantial commitment among agencies to a coordinated 
approach. The Secretary of the Treasury, as Chairperson of the 
FSOC, is coordinating the rulemaking implementing the Volcker 
Rule by the SEC, CFTC, and Federal banking agencies.
    Treasury remains committed to working with the rulemaking 
agencies toward a substantively identical final rule. Moreover, 
Treasury believes that it is critical for the agencies to work 
together on ``consistent application and implementation'' of 
the Volcker Rule, as the statute provides.

Q.2. The proposed regulatory framework under Section 619 of 
Dodd-Frank will certainly impact liquidity in the markets for 
many financial products to some degree. What analysis has been 
done to estimate the impact in various representative markets 
(e.g., corporate bonds)? What are the main elements of the 
proposed rules which you believe mitigate potential harm to 
market liquidity? To the extent the proposed rules contain such 
mitigating elements, do you believe those safeguards are 
adequate?

A.2. The health and liquidity of U.S. capital markets is 
essential for economic growth. Treasury is committed to 
effective implementation of the Volcker Rule, including 
prohibiting proprietary trading while promoting economically 
important activities that are essential to liquid and efficient 
capital markets, such as market-making, underwriting, and 
hedging.
    The Council published a study on effective implementation 
of the Volcker Rule on January 18, 2011, that included 
perspectives on liquidity in markets, developed on the basis of 
extensive public comment and outreach to market participants.
    The notice of proposed rulemaking requests additional 
public comment on many aspects of the potential costs and 
benefits of the proposed rules. As the five rulemaking agencies 
work through these comments, it is important that they 
promulgate a final rule that is strong and effective while also 
protecting the proper functioning of our capital markets.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM NEAL S. 
                             WOLIN

Q.1. Last week the House Financial Services Committee passed 
unanimously a bill that exempts end users from margin 
requirements. Proposed margin rules ignore the clear intent of 
Congress that margin should not be imposed on end-user 
transactions. Do you all agree that end-user hedging does not 
meaningfully contribute to systemic risk, that the economy 
benefits from their risk management activity and that they 
should be exempt from margin requirements, and are you working 
together to provide consistent rules to provide end users with 
a clear exemption from margin requirements?

A.1. Although the Department of the Treasury does not regulate 
the over-the-counter derivatives market, we recognize the 
importance of appropriate margin requirements and ensuring that 
end users can continue to prudently hedge risk. The CFTC, the 
SEC, and the banking agencies are in the process of crafting 
rules regarding margin requirements, and are focused on 
adopting requirements that will strengthen the financial system 
while allowing for proper commercial risk management. Both are 
essential for economic growth and job creation. Sections 731 
and 764 of the Dodd-Frank Act give regulators the flexibility 
to set margin and capital requirements ``appropriate for the 
risk associated with the noncleared swaps'' (and noncleared 
security-based swaps).
    The CFTC and prudential regulators have proposed rules 
that, in general, would allow commercial end users that operate 
within established risk limits to enter into noncleared swaps 
contracts without having to post margin on those contracts--
leaving those funds (or assets) free for job creation and 
investment. The SEC is expected to propose its margin rules in 
the coming months. The U.S. regulators have been coordinating 
their efforts in this rulemaking process, including provisions 
regarding margin requirements. They also held a joint public 
roundtable on issues related to margin requirements for swaps, 
including swaps with end-user counterparties.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM NEAL S. 
                             WOLIN

Q.1. Under Dodd-Frank, the Volcker rule becomes effective on 
July 21, 2012 regardless of whether a rule is finalized. 
Banking entities then have 2 years to come into compliance--
July 21, 2014.

   LThe proposed rule requires conformance ``as soon as 
        practicable'' after July 21, 2012. Is that consistent 
        with the statute which gives banking entities a full 2 
        years to come into compliance? What do you mean by ``as 
        soon as practicable?'' How do banks plan around ``as 
        soon as practicable?''

   LIf the Volcker rule takes effect near or after July 
        21, 2012, will you give banking entities a reasonable 
        amount of time to digest and come into compliance with 
        the final rule?

A.1. The Federal Reserve recently issued guidance on the 
statutory conformance period. That guidance confirms that the 
Dodd-Frank Act provides entities covered by the Volcker Rule a 
period of 2 years from the statutory effective date, which 
would be until July 21, 2014, to fully conform their activities 
and investments to the requirements of the Volcker Rule 
provisions of the Act and any final rules implementing those 
provisions.
    The Federal Reserve's guidance states that during the 
conformance period banking entities should engage in good-faith 
planning efforts, appropriate for their activities and 
investments, to enable them to conform their activities and 
investments to the requirements of the Volcker Rule provisions 
of the Dodd-Frank Act and final implementing rules by no later 
than the end of the conformance period.

Q.2. As written, the proposed interagency rule to implement the 
so-called ``Volcker Rule'' would impose new and very 
substantial and costly compliance burdens on many banks that do 
not have a standalone proprietary trading desk or substantial 
fund investments, and never have. Specifically, the proposed 
rule would require these institutions to establish, at a 
minimum, policies and procedures designed to prevent the 
occurrence of activities in which the institution is not 
engaged--in other words, the regulatory equivalent of proving a 
negative. It sounds to me like that could be a very costly 
undertaking for an institution that was never the intended 
target of the Volcker Rule. But more importantly, this makes 
even less sense given the economic challenges we face and the 
need to direct resources toward capital planning and lending.
    Can you comment on why this is necessary? Is there a less 
onerous way to implement the permitted activities?

A.2. The statutory text of the Volcker Rule provides for a 
general prohibition on proprietary trading for all banking 
entities. The rulewriting agencies have designed a proposed 
compliance regime for banking entities based on the amount of 
trading firms engage in and that will provide supervisors with 
the information necessary to both prevent statutorily 
prohibited proprietary trading and protect permissible 
activities like market-making and hedging. This regime has been 
designed to complement existing compliance programs and risk 
management systems within large firms with active trading 
operations, and to have a limited impact on those banking 
entities that are small or have limited trading activity.

Q.3. Dodd-Frank created the FSOC as a way to make sure all of 
the regulatory agencies are communicating and rules across the 
agencies can be as consistent as possible. However, we have 
seen recently with the release of the Volcker rule by the FDIC, 
Federal Reserve, OCC and SEC that even with the FSOC and a law 
that mandates coordination, not all of the agencies can work 
together.
    Despite the new construct, the CFTC is now working on its 
own rule and has not signed onto the existing rule with the 
rest of you. Have you all contemplated how it might work to 
have an individual who handles multiple product lines being 
forced to adhere to the two different standards? Couldn't that 
be problematic functionally? Also, do you believe, since the 
CFTC is going to develop its own rule, we should extend the 
timeline for implementation so that the interested parties can 
view ALL of the regulators' proposals and how they will 
interconnect before filing official comments?

A.3. The five Volcker rulemaking agencies released 
substantively identical proposed rules, demonstrating a 
substantial commitment among agencies to a coordinated 
approach. The Secretary of the Treasury, as Chairperson of the 
FSOC, is coordinating the rulemaking implementing the Volcker 
Rule by the SEC, CFTC, and Federal banking agencies.
    The comment periods for all five rulemaking agencies are 
now complete. The agencies are now reviewing over 18,000 
letters submitted by public commenters. Treasury remains 
committed to working with the rulemaking agencies toward a 
substantively identical final rule.

Q.4. The new Federal Insurance Office will play a critical role 
in negotiating with international bodies to ensure that U.S. 
companies are treated fairly. There are a number of issues that 
will be debated over the next year including Solvency II and 
whether the U.S. regulatory system will be deemed equivalent to 
Europe's. With the U.S. insurance industry being the largest in 
the world with about $1.6 trillion in premiums, do you believe 
that FIO has the resources and access to the highest levels at 
Treasury to adequately represent the United States in these 
discussions?

A.4. The Federal Insurance Office (FIO) provides the U.S. 
Government with dedicated expertise regarding the insurance 
industry. FIO is already playing a number of important roles, 
including supporting the Financial Stability Oversight Council 
with expertise on the insurance industry and engaging in 
international discussions regarding prudential matters in 
insurance policy.
    FIO has the full support and backing of the Treasury 
Department, and is integrated into the Department structure and 
its operations. The Treasury Department is committed to 
building the FIO with appropriate staffing and resources.

Q.5. Follow-up--I understand that your intent is to have FIO be 
able to adequately represent the United States, so I ask that 
you report back to us as soon as possible about the status of 
FIO within the Department of Treasury, where FIO has been 
placed organizationally, and how FIO can be elevated to ensure 
it can properly represent the United States in international 
negotiations.

A.5. FIO is an important office within the Department of the 
Treasury. FIO is an office within the Office of the Under 
Secretary for Domestic Finance and, as appropriate, works 
closely with the Office of the Under Secretary for 
International Affairs and other offices in Treasury. FIO has 
assumed a seat on the executive committee of the International 
Association of Insurance Supervisors (IAIS). FIO is providing 
important leadership in the EU-U.S. insurance dialogue 
regarding such matters as professional secrecy and 
confidentiality standards, group supervision, capital 
requirements, reinsurance, financial reporting, regulator peer 
reviews, and independent audit functions. FIO also participated 
in the recent U.S.-China Strategic and Economic Dialogue in 
Beijing.

Q.6. To what extent has FIO and the new FIO Director been 
involved in discussions regarding systemically important 
financial institutions (SIFIs) in the international arena? I am 
concerned that international bodies may get out in front of the 
United States in SIFI designations, and believe that in 
general, insurance companies are not a systemic risk to the 
financial system. Had FIO been involved with these talks?

A.6. The IAIS has been charged with recommending insurance 
institutions of global importance to the Financial Stability 
Board (FSB). FIO became a full member of the IAIS on October 1, 
2011, and joined the IAIS Executive Committee on February 24, 
2012. FIO has been working through the IAIS to shape 
international consensus so that the IAIS designation process, 
criteria, and timing are consistent with those of the Financial 
Stability Oversight Council. The IAIS has publicly announced 
that it will not recommend individual insurers for designation 
until the end of the first quarter of 2013.

Q.7. FSOC's proposed guidance will initially screen nonbanks 
for systemic relevance on the same $50bn threshold for banks.
    How is this appropriate for the investment fund industry, 
where assets are managed not owned, and frequently in multiple 
funds none of which is $50bn but you have to add several funds 
together to get to the $50bn number?

A.7. The $50 billion threshold in Stage 1 of the Council's 
analysis applies to firms' total consolidated assets. The 
Council intends to apply the Stage 1 thresholds to all types of 
nonbank financial companies, including asset management firms, 
to identify firms for further evaluation in Stage 2. For 
purposes of applying the Council's Stage 1 thresholds to 
separate funds that are managed by the same adviser, the 
Council's guidance states that the Council may consider the 
aggregate risks posed by such separate funds, particularly if 
their investments are identical or highly similar.
    The Council recognizes that asset management companies may 
pose risks that are not well-measured by the quantitative 
thresholds approach, in part because assets under management 
are often not included in measures of consolidated assets. As a 
result, the Council, its member agencies, and the Office of 
Financial Research are analyzing the extent to which there are 
potential threats to U.S. financial stability arising from 
asset management companies. This analysis is considering what 
threats exist, if any, and whether such threats can be 
mitigated by subjecting such companies to Federal Reserve 
supervision and prudential standards, or whether they are 
better addressed through other regulatory measures. The Council 
may issue additional guidance for public comment regarding 
potential additional metrics and thresholds relevant to asset 
manager determinations, as appropriate.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM DANIEL K. 
                            TARULLO

Q.1. Governor Tarullo, the Federal Reserve has recently started 
taking steps toward greater transparency. For example, the Fed 
has begun holding press conferences following monetary policy 
meetings. According to press reports, the Fed will next unveil 
a new communications policy to improve the clarity of its 
monetary policy objectives.

   LWill the Fed's movement toward transparency be 
        extended to the Fed's bank supervision?

   LWhat steps could the Fed take to make it easier for 
        Congress and the public to assess the Fed's regulation 
        of banks?

A.1. In 2011, the Federal Reserve initiated steps designed to 
provide greater transparency around our supervision and 
regulation of the largest, most complex, and systemically 
critical institutions. A key objective of our supervisory 
program for these institutions is to ensure they have adequate 
capital and liquidity to conduct their operations in a safe and 
sound manner and to make the adequacy of their capital and 
liquidity positions transparent to the public. An example of 
our effort to increase transparency is in the area of our 
Comprehensive Capital Analysis and Review (CCAR).
    The CCAR is a broad supervisory exercise that considers a 
range of factors that could impact the capital adequacy of 
these institutions including their internal capital planning 
process, capital distribution policies, pro forma, post-stress 
capital ratios, and projected path to compliance with the 
revised Basel Committee on Bank Supervision regulatory capital 
standards. Recently, we implemented a capital plan rule that 
explains our supervisory process for assessing the capital 
adequacy of CCAR institutions, developed standardized publicly 
available forms and instructions that identify the specific 
information we require these institutions to submit, published 
papers on the CCAR process, and disclosed information on the 
economic scenarios used in the exercise. We intend to further 
increase CCAR transparency by providing the public with 
meaningful summary information on the 2012 CCAR results without 
violating our commitment to ensure the integrity of 
confidential supervisory information. As we implement our 
revised supervisory approach for assessing the liquidity plans 
of these institutions, we will endeavor to provide a similar 
level of transparency.
    These types of actions are intended to make it easier for 
Congress and the public to obtain a clear understanding of the 
effectiveness of our supervisory program without jeopardizing 
the integrity of the process or disclosing confidential 
information that would place U.S. institutions at a competitive 
disadvantage to their international competitors. The Federal 
Reserve believes a similar level of transparency would be 
beneficial at systemically critical institutions located in 
other jurisdictions and is actively working through 
organizations such as the Basel Committee and the Financial 
Stability Board to achieve this objective.

Q.2. The agencies have submitted a proposed Volcker rule with 
over 1,300 questions, making it more of a concept release than 
a proposed rule. Additionally, the CFTC has not yet proposed 
its version of the Volcker Rule and might offer a competing 
version.

   LGiven the complexity of the issues involved and 
        that the CFTC has not signed on, do you anticipate 
        extending the comment period?

   LDo you anticipate doing a re-proposal?

A.2. On December 23, 2011, the Federal Reserve, FDIC, OCC and 
SEC each acted to extend for an additional 30 days, until 
February 13, 2012, the public comment period on the proposal to 
implement section 619 of the Dodd-Frank Act. On January 11, 
2012, the CFTC sought public comments on a proposal to 
implement section 619 of the Dodd-Frank Act that is 
substantively the same as the proposal published by the Federal 
Reserve and the other agencies. The Federal Reserve and other 
agencies will carefully consider the public comments received 
and take those comments into account in crafting a final rule 
to implement section 619.

Q.3. The agencies missed the October 18th statutory deadline 
for adopting a final Volcker rule, and despite agency delays, 
the rule is still scheduled to go into effect in July 2012. The 
Dodd-Frank Act had contemplated at least a 9-month timeframe of 
advance preparation for compliance.

   LDo you believe there will be sufficient time for 
        banking entities to adjust to all of the changes 
        imposed by the rule?

   LWould it make sense to phase in the implementation 
        of the rule, so as to identify potential market 
        disruptions caused by any single element of the rule?

   LThere is ample precedent for a phase-in, such as 
        implementation of Regulation NMS. Do you believe the 
        Volcker Rule calls for a similar phased-in approach?

A.3. As part of the proposed rule, the Federal Reserve and 
other rule-writing agencies requested comment on potential 
alternative approaches for compliance with the proposed rule. 
The proposal specifically requested comment regarding whether a 
phased-in approach would be more effective than the approach 
contained in the proposed rule. The Federal Reserve and other 
agencies will carefully consider all public comments regarding 
this matter in crafting a final rule to implement section 619.
    In addition, the Dodd-Frank Act required the Federal 
Reserve to issue a final rule implementing the various 
conformance periods for activities and investments prohibited 
by the Volcker Rule by January 21, 2011--a date long before the 
proposal implementing the substantive provisions of the Volcker 
Rule was due or proposed. In its final rule establishing the 
conformance periods, the Federal Reserve explained that it 
would revisit the conformance period rule in light of the 
requirements of the final rule implementing the substantive 
provisions of the Volcker Rule. In doing so, the Federal 
Reserve will carefully consider your suggestions--which have 
also been noted by other commenters.
    In formulating the proposed rule, the agencies sought to 
limit the potential impact of the proposed rule on small 
banking entities and banking entities that engage in little or 
no activity prohibited by the Volcker Rule provisions of the 
Dodd-Frank Act. In particular, the agencies proposed to reduce 
the effect of the proposed rule on these banking entities by 
limiting the application of the reporting, recordkeeping, and 
the compliance program requirements of the proposed rule, to 
those banking entities that engage in little or no covered 
trading activities or covered fund activities and investments. 
The agencies also requested comment on a number of questions 
related to the costs and burdens associated with particular 
aspects of the proposal, as well as on any significant 
alternatives that would minimize the impact of the proposal on 
small banking entities. The Federal Reserve will carefully 
consider the public comments received on these points and take 
those comments into account in crafting a final rule consistent 
with the statute.
                                ------                                


RESPONSE TO WRITTEN QUESTION OF SENATOR SCHUMER FROM DANIEL K. 
                            TARULLO

Q.1. The proposed regulatory framework under Section 619 of 
Dodd-Frank will certainly impact liquidity in the markets for 
many financial products to some degree. What analysis has been 
done to estimate the impact in various representative markets 
(e.g., corporate bonds)? What are the main elements of the 
proposed rules which you believe mitigate potential harm to 
market liquidity? To the extent the proposed rules contain such 
mitigating elements, do you believe those safeguards are 
adequate?

A.1. Section 619 of the Dodd-Frank Act prohibits proprietary 
trading, but provides an exemption for market making-related 
activities. The implementing rule proposed by the agencies 
contains the same market making exemption contained in the 
statute. Consistent with the statutory exemption for market 
making-related activities, the proposal is designed to permit 
firms to continue to engage in legitimate market-making 
activity and provide liquidity in all areas of the trading 
markets. The proposal is designed to take into account the fact 
that features of market making activities will vary depending 
on the type of asset involved and the relative liquidity of a 
particular market.
    For example, the proposal offers a large number of metrics 
that are proposed to be developed over time and used for the 
purpose of helping banking firms and supervisors identify 
trading activity that warrants in-depth review. As explained in 
the interagency proposal, some metrics may be more useful for a 
given asset class than others, thereby allowing firms and the 
agencies flexibility in designing an approach that is most 
effective in meeting the statutory prohibitions in the Dodd-
Frank Act and the exemption for market making-related 
activities. The agencies have also made clear in their proposal 
that we intend to take a gradual, heuristic approach to 
implementing and applying certain supervisory tools, such as 
metrics, that we have proposed to use to distinguish prohibited 
proprietary trading from permitted market making, revising and 
refining those tools during the conformance period so as to 
ensure they are appropriately tailored and do not chill market 
liquidity. The Federal Reserve and other rulemaking agencies 
have requested comment on the potential impact that particular 
parts of the rule might have on market liquidity and how any 
negative impacts might be minimized. We will carefully consider 
the public comments received on these points and take those 
comments into account, as appropriate, in crafting a final rule 
to implement section 619.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM DANIEL K. 
                            TARULLO

Q.1. Under Dodd-Frank, the Volcker rule becomes effective on 
July 21, 2012 regardless of whether a rule is finalized. 
Banking entities then have 2 years to come into compliance July 
21, 2014.

   LThe proposed rule requires conformance ``as soon as 
        practicable'' after July 21, 2012. Is that consistent 
        with the statute which gives banking entities a full 2 
        years to come into compliance? What do you mean by ``as 
        soon as practicable?'' How do banks plan around ``as 
        soon as practicable?''

   LIf the Volcker rule takes effect near or after July 
        21, 2012, will you give banking entities a reasonable 
        amount of time to digest and come into compliance with 
        the final rule?

   LAs written, the proposed interagency rule to 
        implement the so-called ``Volcker Rule'' would impose 
        new and very substantial and costly compliance burdens 
        on many banks that do not have a standalone proprietary 
        trading desk or substantial fund investments, and never 
        have. Specifically, the proposed rule would require 
        these institutions to establish, at a minimum, policies 
        and procedures designed to prevent the occurrence of 
        activities in which the institution is not engaged--in 
        other words, the regulatory equivalent of proving a 
        negative. It sounds to me like that could be a very 
        costly undertaking for an institution that was never 
        the intended target of the Volcker Rule. But more 
        importantly, this makes even less sense given the 
        economic challenges we face and the need to direct 
        resources toward capital planning and lending.

    Can you comment on why this is necessary? Is there a less 
onerous way to implement the permitted activities?

A.1. The Dodd-Frank Act required the Federal Reserve to issue a 
final rule implementing the various conformance periods for 
activities and investments prohibited by the Volcker Rule by 
January 21, 2011--a date long before the proposal implementing 
the substantive provisions of the Volcker Rule was due or 
proposed. In its final rule establishing the conformance 
periods, the Federal Reserve explained that it would revisit 
the conformance period rule in light of the requirements of the 
final rule implementing the substantive provisions of the 
Volcker Rule. In doing so, the Federal Reserve will carefully 
consider your suggestions--which have also been noted by other 
commenters.
    In formulating the proposed rule, the agencies sought to 
limit the potential impact of the proposed rule on small 
banking entities and banking entities that engage in little or 
no activity prohibited by the Volcker Rule provisions of the 
Dodd-Frank Act. In particular, the agencies proposed to reduce 
the effect of the proposed rule on these banking entities by 
limiting the application of the reporting, recordkeeping, and 
the compliance program requirements of the proposed rule, to 
those banking entities that engage in little or no covered 
trading activities or covered fund activities and investments. 
The agencies also requested comment on a number of questions 
related to the costs and burdens associated with particular 
aspects of the proposal, as well as on any significant 
alternatives that would minimize the impact of the proposal on 
small banking entities. The Federal Reserve will carefully 
consider the public comments received on these points and take 
those comments into account in crafting a final rule consistent 
with the statute.

Q.2. FSOC's proposed guidance will initially screen nonbanks 
for systemic relevance on the same $50bn threshold for banks.

   LHow is this appropriate for the investment fund 
        industry, where assets are managed not owned, and 
        frequently in multiple funds none of which is $50bn but 
        you have to add several funds together to get to the 
        $50bn number?

A.2. The FSOC has acknowledged in various statements that the 
same measurements of the size of an organization may not be 
appropriate for identifying the risk that organizations in 
different industries pose to the financial system. Indeed, in 
the preamble to its second notice of proposed rulemaking and 
proposed interpretive guidance, the FSOC recognized the need 
for further analysis of appropriate metrics for identifying the 
potential systemic risks posed by asset management companies 
and indicated its intent to consider whether asset management 
companies could in fact pose a threat to U.S. financial 
stability, the extent of any such threats, and whether such 
threats could be mitigated by subjecting these companies to 
Board supervision and prudential standards, or whether these 
threats would be better mitigated through other regulatory 
measures. The FSOC indicated that it may develop additional 
metrics and thresholds more appropriate for identifying asset 
management companies for further review.\1\
---------------------------------------------------------------------------
    \1\ See 76 FR 64264 (2011).
---------------------------------------------------------------------------
    The FSOC also specifically noted that because a limited 
amount of data is currently available about hedge funds and 
private equity firms, it may establish additional metrics or 
thresholds tailored to evaluate these firms once these firms 
are required to provide data about their operations to the 
Securities and Exchange Commission, beginning in 2012, and this 
data becomes available for evaluation by the FSOC.
    As a member agency of the FSOC, the Board is continuing to 
work with the FSOC and its member agencies to establish a 
methodology to identify systemically important nonbank 
financial companies.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM DANIEL K. 
                            TARULLO

Q.1. Last week the House Financial Services Committee passed 
unanimously a bill that exempts end users from margin 
requirements. Proposed margin rules ignore the clear intent of 
Congress that margin should not be imposed on end-user 
transactions. Do you all agree that end-user hedging does not 
meaningfully contribute to systemic risk, that the economy 
benefits from their risk management activity and that they 
should be exempt from margin requirements, and are you working 
together to provide consistent rules to provide end users with 
a clear exemption from margin requirements?

A.1. Although section 723 of the Dodd-Frank Act provides an 
explicit exemption for certain end users from the swap clearing 
requirement, there is no exemption from the margin requirement 
in section 731 or section 764 of the Act for a swap dealer's or 
major swap participant's (MSP's) swaps with end users. Sections 
731 and 764 of the Act require the CFTC, SEC, Board, and other 
prudential regulators to adopt rules for swap dealers and MSPs 
imposing initial and variation margin requirements on all 
noncleared swaps. The statute directs that these margin 
requirements be risk-based.
    The prudential regulators' proposed rule implementing 
sections 731 and 764 follows the statutory framework and 
proposes a risk-based approach to imposing margin requirements 
for transactions with nonfinancial end users. Nonfinancial end 
users appear to pose minimal risks to the safety and soundness 
of swap dealers and to U.S. financial stability when they hedge 
commercial risks with derivatives and the related unsecured 
exposure remains below an appropriate credit exposure 
threshold. Accordingly, the proposed rule does not specify a 
minimum margin requirement for transactions with nonfinancial 
end users. Rather, the proposed rule, consistent with long-
standing supervisory guidance, would permit a swap dealer to 
adopt, where appropriate, its own thresholds below which the 
swap dealer is not required to collect margin from 
counterparties that are nonfinancial end users. Such thresholds 
would be set forth in a credit support agreement and approved 
and monitored by the swap dealer as part of its own credit 
approval process.
    In issuing the proposal, the prudential regulators 
requested comment on a number of questions related to the 
effect of the proposed margin requirements on nonfinancial end 
users, including whether alternative approaches are preferable. 
We have received a variety of comments from members of the 
public, including commercial firms that use swaps to hedge 
their risk. Some of these comments have raised concerns 
regarding aspects of the proposed rule that commenters believe 
(i) would be inconsistent with current market practices with 
respect to nonfinancial end users and/or (ii) would have a 
negative impact on commercial firms and their use of 
derivatives to hedge. The prudential regulators are carefully 
considering all comments, and coordinating with the CFTC and 
the SEC, as we evaluate the proposal in light of comments 
received and formulate a final rule, as required by statute.
                                ------                                


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

Q.1. How has financial oversight and the implementation of Wall 
Street Reform benefited from the formal and informal 
coordination being done by FSOC?

A.1. Financial oversight and implementation have benefited 
tremendously from the formal and informal coordination being 
done by FSOC.
    Formally, the FSOC has established several staff committees 
and workstreams made up of staff at its member agencies to 
address a variety of topics, including a study of the Volcker 
Rule; the identification of potential risks that flow across 
the financial system; the publication of the FSOC annual 
report; and consideration of processes for the designation of 
financial market utilities and nonbank financials for 
heightened review by the Federal Reserve.
    Just as important, I believe has been the progress made 
through informal coordination. By its very existence and unique 
mission, the FSOC has helped foster far greater communication 
between regulatory agencies--both at the principal level and at 
the staff level--about risks to the financial system and about 
more traditional regulatory efforts. These informal contacts 
have helped speed interactions, break down traditional silos, 
and substantially improved information sharing among the 
agencies and I believe all for the better.

Q.2. The Securities Subcommittee recently held a hearing with 
the SEC Division Directors to discuss recent problems reported 
at the SEC. Since that hearing, what changes are you making at 
the SEC to improve its operations?

A.2. As our Division Directors testified in that November 
hearing, a significant amount of work has gone on at the SEC in 
the last 3 years to improve our operations. As one highlight, 
the GAO's audit of the SEC's FY 2011 financial reports found 
that the SEC had succeeded in eliminating both of the two 
material weaknesses in its internal controls. Our staff has 
been working tirelessly to tackle longstanding issues in this 
area, and I am very proud of these results.
    As another example, the SEC's Office of Compliance 
Inspections and Examinations (``OCIE'') continues to implement 
the improvement plan that was a result of OCIE's self-
assessment of the best way to improve process, strategy, 
structure, people and technology. The improvement plan 
initiatives are in various stages of development as OCIE moves 
forward with changes on a number of fronts. Since the November 
testimony, OCIE has implemented a couple of significant new 
improvements:

   LOn January 3, 2012, OCIE nationally implemented its 
        electronic examination workbook, the Tracking and 
        Reporting Examinations National Documentation System 
        (``TRENDS''), for all staff to use when conducting 
        examinations of investment advisers and investment 
        companies. TRENDS is a Web-based program that creates a 
        uniform examination process and record-retention 
        function for the National Examination Program, and 
        streamlines the examination process to enable examiners 
        to more efficiently carry out their examination-related 
        responsibilities.

   LOn January 17, 2012, the National Examination 
        Program implemented a single comprehensive Inspections 
        and Examinations Program Manual. The Manual represents 
        the culmination of 15 months of work to review more 
        than 200 NEP policies, identify policies that were no 
        longer in effect or out of date, and capture the 
        elements of those policies that were critical for the 
        effective operation of the National Examination 
        Program. We recognize that a comprehensive manual that 
        allows all examination staff to have a common set of 
        standards is critical to establishing a high performing 
        and compliant organization.

The OCIE reforms are bearing results, including improved 
actionable information for enforcement investigations.
    Furthermore, the structural reforms undertaken by our 
enforcement program are bearing fruit. In FY 2011, the 
Commission filed 735 enforcement actions--more than ever filed 
in a single year in SEC history. The SEC was better able to 
discover and stop illegal activity earlier and obtained more 
than $2.8 billion in penalties and disgorgement ordered. Among 
the cases filed in FY 2011 were 15 separate actions related to 
the financial crisis, naming 17 individuals, including 16 CEOs, 
CFOs, and other senior corporate officers. To date, the SEC has 
filed financial crisis-related actions against 95 individuals 
and entities, naming nearly 50 CEOs, CFOs, and other senior 
corporate officers. In FY 2011, the number of enforcement 
actions related to investment advisers and broker-dealers also 
grew, with a total of 146 enforcement actions filed related to 
investment advisers and investment companies, a single-year 
record and 30 percent increase over FY 2010. The SEC also 
brought 112 enforcement actions related to broker-dealers, a 60 
percent increase over last fiscal year.

Q.3. Does your agency take economic impact analysis seriously 
in your rules? If so, please discuss if there are any barriers 
to better analysis, such as your agency's funding or ability to 
collect data from stakeholders who may be reluctant to share 
that information.

A.3. High-quality economic analysis is an essential part of SEC 
rulemaking. The Commission has long recognized that a rule's 
potential benefits and costs should be considered along with 
the protection of investors in making a reasoned determination 
that adopting a rule is in the public interest.
    When proposing a rule, the Commission engages in cost-
benefit analysis and invites the public to comment on its 
analysis and provide any information and data that may better 
inform its decisionmaking. In adopting releases, the Commission 
responds to the information provided and revises its analysis 
as appropriate. This approach promotes a regulatory framework 
that strikes an appropriate balance between the costs and the 
benefits of regulation.
    In some cases, economic impact analysis is specifically 
required by statute. For example, the securities laws require 
the Commission, when it engages in rulemaking and is required 
to consider or determine whether the rulemaking is in the 
public interest, to consider, in addition to the protection of 
investors, whether the action will promote efficiency, 
competition, and capital formation.\1\ Section 23(a) of the 
Exchange Act also requires the Commission, in making rules and 
regulations pursuant to the Exchange Act, to consider among 
other matters the impact any such rule or regulation would have 
on competition. The agency may not adopt a rule under the 
Exchange Act that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the 
Act. In addition, the Commission considers the economic impact 
of its rules pursuant to requirements under the Regulatory 
Flexibility Act, the Paperwork Reduction Act, and the Small 
Business Regulatory Enforcement Fairness Act of 1996.
---------------------------------------------------------------------------
    \1\ See Securities Act  2(b); Exchange Act  3(f); Investment 
Company Act  2(c); and Advisers Act  202(c).
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    The Commission also considers the costs and benefits of 
rules as a regular part of the rulemaking process. We are 
keenly aware that our rules have both costs and benefits, and 
that the steps we take to protect the investing public impact 
both financial markets and industry participants who must 
comply with our rules. This is especially relevant given the 
scope, significance, and complexity of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (``Dodd-Frank Act''). 
Our Division of Risk, Strategy, and Financial Innovation 
(``RSFI'') directly participates in the rulemaking process by 
helping to develop the conceptual framing for, and assisting in 
the subsequent writing of, the economic analysis sections of 
the Commission's rulemaking releases.
    Certain costs or benefits may be difficult to quantify or 
value with precision, particularly those that are indirect or 
intangible.\2\ The primary difficulties can be traced to the 
absence of suitable data. This situation often arises in 
rulemaking because many rules are designed to modify the 
behavior of market participants in response to perceived 
problems. When there are no precedents that can be used as a 
basis for analysis, it is impossible to rigorously predict 
anticipated responses to proposed regulations. In addition, 
relevant data are only available from certain market 
participants. During the comment process, the SEC may ask the 
public to quantify their estimates of cost and benefits, 
especially when the dollar costs of proposed rulemaking are 
known only to or best determined by market participants. 
Although this can be an effective method for obtaining data, 
some firms are reluctant to provide information that is 
proprietary or confidential. Further, the process of providing 
the data may be burdensome to the individuals and firms and 
such data may be biased in favor of the respondent's preferred 
outcome.
---------------------------------------------------------------------------
    \2\ In its report discussing cost-benefit analyses of Dodd-Frank 
Act rulemaking by financial regulators, the GAO noted that ``the 
difficulty of reliably estimating the costs of regulations to the 
financial services industry and the Nation has long been recognized, 
and the benefits of regulation generally are regarded as even more 
difficult to measure.'' GAO-12-151, p. 19; see also GAO-08-32.
---------------------------------------------------------------------------
    The Commission's ability to gather data for use in its 
cost-benefit analysis also is constrained in some respects by 
administrative laws, such as the Paperwork Reduction Act, 
although the Dodd-Frank Act provides the Commission with some 
relief from the data gathering constraints of the Paperwork 
Reduction Act in the rulemaking context.\3\
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    \3\ Securities Act Section 19(e), as added by Section 912 of the 
Dodd-Frank Act, provides that, for the purpose of evaluating any rule 
or program of the Commission issued or carried out under any provision 
of the securities laws and the purposes of considering proposing, 
adopting, or engaging in any such rule or program or developing new 
rules or programs, the Commission may: (1) gather information from and 
communicate with investors or other members of the public; (2) engage 
in such temporary investor testing programs as the Commission 
determines are in the public interest or would protect investors; and 
(3) consult with academics and consultants. Securities Act Section 
19(f) provides that any action taken under Section 19(e) will not be 
construed to be a collection of information for purposes of the 
Paperwork Reduction Act.
---------------------------------------------------------------------------
    In light of recent court decisions, RSFI and the rule 
writing divisions, together with the Office of General Counsel, 
are examining improvements in the economic analysis the SEC 
employs in rulemaking. Although the existing processes are 
designed to provide a rigorous and transparent economic 
analysis, we are taking steps to improve this process so that 
future rules are consistent with best practices in economic 
analysis.

Q.4. Even as you work to consult and harmonize the swap rules, 
it appears the SEC and CFTC do not plan to adopt a joint, 
integrated and coordinated approach to implementing the new 
rules. What can be done to ensure that the SEC and CFTC move 
together to issue an implementation plan for public comment 
that includes identical or coordinated dates for when the new 
rules go effective?

A.4. The Dodd-Frank Act calls for the CFTC and the Commission 
to consult and coordinate for the purposes of assuring 
regulatory consistency and comparability to the extent 
possible. The Dodd-Frank Act also calls on the agencies to 
treat functionally or economically similar products or entities 
in a similar manner, but does not require identical rules.
    Commission staff has consulted extensively with the CFTC in 
the development of our proposed rules. Our objective has been 
to establish consistent and comparable requirements, where 
possible, given the differences in the swap and security-based 
swap markets. The Dodd-Frank Act's application to security-
based swaps may differ from its application to the swaps 
regulated by the CFTC, as the relevant products, entities and 
markets themselves are different. Given this, differing 
approaches to the new requirements applicable to swaps and 
security-based swaps pursuant to the Dodd-Frank Act--including 
the timing of compliance with such requirements--may be 
warranted in some instances.
    As we have previously announced, the Commission intends to 
seek public comment on an implementation plan that will aim to 
permit the roll-out of the new security-based swap requirements 
in a logical, progressive, and efficient manner while 
minimizing unnecessary disruptions and costs to the markets. We 
will continue our efforts to coordinate as much as practicable 
with the CFTC as we move toward the publication of this 
implementation plan.

Q.5. Congress created a new whistleblower program to encourage 
private citizens to bring quality tips of securities law 
violations to the attention of the SEC. Has this helped bring 
better quality information to the attention of the SEC 
enforcement staff to prosecute wrongdoers?

A.5. Section 922 of the Dodd-Frank Act established a 
whistleblower program that requires the SEC to pay an award to 
eligible whistleblowers who voluntarily provide the agency with 
original information about a violation of the Federal 
securities laws that leads to a successful SEC enforcement 
action. The Act also required the Commission to promulgate 
rules to implement the program. Our final rules, adopted in May 
2011, became effective on August 12th. Since then, the 
Commission has received hundreds of tips through the 
whistleblower program from individuals all over the country and 
in many parts of the world. That, of course, is in addition to 
the tens of thousands of tips, complaints, and referrals the 
agency receives every year.
    We are indeed reaping the early benefits of the 
whistleblower program through active and promising 
investigations utilizing crucial whistleblower information, 
some of which may lead to rewards in the near future. Though 
some expressed concern that the Commission will be inundated 
with low-quality submissions, to date, the contrary is proving 
to be the case. We continue to see an uptick in higher quality 
submissions, including potential violations that would have 
been difficult to detect or which otherwise may never have come 
to light without the assistance of the whistleblower. In 
addition, the quality of the information we are receiving has, 
in many instances, enabled our investigative staff to work more 
efficiently, thereby allowing us to better utilize our 
resources.
    Our new Office of the Whistleblower is reviewing these 
submissions and working with whistleblowers. The office 
recently filed its Annual Report to Congress detailing its many 
activities since its creation.\4\ These include, among other 
things, the establishment of an outreach program, internal 
training programs, creation of policies and procedures, 
meetings with whistleblowers and their counsel, and 
coordination on investigations with Commission staff. The 
report also includes information about the number and types of 
whistleblower tips and complaints the agency has received since 
the rules became effective.
---------------------------------------------------------------------------
    \4\ See U.S. Securities and Exchange Commission Annual Report on 
the Dodd-Frank Whistleblower Program, Fiscal Year 2011 (November 2011), 
available at http://www.sec.gov/about/offices/owb/whistleblower-annual-
report-2011.pdf.

Q.6. There have been several questions raised about the scope 
of the SEC's proposed rule to implement provisions of Section 
975 of the Wall Street Reform and Consumer Protection Act. Can 
you please provide an update on where this rulemaking stands? 
How are you responding to concerns that the proposed rule is 
---------------------------------------------------------------------------
broader than Congress intended?

A.6. As you know, Section 975 of the Dodd-Frank Act amended 
Section 15B of the Exchange Act to require registration as a 
``municipal advisor'' of any person that provides advice to a 
municipal entity with respect to municipal financial products 
or the issuance of municipal securities. On September 1, 2010, 
the Commission adopted an interim final temporary rule that 
established a procedure for advisors to temporarily satisfy the 
registration requirement as a transitional step toward the 
implementation of a permanent registration regime. The 
temporary rule is currently set to sunset on September 30, 
2012. A municipal advisor that has completed the temporary 
registration form and received confirmation from the Commission 
that the form has been filed temporarily satisfies the 
registration requirement. The Commission has received 
approximately 1,000 confirmed registrations, including 
approximately 300 from registered broker-dealers.
    In addition, on December 20, 2010, the Commission proposed 
for public comment rules that would govern the registration of 
municipal advisors and, among other things, proposed guidance 
and solicited comments on many important issues. We have 
received over 1,000 comment letters on the proposal, and are 
reviewing them carefully. We expect to adopt final rules for 
the registration of municipal advisors later this year.
    We greatly appreciate these comments, including comments 
from the banking industry, public officials, market 
participants and Members of Congress, as the comments are 
helping us to formulate final rules that thoroughly consider 
the costs and benefits to investors, municipal entities, and 
obligated persons. In addition to reviewing the many comments 
received, Commission staff is consulting with staff at other 
regulators, market participants and other stakeholders 
regarding the appropriate scope of the definition of municipal 
advisor. This consultation should help promote a more effective 
and efficient implementation of the requirements of the Dodd-
Frank Act that protects investors, municipal entities, 
obligated persons, and the public interest. The Commission 
expects that the final rule will strike an appropriate balance 
between ensuring that parties engaging in municipal advisory 
activities are registered, without needlessly requiring 
regulated persons already under the jurisdiction of Federal and 
state governmental agencies and self-regulatory organizations 
to comply with additional regulation, examination and 
inspection burdens.

Q.7. Once the definition of a municipal advisor is completed, 
the SEC and the MSRB then have to flesh out the regulatory 
regime that applies to currently unregulated municipal 
advisors. What kind of framework do you intend to apply to 
municipal advisors not employed by underwriters?

A.7. Once the definition of a municipal advisor has been 
finalized, the Commission expects that the MSRB will propose 
several rule changes relating to the regulation of municipal 
advisors, including a proposal that would prohibit ``pay-to-
play'' practices by municipal advisors, as well as proposals 
that would impose uniform standards for the training and 
conduct of municipal advisors. Like all self-regulatory 
organization rules, any proposals relating to the regulation of 
municipal advisors will be subject to public notice and 
comment, as well as Commission review.
    The municipal advisor regulatory framework will apply to 
all ``municipal advisors'', as that term is defined in Section 
15B of the Exchange Act and rules or regulations promulgated 
thereunder. Thus, without other action, this framework would be 
applicable to municipal advisors not employed by underwriters.

Q.8. The sharing of swap data among international and domestic 
regulators is critical to reducing systemic risk in the global 
derivatives market. Could you describe how the SEC plans to 
further the goal of allowing U.S. and international regulators 
the ability to share swap data, and the types of international 
swap data sharing arrangements the United States plans to enter 
into with other financial regulatory authorities? Also, how 
will these international swap data sharing arrangements address 
the indemnification provisions contained in Title VII of the 
Wall Street Reform Act, and do you anticipate any challenges in 
implementing effective data sharing arrangements with 
international regulators resulting from such indemnification 
provisions that cannot be addressed through SEC ``exemptive 
authority,'' powers granted under Section 752 of the Wall 
Street Reform Act, or other authorities provided to your 
agency?

A.8. The Commission and other regulators should have access to 
data pertaining to transactions and participants in the OTC 
derivatives markets that they oversee. By having access to such 
data, regulators will be in a better position to, among other 
things, monitor counterparties' exposure to risk, identify 
concentrations of risk exposures, and evaluate systemic risks.
    The system that the Dodd-Frank Act (DFA) established to 
govern access by relevant foreign and domestic regulators to 
Security Based Swap (SBS) data relies primarily on Security 
Based Swap Data Repositories (SBSDR) making this information 
directly available to these regulators. Specifically, the DFA 
requires all cleared and uncleared SBSs to be reported to a 
SBSDR registered with the Commission or, if the SBS is 
uncleared and no SDR will accept the SBS, to the Commission.
    DFA Section 763(i) requires SBSDRs to share this SBS data, 
on a confidential basis, directly with certain domestic and 
foreign regulators and other parties that the Commission deems 
appropriate, provided that certain criteria are met, including 
notice to the Commission of the SBSDR's receipt of a request 
for information. Pursuant to DFA Section 763(i), among other 
things, the SBSDR is required to obtain an agreement from the 
requesting regulator or third party stating that the requesting 
party will indemnify the Commission and the SBSDR for 
litigation expenses related to the SBSDR's sharing of 
information with the requesting party (Indemnification 
Provision).
Indemnification Provision
    As reflected in the SEC's proposed rule regarding Security-
Based Swap Data Repository Registration, Duties, and Core 
Principles (SBSDR Proposed Rules),\5\ the Indemnification 
Provision raises several challenges with respect to an SDR's 
ability to share SBS data with domestic and foreign 
counterparts. First, foreign regulators, as is the case with 
the SEC, may be legally prohibited or otherwise restricted from 
agreeing to indemnify third parties, including SBSDRs and the 
Commission. Second, the Indemnification Provision could chill 
other regulators' requests for access to data held by SDRs, 
thereby hindering their ability to fulfill their regulatory 
responsibilities. Foreign authorities have expressed these 
concerns about the potential effect of the Indemnification 
Provision.
---------------------------------------------------------------------------
    \5\ November 19, 2010, available at http://www.sec.gov/news/press/
2010/2010-229.htm.
---------------------------------------------------------------------------
    In the SBSDR Proposed Rules, the Commission highlighted two 
ways in which foreign regulators could obtain data maintained 
by SBSDRs without providing indemnification. First, as the 
Commission pointed out in proposing the SBSDR Proposed Rules, 
the Commission has general authority under the Section 24 of 
the Exchange Act to share nonpublic information in its 
possession with both domestic and foreign authorities and 
regulators. The Commission also has specific authority under 
Section 21(a) of the Exchange Act to help foreign authorities 
investigate matters that pertain to their oversight duties. The 
Indemnification Provision would not apply to a Commission 
decision to assist foreign regulators under Section 21(a) or to 
share SBS data in the Commission's possession with foreign 
regulators pursuant to Section 24 of the Exchange Act, as 
discussed above.
    Furthermore, the Indemnification Provision need not apply 
where a U.S.-registered trade repository is separately 
registered in a foreign jurisdiction. Under such a 
circumstance, the foreign supervisor of the U.S.-registered 
trade repository should have direct access to information held 
in the repository pursuant to the law of that foreign 
jurisdiction, provided that applicable U.S. statutory 
confidentiality provisions are met.
International SBS Data Sharing Arrangements
    The Commission may enter into a broad array of arrangements 
with regard to the sharing of SBS data, including memoranda of 
understanding, pacts, exchange of letters, protocols and 
undertakings. In the enforcement context, the Commission 
derives its ability to conclude reciprocal arrangements with 
foreign counterparts from statutory sources that: (i) allow the 
Commission to provide enforcement and supervisory assistance to 
foreign securities authorities;\6\ (ii) permit certain high-
level Commission officials to share confidential information 
with certain types of entities at the Commission's discretion; 
and (iii) allow the Commission to avoid compulsory disclosure 
of records provided to the Commission by foreign securities 
authorities.
---------------------------------------------------------------------------
    \6\ Specifically, the Commission's authority to provide enforcement 
assistance to foreign authorities is contained in Section 21(a)(2) of 
the Exchange Act. Section 21(a) provides that:

    On request from a foreign securities authority, the Commission may 
provide assistance in accordance with this paragraph if the requesting 
authority states that the requesting authority is conducting an 
investigation which it deems necessary to determine whether any person 
has violated, is violating, or is about to violate any laws or rules 
relating to securities matters that the requesting authority 
administers or enforces. The Commission may, in its discretion, conduct 
such investigation as the Commission deems necessary to collect 
information and evidence pertinent to the request for assistance. Such 
assistance may be provided without regard to whether the facts stated 
in the request would also constitute a violation of the laws of the 
United States. In deciding whether to provide such assistance, the 
Commission shall consider whether (A) the requesting authority has 
agreed to provide reciprocal assistance in securities matters to the 
Commission; and (B) compliance with the request would prejudice the 
public interest of the United States.
---------------------------------------------------------------------------
    Since the late 1980s, the Commission successfully has used 
information-sharing arrangements to facilitate cooperation with 
its foreign counterparts. To date, the Commission has entered 
into around 40 memoranda of understanding with foreign 
securities authorities related to enforcement and supervisory 
cooperation.\7\ In addition, the Commission is a signatory to 
the IOSCO Multilateral Memorandum of Understanding, pursuant to 
which the Commission shares information with foreign regulators 
in 80 countries.
---------------------------------------------------------------------------
    \7\ A complete list of the SEC's cooperative arrangements in the 
areas of enforcement cooperation, supervisory cooperation and technical 
assistance can be found at: http://www.sec.gov/about/offices/oia/
oia_cooparrangements.htm.
---------------------------------------------------------------------------
    The Commission staff believes that many of these agreements 
could serve as framework for sharing SBS information for 
enforcement-related purposes. In fact, prior to the adoption of 
the DFA, the SEC staff obtained SBS data from U.S. trade 
repositories pursuant to these MOUs on behalf of foreign 
regulators. The Commission staff will review our existing 
information sharing arrangements and discuss with our 
counterparts whether these arrangements fully cover the sharing 
of SBS data or whether amendments are necessary.

Q.9. In 2010, the Commission adopted rules designed to make 
money market funds more resilient and less likely to break the 
buck. Please discuss the Commission's experience with the 
implementation of the new rules and their impact on money 
market funds and the markets.

A.9. As you note, in 2010 the Commission adopted rules designed 
to increase the resiliency of money market funds. These reforms 
imposed new liquidity requirements on money market funds, 
reduced their exposure to interest rate and credit spread risk, 
and provided a means by which a money market fund that had 
broken the buck could cease redeeming shares and liquidate in 
an orderly manner. The rule changes also have provided the 
Commission with important data that Commission staff uses daily 
to monitor the operations of money market funds. Through this 
monitoring, there is some evidence that these reforms are 
working as intended and that money market funds have much 
greater levels of liquidity to meet potential redemptions. 
There also is some evidence that, as a result of these reforms, 
money market funds hold a greater amount of their portfolio in 
securities with a shorter maturity, which may have had an 
impact on the maturity structure of the short-term funding 
markets and increased rollover risk for entities relying on 
those markets for funding.
    I note, however, that while these reforms to date have been 
successful at what they were intended to do, they specifically 
were not designed to address some of the structural features of 
money market funds that can make them susceptible to runs.
                                ------                                


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

Q.1.a. The agencies have submitted a proposed Volcker rule with 
over 1,300 questions, making it more of a concept release than 
a proposed rule. Additionally, the CFTC has not yet proposed 
its version of the Volcker Rule and might offer a competing 
version.
    Given the complexity of the issues involved and that the 
CFTC has not signed on, do you anticipate extending the comment 
period?

A.1.a. The Commission and the Federal banking agencies extended 
the comment period for the Volcker proposal from January 13, 
2012 to February 13, 2012. This extension gave commenters 
additional time to review, assess, and provide comments on the 
proposal.

Q.1.b. Do you anticipate doing a re-proposal?

A.1.b. We are reviewing the public comments that were submitted 
during the extended comment period before considering whether 
or not the Commission should re-propose a rule to implement the 
Volcker Rule.

Q.2.a. The agencies missed the October 18th statutory deadline 
for adopting a final Volcker rule, and despite agency delays, 
the rule is still scheduled to go into effect in July 2012. The 
Dodd-Frank Act had contemplated at least a 9-month timeframe of 
advance preparation for compliance.
    Do you believe there will be sufficient time for banking 
entities to adjust to all of the changes imposed by the rule?

A.2.a. The joint Volcker Rule proposal requested comment on 
potential timeframes for compliance with the proposed rule. 
Some firms have indicated in meetings with Commission staff 
that the proposed effective date of July 21, 2012 will not 
provide sufficient time to establish a compliance program or to 
begin reporting quantitative measurements due to planned 
implementation of other new regulatory requirements and other 
systems issues. The Commission is considering this issue in 
light of comments received.

Q.2.b. Would it make sense to phase in the implementation of 
the rule, so as to identify potential market disruptions caused 
by any single element of the rule?

A.2.b. The joint Volcker Rule proposal asked for comment about 
a phased implementation of the proposed rule. We will continue 
to consider the option for such an implementation approach 
together with the other agencies involved.

Q.2.c. There is ample precedent for a phase-in, such as 
implementation of Regulation NMS. Do you believe the Volcker 
Rule calls for a similar phased-in approach?

A.2.c. The Commission has some experience with a phased 
implementation of a new rule, and, depending on the 
circumstances, it can be an effective approach to ease 
potential compliance and systems issues. The joint Volcker Rule 
proposal requested comment on a phased-in approach, and we look 
forward to considering comment on the issue.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR SCHUMER FROM MARY L. 
                            SCHAPIRO

Q.1. The proposed regulatory framework under Section 619 of 
Dodd-Frank will certainly impact liquidity in the markets for 
many financial products to some degree. What analysis has been 
done to estimate the impact in various representative markets 
(e.g., corporate bonds)? What are the main elements of the 
proposed rules which you believe mitigate potential harm to 
market liquidity? To the extent the proposed rules contain such 
mitigating elements, do you believe those safeguards are 
adequate?

A.1. The agencies requested extensive comment in the joint 
proposal about the potential economic impacts of the proposed 
implementation of Section 619 of the Dodd-Frank Act. We hope 
commenters will address these issues, particularly with respect 
to the proposed rule's potential impact on market liquidity, 
and that they will provide quantitative data, where possible.
    The Commission staff is aware of a few public analyses that 
have been conducted to date. For example, Oliver Wyman 
conducted a study, commissioned by the Securities Industry and 
Financial Markets Association, on the potential impact of the 
proposed rule on liquidity in the corporate bond market. We 
posted this study in our public comment file and we will 
consider it in developing the final rule.
    We believe the market making, underwriting, and hedging 
exceptions in the rule proposal should help mitigate any 
potential harm to market liquidity, while furthering the goals 
of the Volcker Rule. We are sensitive to issues involving 
market liquidity and will consider any comments discussing the 
proposed exception's potential impact on market liquidity in 
developing a final rule.
                                ------                                


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

Q.1. Last week the House Financial Services Committee passed 
unanimously a bill that exempts end users from margin 
requirements. Proposed margin rules ignore the clear intent of 
Congress that margin should not be imposed on end-user 
transactions. Do you all agree that end-user hedging does not 
meaningfully contribute to systemic risk, that the economy 
benefits from their risk management activity and that they 
should be exempt from margin requirements, and are you working 
together to provide consistent rules to provide end users with 
a clear exemption from margin requirements?

A.1. Federal margin requirements for securities were put into 
effect in response to the events of the Great Depression. They 
are designed to limit leverage in the system and protect 
dealers from uncollateralized exposure. This, in turn, protects 
the financial markets.
    We recognize that certain types of entities active in the 
OTC derivatives markets traditionally have not posted margin 
and that these entities are concerned that regulatory margin 
requirements could interfere with their ability to hedge 
commercial risk. The other Federal agencies implementing the 
OTC derivatives rulemaking mandated by the Dodd-Frank Act have 
proposed requirements to address these concerns. Commission 
staff is consulting with these agencies and taking their 
approaches into consideration as it formulates a rule proposal 
for Commission consideration.

Q.2. Title VII of the Dodd-Frank Act states that the SEC and 
CFTC shall consult and coordinate to the extent possible for 
the purposes of assuring regulatory consistency and 
comparability. Will the SEC and CFTC propose the same rule on 
the extraterritorial application of Title VII?

A.2. Since the Dodd-Frank Act's passage, Commission staff has 
been engaged in ongoing discussions with CFTC staff regarding 
our respective approaches to implementing the statutory 
provisions of Title VII. In many cases, these discussions have 
led to a common approach.
    However, the Dodd-Frank Act's application to security-based 
swaps may differ from its application to swaps, as the relevant 
products, entities and markets themselves are different. As a 
result, in certain instances, it may not be appropriate for the 
Commission's and the CFTC's rules to be identical, given the 
differences in the swap and security-based swap markets.
    We will continue to coordinate with the CFTC to develop as 
harmonized an approach as practicable and appropriate as we 
work to develop proposed rules concerning the treatment of 
cross-border security-based swap transactions.

Q.3. Reviewing public comments and meeting with interested 
parties are good steps, but they are not a substitute for 
rigorous economic analysis that SEC Commissioners KathleenCasey 
and Troy Paredes called for and found lacking in the SEC staff 
study on Investment Advisers and Broker-Dealers. Before 
proposing any specific rule to public, is the SEC going to 
conduct and then make available for public comment rigorous 
economic analysis to inform its decisionmaking?

A.3. In considering any possible regulatory action in 
connection with the study on the investment advisers and 
broker-dealers required under Section 913 of the Dodd-Frank 
Act, the Commission expects to follow its usual practice of 
including its economic analysis for review and public comment 
as part of any rule proposal. This process has important 
benefits, as the comment process provides a mechanism for 
refining our economic analysis by seeking feedback on specific 
issues and making requests for private data. This is especially 
important where, as here, data necessary to conduct an analysis 
may not be publicly available. The process also provides us 
with additional insights from affected parties that may not 
have been known or considered during the proposal's 
development. By analyzing and, where appropriate, incorporating 
this input into its analysis, the Commission is able to 
determine whether to proceed to a final rule and to produce the 
best possible final product.
    In this case, it is likely to be especially important for 
the Commission to ask the public to provide additional relevant 
data or empirical analysis. As such, Commission staff, 
including its economists, is drafting a public request for 
information to obtain data specific to the provision of retail 
financial advice and the regulatory alternatives. It is our 
hope commenters will provide information that will allow 
Commission staff to continue to analyze the various components 
of the market for retail financial advice.
                                ------                                


  RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY FROM MARY L. 
                            SCHAPIRO

Q.1. FSOC's proposed guidance will initially screen nonbanks 
for systemic relevance on the same $50bn threshold for banks.
    How is this appropriate for the investment fund industry, 
where assets are managed not owned, and frequently in multiple 
funds none of which is $50bn but you have to add several funds 
together to get to the $50bn number?

A.1. FSOC's proposed guidance recognized that its proposed 
thresholds may not be appropriate for the investment fund 
industry. The release proposing this guidance states:

        The Council recognizes that the quantitative thresholds it has 
        identified for application during Stage 1 may not provide an 
        appropriate means to identify a subset of nonbank financial 
        companies for further review in all cases across all financial 
        industries and firms. While the Council will apply the Stage 1 
        thresholds to all types of nonbank financial companies, 
        including financial guarantors, asset management companies, 
        private equity firms, and hedge funds, these companies may pose 
        risks that are not well-measured by the quantitative thresholds 
        approach.

        With respect to hedge funds and private equity firms in 
        particular, the Council intends to apply the Stage 1 
        thresholds, but recognizes that less data is generally 
        available about these companies than about certain other types 
        of nonbank financial companies. Beginning in 2012, advisers to 
        hedge funds and private equity firms and commodity pool 
        operators and commodity trading advisors will be required to 
        file Form PF with the Securities and Exchange Commission or the 
        Commodity Futures Trading Commission, as applicable, on which 
        form such companies will make certain financial disclosures. 
        Using these and other data, the Council will consider whether 
        to establish an additional set of metrics or thresholds 
        tailored to evaluate hedge funds and private equity firms and 
        their advisers.

        In addition, the Council, its member agencies, and the Office 
        of Financial Research will analyze the extent to which there 
        are potential threats to U.S. financial stability arising from 
        asset management companies. This analysis will consider what 
        threats exist, if any, and whether such threats can be 
        mitigated by subjecting such companies to Board of Governors 
        supervision and prudential standards, or whether they are 
        better addressed through other regulatory measures. The Council 
        may issue additional guidance for public comment regarding 
        potential additional metrics and thresholds relevant to asset 
        manager determinations.

I expect that the matters your question raises will be 
addressed as FSOC considers potential additional or different 
metrics or thresholds tailored to the investment fund industry.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON FROM GARY 
                            GENSLER

Q.1. Does your agency take economic impact analysis seriously 
in your rules? If so, please discuss if there are any barriers 
to better analysis, such as your agency's funding or ability to 
collect data from stakeholders who may be reluctant to share 
that information.

A.1. The CFTC does take economic impact analysis seriously. For 
example, the Commission strives to include well-developed 
considerations of costs and benefits in each of its proposed 
rulemakings. Relevant considerations are presented not only in 
the cost-benefit analysis section of the CFTC's rulemaking 
releases, but are discussed throughout the release in 
compliance with the Administrative Procedure Act, which 
requires the CFTC to set forth the legal, factual and policy 
basis for its rulemakings.
    In its Dodd-Frank Act rules, each staff rulemaking team 
includes a member from the Commission's Office of the Chief 
Economist. Rulemakings involve quantified costs and benefits to 
the extent it is reasonably feasible and appropriate. For rules 
that do not have quantifiable costs, the Commission seeks to 
explain why such costs are not quantifiable and to explain the 
reasoning and supportive explanation of its predictive 
judgments using qualitative measures.
    With each proposed rule, the Commission has sought public 
comment regarding costs and benefits. Nonetheless, at times 
commenters omit specific cost estimates.

Q.2. Even as you work to consult and harmonize the swap rules, 
it appears the SEC and CFTC do not plan to adopt a joint, 
integrated and coordinated approach to implementing the new 
rules. What can be done to ensure that your two agencies move 
together to issue an implementation plan for public comment 
that includes identical or coordinated dates for when the new 
rules go effective?

A.2. The CFTC and the SEC are coordinating closely in writing 
rules to implement the derivatives provisions of the Dodd-Frank 
Act. We have jointly proposed rulemakings and coordinated and 
consulted on each of the other rulemakings, including sharing 
many of our memos, term sheets and draft work product. This 
close working relationship has benefited the rulemaking 
process, and will continue throughout completion of rulemaking 
and implementation. On May 2 and May 3, 2011, SEC and CFTC 
staff jointly held roundtable discussions to get the public's 
views with regard to the very important issues associated with 
the implementation schedule for final rules. The Commissions 
gathered helpful information on a joint basis through this 
process as well as through subsequent analysis of written 
submissions. The Commissions have collected valuable 
information to guide efforts in a manner that facilitates 
efficient and coordinated implementation.

Q.3. The sharing of swap data among international and domestic 
regulators is critical to reducing systemic risk in the global 
derivatives market. Could you describe how the CFTC plans to 
further the goal of allowing U.S. and international regulators 
the ability to share swap data, and the types of international 
swap data sharing arrangements the United States plans to enter 
into with other financial regulatory authorities? Also, how 
will these international swap data sharing arrangements address 
the indemnification provisions contained in Title VII of the 
Wall Street Reform Act, and do you anticipate any challenges in 
implementing effective data sharing arrangements with 
international regulators resulting from such indemnification 
provisions that cannot be addressed through CFTC ``exemptive 
authority,'' powers granted under Section 752 of the Wall 
Street Reform Act, or other authorities provided to your 
agency?

A.3. The CFTC is working to ensure that both domestic and 
international regulators have access to swap data to support 
their regulatory mandates. The Commission was an active 
participant in the 2010 Financial Stability Board report, which 
highlighted the fact that trade repository data will allow 
authorities to address vulnerabilities in the financial system 
and to develop well-informed regulatory, supervisory and other 
policies that promote financial stability and reduce systemic 
risks.
    The Commission specifically addressed access to swap data 
repository (SDR) data in its final SDR rulemaking. In that 
rulemaking, the CFTC noted that the Dodd-Frank Act requires a 
registered SDR to make available on a confidential basis all 
data obtained by the registered SDR to ``appropriate domestic 
regulators'' and ``appropriate foreign regulators.''
    With respect to indemnification, in its SDR rulemaking, the 
CFTC notes that we are ``mindful that the Confidentiality and 
Indemnification Agreement requirement . . . may be difficult 
for certain domestic and foreign regulators to execute with an 
SDR due to various home country laws and regulations.'' 
Accordingly, the Commission rule allows for the provision of 
access to swap data reported and maintained by SDRs for 
domestic regulators without being subject to the notice and 
indemnification provisions of the Commodity Exchange Act (CEA) 
if the SDR is subject to the regulatory jurisdiction of, and 
registers with, the domestic regulator. In addition, pursuant 
to a separate provision of the CEA, the SDR may be permitted to 
provide direct electronic access to such regulator as a 
designee of the Commission.
    With respect to foreign regulatory authorities, the rule 
provides that data in an SDR may be accessed by an appropriate 
foreign regulator without the execution of a confidentiality 
and indemnification agreement in appropriate circumstances. 
Such access may be granted when the regulator is acting with 
respect to a SDR that is also registered with that regulator or 
when the foreign regulator, pursuant to section 8(e) of the 
CEA, receives SDR information from the Commission.
    The Commission continues to review the indemnification 
provisions of the CEA. CFTC staff is actively discussing with 
foreign regulators how to implement effective information 
sharing arrangements with non-U.S. regulators, and I anticipate 
that staff will make additional recommendations for the 
Commission's consideration to facilitate regulators' access to 
information necessary for regulatory, supervisory and 
enforcement purposes.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM GARY 
                            GENSLER

Q.1. As you noted in your testimony, access by regulators to 
data about the swaps market is important. The Depository Trust 
& Clearing Corporation operates a regulators' portal to give 
regulators access to certain OTC derivatives data.

   LDoes the CFTC have access to and review this 
        information?

   LIf so, when did the CFTC begin accessing and 
        reviewing this information? If not, why not?

A.1. Commission staff expect that the Depository Trust & 
Clearing Corporation (DTCC) will seek registration as a Swap 
Data Repository (SDR). Commission staff make themselves 
available to all such applicants to consult on practical and 
technical issues, including in the case of SDRs how the CFTC 
will use technology to access SDR data. With regard to the DTCC 
regulators' portal, Commission staff is working with the DTCC 
in order to obtain access.

Q.2. The agencies have submitted a proposed Volcker rule with 
over 1,300 questions, making it more of a concept release than 
a proposed rule. Additionally, the CFTC has not yet proposed 
its version of the Volcker Rule and might offer a competing 
version.

   LGiven the complexity of the issues involved and 
        that the CFTC has not signed on, do you anticipate 
        extending the comment period?

   LDo you anticipate doing a re-proposal?

A.2. The CFTC's proposed rule was published in the Federal 
Register on February 14, 2012. The Commission looks forward to 
receiving public comments and will carefully consider those 
comments before determining how to proceed further.

Q.3. The agencies missed the October 18th statutory deadline 
for adopting a final Volcker rule, and despite agency delays, 
the rule is still scheduled to go into effect in July 2012. The 
Dodd-Frank Act had contemplated at least a 9-month timeframe of 
advance preparation for compliance.

   LDo you believe there will be sufficient time for 
        banking entities to adjust to all of the changes 
        imposed by the rule?

   LWould it make sense to phase in the implementation 
        of the rule, so as to identify potential market 
        disruptions caused by any single element of the rule?

   LThere is ample precedent for a phase-in, such as 
        implementation of Regulation NMS. Do you believe the 
        Volcker Rule calls for a similar phased-in approach?

A.3. The CFTC's release of its proposed rulemaking specifically 
asks commenters to provide information regarding time needed to 
comply and proper phasing of implementation. The Commission 
will carefully take into account all public comments.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM GARY 
                            GENSLER

Q.1. Last week the House Financial Services Committee passed 
unanimously a bill that exempts end users from margin 
requirements. Proposed margin rules ignore the clear intent of 
Congress that margin should not be imposed on end-user 
transactions. Do you all agree that end-user hedging does not 
meaningfully contribute to systemic risk, that the economy 
benefits from their risk management activity and that they 
should be exempt from margin requirements, and are you working 
together to provide consistent rules to provide end users with 
a clear exemption from margin requirements?

A.1. In the Dodd-Frank Act, Congress recognized the different 
levels of risk posed by transactions between financial entities 
and those that involve nonfinancial entities, as reflected in 
the nonfinancial, end-user exception to clearing. The risk of a 
crisis spreading throughout the financial system is greater the 
more interconnected financial companies are to each other. 
Interconnectedness among financial entities allows one entity's 
failure to cause uncertainty and possible runs on the funding 
of other financial entities, which can spread risk and economic 
harm throughout the economy. Consistent with this, the CFTC's 
proposed rules on margin requirements focus only on 
transactions between financial entities and exclude end users.

Q.2. While the CFTC proposal may not require margin to be 
posted for uncleared swaps involving some commercial end users, 
the test for qualifying as an end user is based upon a 
distinction between financial entities and nonfinancial 
entities and any swap dealer is considered a financial entity. 
Therefore, the issue becomes how the CFTC defines swap dealers 
and whether many end users may be captured as swap dealers and 
subject to posting margin. Can you explain how many swap 
dealers you are expecting to require to register and what types 
of entities may be captured by this term?

A.2. The Dodd-Frank Act includes a definition of the term 
``swap dealer'' and also requires the CFTC and SEC to jointly 
adopt rules further defining the term. The number of entities 
required to register is uncertain and will depend on the 
decisions of businesses involved. In an effort to estimate how 
many entities may register as swap dealers, CFTC staff analyzed 
the membership statements of relevant trade associations that 
list swap dealers as members and other relevant sources. CFTC 
staff estimates that 100-150 entities may seek to register with 
the Commission as swap dealers.

Q.3. Title VII of the Dodd-Frank Act states that the SEC and 
CFTC shall consult and coordinate to the extent possible for 
the purposes of assuring regulatory consistency and 
comparability. Will the SEC and CFTC propose the same rule on 
the extraterritorial application of Title VII?

A.3. The CFTC and the SEC coordinate very closely with regard 
to all aspects of rulemaking under Title VII of the Dodd-Frank 
Act. The two agencies will continue to do so as the rulemaking 
process proceeds including, with regard to extraterritorial 
application.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY FROM GARY 
                            GENSLER

Q.1. Dodd-Frank created the FSOC as a way to make sure all of 
the regulatory agencies are communicating and rules across the 
agencies can be as consistent as possible. However, we have 
seen recently with the release of the Volcker rule by the FDIC, 
Federal Reserve, OCC and SEC that even with the FSOC and a law 
that mandates coordination, not all of the agencies can work 
together.
    Despite the new construct, the CFTC is now working on its 
own rule and has not signed onto the existing rule with the 
rest of you. Have you all contemplated how it might work to 
have an individual who handles multiple product lines being 
forced to adhere to the two different standards? Couldn't that 
be problematic functionally? Also, do you believe, since the 
CFTC is going to develop its own rule, we should extend the 
timeline for implementation so that the interested parties can 
view ALL of the regulators' proposals and how they will 
interconnect before filing official comments?

A.1. The CFTC's proposed rule was published in the Federal 
Register on February 14, 2012. The Commission looks forward to 
receiving public comments and will carefully consider those 
comments before determining how to proceed further. The 
Commission will continue to coordinate closely with fellow 
regulators regarding implementation of all Dodd-Frank Act 
provisions.

Q.2. The SEC and CFTC recently approved the final version of 
Form PF, the new systemic risk reporting form for SEC-
registered managers to private funds. In addition to Form PF, 
the CFTC has proposed its own separate systemic risk reporting 
forms (Forms CPO-PQR and CTA-PR) for firms registered with the 
CFTC. The final Form PF release indicates that managers that 
are registered with both the SEC and CFTC may have the option 
to consolidate their information on Form PF, rather than 
reporting on separate forms, if the CFTC determines to makes 
changes to its proposed forms.
    The CFTC has not yet published final versions of its 
proposed forms. Does the CFTC intend to allow firms to reduce 
their compliance burden by submitting systemic risk information 
on a single form?

A.2. Entities that are dual registrants may file Form PF for 
all operated pools without having to file Form CPO-PQR on a 
quarterly basis. Such firms will continue to have to file 
demographic information on Schedule A of Form CP-PQR on an 
annual basis.

Q.3. The final Form PF release indicates that the SEC and CFTC 
will adopt policies and procedures to ensure strong 
confidentiality protections for information submitted on Form 
PF. Does the CFTC intend to adopt similar confidentiality 
safeguards for information submitted on Forms CPO-PQR and CTA-
PR? As you know, the recent public disclosure of confidential 
trading information that was provided to the CFTC in 2008 was 
very troubling to market participants.

A.3. The CFTC received considerable comment regarding 
confidential treatment of information submitted by registrants. 
In response, the final rule adopted by the Commission 
designates certain information in Forms CPO-PQR and CTA-PR as 
confidential.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM MARTIN J. 
                           GRUENBERG

Q.1. Chairman Gruenberg, in your testimony you discuss the 
FDIC's implementation of Title II of the Dodd-Frank Act and how 
the FDIC is preparing to resolve, if necessary, systemically 
significant institutions with its new orderly liquidation 
authority.
    Had MF Global been deemed systemically significant before 
its collapse, would the FDIC have been able to resolve MIT 
Global under Title II?

A.1. Yes, the FDIC could have resolved MF Global had it been 
necessary. The FDIC has the legal authority, technical 
expertise, and operational capability to resolve a systemically 
significant financial institution with its new orderly 
liquidation authority. Since the Dodd-Frank Act was enacted on 
July 21, 2010, the FDIC has established a new Office of Complex 
Financial Institutions. This new office is monitoring risk, 
conducting resolution planning, and coordinating with 
regulators overseas. We also have completed a series of 
rulemakings that implement our orderly liquidation authority 
under Title II of the Dodd-Frank Act and have finalized the 
joint rulemaking with the Federal Reserve Board to implement 
the resolution requirements (``living wills'').

Q.2. The agencies have submitted a proposed Volcker rule with 
over 1,300 questions, making it more of a concept release than 
a proposed rule. Additionally, the CFTC has not yet proposed 
its version of the Volcker Rule and might offer a competing 
version.

   LGiven the complexity of the issues involved and 
        that the CFTC has not signed on, do you anticipate 
        extending the comment period?

   LDo you anticipate doing a re-proposal?

A.2. On January 3, 2012, the agencies announced a 30-day 
extension of the comment period to February 13, 2012. On 
January 11, 2012, the CFTC approved its notice of proposed 
rulemaking to implement the Volcker Rule, with substantially 
identical proposed rule text as in the interagency notice of 
proposed rulemaking. The comment period extension was intended 
to facilitate public comment on the provisions of the rule and 
the questions posed by the agencies, as well as coordination of 
the rulemaking among the responsible agencies. The agencies 
will carefully consider the comments received on the proposed 
Volcker Rule in the development of the final rule and, as part 
of this review, will consider whether a re-proposal is 
necessary.

Q.3. The agencies missed the October 18th statutory deadline 
for adopting a final Volcker rule, and despite agency delays, 
the rule is still scheduled to go into effect in July 2012. The 
Dodd-Frank Act had contemplated at least a 9-month timeframe of 
advance preparation for compliance.

   LDo you believe there will be sufficient time for 
        banking entities to adjust to all of the changes 
        imposed by the rule?

   LWould it make sense to phase in the implementation 
        of the rule, so as to identify potential market 
        disruptions caused by any single element of the rule?

   LThere is ample precedent for a phase-in, such as 
        implementation of Regulation NMS. Do you believe the 
        Volcker Rule calls for a similar phased in approach?

A.3. The FDIC and the other agencies recognize the complexities 
associated with Section 619 of the Dodd-Frank Act and the care 
and attention required for implementing and complying with the 
new rules. Perhaps because of these complexities, the statute 
specifically provides affected companies with a minimum of 2 
years to come into compliance with Section 619, which can be 
extended by rule or order by the Federal Reserve Board. 
Further, it is our understanding that many of the institutions 
affected by these proposed rules have begun preparing for their 
promulgation. However, although alternative approaches are not 
explicitly under consideration, the agencies continuously gauge 
the reasonableness of the implementation of rules and their 
impact on stakeholders.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM MARTIN J. 
                           GRUENBERG

Q.1. Last week the House Financial Services Committee passed 
unanimously a bill that exempts end users from margin 
requirements. Proposed margin rules ignore the clear intent of 
Congress that margin should not be imposed on end-user 
transactions.
    Do you all agree that end-user hedging does not 
meaningfully contribute to systemic risk, that the economy 
benefits from their risk management activity and that they 
should be exempt from margin requirements, and are you working 
together to provide consistent rules to provide end users with 
a clear exemption from margin requirements?

A.1. Nonfinancial end users appear to pose minimal risks to the 
safety and soundness of swap dealers and to U.S. financial 
stability when they hedge commercial risks with derivatives and 
the related unsecured exposure remains below an appropriate 
credit exposure threshold. Accordingly, the proposed rule does 
not specify a minimum margin requirement for transactions with 
nonfinancial end users. Rather, the proposed rule, consistent 
with long-standing supervisory guidance, would permit a swap 
dealer to adopt, where appropriate, its own thresholds below 
which the swap dealer is not required to collect margin from 
counterparties that are nonfinancial end users. In addition, 
low-risk financial end users, including most community banks, 
would not be required to post collateral for initial margin 
unless their activity exceeds either substantial thresholds or 
the risk limits set by the swap dealer with which they are 
doing business. Such thresholds are usually explicitly set 
forth in a credit support agreement or other agreement and are 
approved and monitored by the swap dealer as part of its own 
credit approval process.
    As noted in the proposal, this approach is consistent with 
current market practices with respect to nonfinancial end users 
and low risk financial end users, in which swap dealers view 
the question of whether, and to what extent, to require margin 
from their counterparties as a part of the prudent credit 
decision process and consistent with safe and sound banking 
practices. Accordingly, the prudential regulators would expect 
that the direct costs and benefits of hedging with noncleared 
derivatives by nonfinancial end users and low risk financial 
end users, including with respect to opportunity costs and 
earnings volatility, would remain unchanged relative to current 
market practices under the terms of the proposed rule.
    In issuing the proposal, the prudential regulators 
requested comment on a variety of issues related to the effect 
of the proposed margin requirements on nonfinancial end users, 
including whether alternative approaches--such as an exemption 
similar to the mandatory clearing exemption--are preferable. We 
have received a variety of comments from members of the public, 
including commercial firms that use swaps to hedge their risk. 
The prudential regulators will carefully consider all comments 
as we evaluate the proposal in light of comments received and 
formulate a final rule.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY FROM MARTIN J. 
                           GRUENBERG

Q.1. As written, the proposed interagency rule to implement the 
so-called ``Volcker Rule'' would impose new and very 
substantial and costly compliance burdens on many banks that do 
not have a standalone proprietary trading desk or substantial 
fund investments, and never have. Specifically, the proposed 
rule would require these institutions to establish, at a 
minimum, policies and procedures designed to prevent the 
occurrence of activities in which the institution is not 
engaged--in other words, the regulatory equivalent of proving a 
negative. It sounds to me like that could be a very costly 
undertaking for an institution that was never the intended 
target of the Volcker Rule. But more importantly, this makes 
even less sense given the economic challenges we face and the 
need to direct resources toward capital planning and lending.
    Can you comment on why this is necessary? Is there a less 
onerous way to implement the permitted activities?

A.1. We agree that banking organizations that are not engaged 
in activities or investments prohibited by the Volcker Rule 
should not face an onerous compliance burden. In fact, the 
proposed regulations specifically provide that such a banking 
organization will have been deemed to satisfy compliance 
requirements if its existing compliance policies and procedures 
include provisions designed to prevent the institution from 
becoming engaged in statutorily prohibited activities or making 
statutorily restricted investments. Further, for those banks 
that do engage in trading activities covered by the statute, 
the regulations provide an asset size threshold for the 
reporting and record keeping requirements, which provide 
smaller institutions with significantly less burdensome 
requirements. We recognize the importance of this issue and 
will carefully consider comments concerning implementation 
burden.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM JOHN WALSH

Q.1. Comptroller Walsh, in your testimony you discuss the Dodd-
Frank requirement that the Bureau of Consumer Financial 
Protection and prudential regulators coordinate their 
supervision activities in order to effectively regulate banks. 
You note that the Bureau must consult with prudential 
regulators and that the Bureau and prudential regulators are 
required to conduct examinations simultaneously. You state, 
however, ``Candidly, aspects of this portion of the Dodd-Frank 
Act do not mesh well with how bank examination activities are 
actually conducted.''
    Would you please elaborate on this statement?

A.1. Section 1025 of the Dodd-Frank Act requires the prudential 
regulators and the CFPB to coordinate their examination and 
supervision of insured depository institutions and their 
affiliates with assets of more than $10 billion in a number of 
ways. First, section 1025 requires the prudential regulators 
and the CFPB to coordinate their examinations of such 
institutions and conduct simultaneous examinations unless an 
institution requests the examinations to be conducted 
separately. In addition, the prudential regulators and the CFPB 
must share draft reports of examination and the receiving 
agency must be provided at least 30 days to comment on the 
draft report before it is made final. Moreover, an agency must 
take into consideration any comments received from the other 
agency before issuing a final report of examination or taking 
supervisory action.
    We support the goal reflected in section 1025 of minimizing 
unnecessary regulatory burden in connection with the 
supervisory activities of the CFPB and the prudential 
regulators. However, as drafted, the requirements of section 
1025 do not mesh well with the practicalities and scope of 
prudential regulators' actual examination responsibilities and 
practices. First, the universe of institutions with over $10 
billion in assets are examined in different ways--some are 
subject to continuous supervision by resident exam teams, 
others are subject to more discrete point-in-time exams. These 
differences present challenges in coordinating ``simultaneous'' 
examinations. The scope of the prudential regulators' 
examinations also is much broader than the examination 
authority of the CFPB such that ``simultaneous'' examination 
activity could have little relevance to the apparent statutory 
objective unless the examination activity is related to the 
same activity, product or service at an institution.
    The banking agencies and the CFPB are currently discussing 
a potential Memorandum of Understanding that would better 
synchronize exam activities in such related areas.

Q.2.a. The agencies have submitted a proposed Volcker rule with 
over 1,300 questions, making it more of a concept release than 
a proposed rule. Additionally, the CFTC has not yet proposed 
its version of the Volcker Rule and might offer a competing 
version.
    Given the complexity of the issues involved and that the 
CFTC has not signed on, do you anticipate extending the comment 
period?

A.2.a. Due to the complexity of the issues involved and to 
facilitate coordination of the rulemaking among the responsible 
agencies as provided in section 619 of the Dodd-Frank Act, the 
OCC, Board, FDIC and SEC (the agencies) extended the comment 
period on the joint notice of proposed rulemaking implementing 
section 619 (the Proposal) from January 13, 2012 until February 
13, 2012. The notice of extension of comment period was 
published in the Federal Register on January 3, 2012. See 77 
Fed. Reg. 23.

Q.2.b. Do you anticipate doing a re-proposal?

A.2.b. The agencies will consider this question after they have 
had an opportunity to review all comments submitted on the 
Proposal and have evaluated the extent of changes that they 
envision making to the Proposal.

Q.2.c. The agencies missed the October 18th statutory deadline 
for adopting a formal Volcker rule, and despite agency delays, 
the rule is still scheduled to go into effect in July 2012. The 
Dodd-Frank Act had contemplated at least a 9-month timeframe of 
advance preparation for compliance. Do you believe there will 
be sufficient time for banking entities to adjust to all of the 
changes imposed by the rule?

A.2.c. Much of the timing for compliance with the final Volcker 
regulation is dictated by section 619 of the Dodd-Frank Act. 
Section 619 goes into effect on July 21, 2012 (even without 
final rules), and provides a 2-year conformance period that 
runs until July 2014. Banking entities may use this conformance 
period to bring their existing activities, investments, and 
relationships into compliance with section 619. In addition, 
section 619 provides that banking entities may request up to 
three 1-year extensions of this conformance period from the 
Federal Reserve Board and another 5-year extension from the 
Board to divest of certain illiquid funds.
    On February 8, 2011, the Board issued a Conformance Rule 
implementing the conformance provisions of section 619. 
However, the Conformance Rule was re-issued on November 7, 
2011, together with the Proposal issued by the agencies, and 
the Board is soliciting comment on whether any portion of the 
Conformance Rule should be revised in light of other elements 
of the Proposal.
    We also recognize that the Proposal (including its 
compliance program requirements and recordkeeping and reporting 
requirements), if adopted as published for comment, would 
become effective on July 21, 2012. Recognizing the potential 
issues this presents, the Proposal specifically solicits 
comment on whether this effective date will provide banking 
entities with sufficient time to comply with the prohibitions 
and restrictions on proprietary trading and covered fund 
activities and implement the proposed compliance program and 
reporting and recordkeeping requirements. The agencies plan to 
consider carefully any comments received on this issue.

Q.2.d. Would it make sense to phase in the implementation of 
the rule, so as to identify potential market disruptions caused 
by any single element of the rule?

A.2.d. The Proposal expressly requests comment on whether the 
agencies should use a gradual, phased-in approach to implement 
the statute rather than having the implementing rules become 
effective at one time and asks banking entities to identify 
prohibitions andrestrictions that should be implemented first, 
if the agencies choose to implement a phased-in approach. We 
plan to consider carefully any comments received on this issue.

Q.2.e. There is ample precedent for a phase-in, such as 
implementation of Regulation NMS. Do you believe the Volcker 
Rule calls for a similar phased-in approach?

A.2.e. The Proposal solicits comment on this issue and the 
agencies plan to carefully consider any comments received on 
the merits of a phased-in approach.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO FROM JOHN WALSH

Q.1. Last week the House Financial Services Committee passed 
unanimously a bill that exempts end users from margin 
requirements. Proposed margin rules ignore the clear intent of 
Congress that margin should not be imposed on end-user 
transactions. Do you all agree that end-user hedging does not 
meaningfully contribute to systemic risk, that the economy 
benefits from their risk management activity and that they 
should be exempt from margin requirements, and are you working 
together to provide consistent rules to provide end users with 
a clear exemption from margin requirements?

A.1. We agree that end-user hedging does not meaningfully 
contribute to systemic risk, and that the economy benefits from 
risk management activity. As the agencies stated as part of the 
rule proposal, nonfinancial end user hedging typically poses 
minimal risk to U.S. financial stability, particularly in the 
case of small margin exposures. (76 Federal Register 27564, 
27570 (May 11, 2011).
    However, swaps with a commercial end user do expose the 
dealer to credit risk, similar to an unsecured line of credit. 
The banking agencies have long required dealers to prudently 
manage this credit risk, in combination with their credit risk 
management measures for other credit exposures to the same end 
user. Banks have legal lending limits to ensure that they do 
not have potentially dangerous concentrations of risk with a 
single counterparty. Derivatives exposures are simply another 
use of those limits. While end-user activity has not 
historically contributed meaningfully to systemic risk, it has 
led to credit losses. Banks report charge-offs of derivatives 
exposures nearly every quarter. They are typically related to 
swaps with commercial borrowers, who indeed have used swaps as 
a hedge. Hedging by commercial end users does not necessarily 
translate into lower counterparty risk, nor for that matter 
does it insulate a business from poor operating or investment 
decisions that can lead to failure.
    The proposed margin requirements were designed to 
incorporate this existing safety and soundness practice, to 
prevent unusually large credit exposure to a commercial end 
user in the form of swaps from going unmanaged, by requiring 
margin when the dealer's credit exposurefrom swaps exceed the 
bank's internal credit limit for the counterparty.
    We received a number of comments, both from the industry 
and commercial counterparties, expressing concern about this 
aspect of the proposal. We did not intend our proposal to 
signal a change from current practices in this regard. Credit 
exposure from swaps with a commercial counterparty is typically 
a relatively small part of the overall credit relationship to 
the firm, and banks rely on their credit risk management 
process to keep the complete exposure within the internal 
credit limit. As we proceed with developing a final rule, we 
will be careful to take the views of these commenters into 
account.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR TOOMEY FROM JOHN WALSH

Q.1. Could you please explain the effect on banks, especially 
community banks, if the SEC's municipal adviser proposal is 
finalized as written? For example, there will clearly be 
duplicative examinations and regulations. Do you think there is 
need for this duplication, or are there areas that the SEC 
would review that bank regulators do not? What do you think the 
costs and potential consequences of such duplicative 
examination would be?

A.1. As proposed, the SEC's municipal advisor rules apply not 
only to previously unregulated activities, but also to banks 
that provide traditional banking products and services to 
municipalities. Banks would be subject to ongoing supervision, 
examination, and enforcement by the SEC simply by providing 
municipalities with advice on traditional banking activities 
such as deposit accounts, savings accounts, certificates of 
deposit, bank loans and letters of credit, and trust and 
fiduciary services. Banks are already subject to ongoing 
supervision, examination, and enforcement by the OCC and other 
Federal banking regulators for these same activities. 
Duplicative regulation and supervision of traditional banking 
activities is unnecessary and may be especially burdensome on 
smaller, community institutions. These concerns were included 
in the attached comment letter from John Walsh, Acting 
Comptroller of the Currency, dated May 24, 2011, on the SEC's 
Proposed Regulation of Municipal Advisors, File No. S7-45-10.

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