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



 
  FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL 
                               YEAR 2012

                              ----------                              


                         WEDNESDAY, MAY 4, 2011

                                       U.S. Senate,
           Subcommittee of the Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 10:17 a.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Richard J. Durbin (chairman) 
presiding.
    Present: Senators Durbin, Lautenberg, and Moran.

                  COMMODITY FUTURES TRADING COMMISSION

STATEMENT OF HON. GARY GENSLER, CHAIRMAN

             OPENING STATEMENT OF SENATOR RICHARD J. DURBIN

    Senator Durbin. Good morning. I'm pleased to convene this 
hearing to consider the fiscal year 2012 funding request of two 
key Federal regulatory agencies within the jurisdiction of the 
Senate Committee on Appropriations Subcommittee on Financial 
Services and General Government--the Commodity Futures Trading 
Commission (CFTC) and the Securities and Exchange Commission 
(SEC). Before I go further, let me apologize for being a few 
minutes late, but I opened a session this morning and it took a 
few minutes to get that started.
    I welcome my distinguished Ranking Member, Senator Jerry 
Moran, other colleagues who've joined me on the dais today, and 
others that may arrive during the course of the proceeding.
    Joining us today to present testimony on the critical work 
of these agencies; to share how they've used the resources 
provided over the past several years; and to explain the 
details of their budgetary needs for the next fiscal year, are 
the Honorable Gary Gensler, chairman of the CFTC, and the 
Honorable Mary L. Schapiro, chairman of the SEC.
    The subcommittee has received a statement for the record 
from Colleen M. Kelley, president of the National Treasury 
Employees Union, regarding the funding for the SEC. And if 
there's no objection, I ask that it be included in the record 
of these proceedings.
    The CFTC and the SEC both occupy pivotal positions at the 
forefront of stimulating and sustaining economic growth and 
prosperity in America, while protecting the marketplace from 
fraud and manipulation. Market users, financial investors, and 
the U.S. economy rely on the vigilant oversight of these two 
agencies in today's rapid-paced, evolving, and often volatile, 
global marketplace.
    It's clear that Chairman Gensler and Chairman Schapiro, 
their fellow commissioners, and their respective staff, have 
invested inestimable hours in paving the way toward a more 
reliable regulatory foundation--one that will safeguard the 
stability and integrity of the futures and securities markets. 
Particularly at this time in history, we depend on their 
foresight and leadership to implement promptly, prudently, and 
transparently the array of comprehensive reforms designed to 
strengthen our regulatory framework.
    The CFTC carries out market surveillance, compliance, and 
enforcement in the futures arena. It detects, deters, and 
punishes abusive trading activity and the manipulation of 
commodity prices which could have a negative impact on 
consumers and the economy.
    Adding to the challenge of the CFTC's mission is a 
significantly transformed, globalized, electronic, around-the-
clock, and highly diversified marketplace. With the enactment 
of the Dodd-Frank Act financial regulatory reform, the CFTC's 
mission was substantially expanded to embrace oversight of the 
swaps marketplace, the vast, once-in-the-shadows world of over-
the-counter (OTC) derivatives.
    To grasp the vast scope of the CFTC's additional 
responsibility, it's useful to consider the long-regulated U.S. 
futures marketplace, historically policed by the CFTC, that has 
the notional value of approximately $40 trillion--enormous by 
anyone's calculation. It pales in comparison to the U.S. OTC 
derivatives marketplace now coming under the CFTC's purview, 
with a notional value not of $40 trillion, but $300 trillion--
nearly eight times the amount of the regulated futures market.
    As the investor's advocate, the SEC is responsible for 
maintaining fair, orderly, and efficient stock and securities 
markets. The SEC conducts day-to-day oversight of major market 
participants, monitors corporate disclosure of information to 
the public, and investigates and pursues civil and criminal 
enforcement actions.
    To fulfill its market oversight and investor protection 
functions, the SEC must monitor 1,800 investment advisers, 
7,500 mutual funds, and more than 5,000 broker-dealers with 
more than 160,000 branch offices. The SEC reviews the 
disclosures and financial statements of approximately 10,000 
reporting companies, oversees approximately 500 transfer 
agents, 15 national securities exchanges, 9 clearing agencies, 
and 10 nationally recognized statistical rating organizations.
    With the enactment of the Dodd-Frank Act last July, the 
SEC's responsibilities grew dramatically. Now the SEC is in the 
driver's seat for issuing 100 new rules; creating 5 new 
offices; producing more than 20 studies and reports; overseeing 
OTC derivatives markets and hedge fund advisers; registering 
municipal advisers and security-based swap market participants; 
enhanced supervising of Nationally Recognized Statistical 
Rating Organizations and clearing agencies; regulating asset-
backed securities; and creating a new whistleblower program.
    I welcome the opportunity today to look at the critical 
budgets of these two very, very important agencies. I am 
pleased that during the past several years that I've been 
honored to chair the subcommittee we have substantially and 
dramatically increased the funding of both of these agencies. 
In terms of resources in recent years, since fiscal year 2007 
funding for the CFTC has increased from $97.9 million to the 
$202.6 million recently enacted in the fiscal year 2011 
continuing resolution--a 107 percent hike in funding over a 4-
year period. The SEC's funding has grown from $892 million in 
fiscal year 2007 to $1.185 billion in fiscal year 2011--a 33 
percent hike in funding in that time span.
    Compared to the allocation available to the subcommittee 
last July when we prepared our recommendations, we experienced 
a significantly reduced overall level for purposes of funding 
the decisions for the recently enhanced fiscal year 2011 full 
year continuing resolution. Encountering a substantial 
reduction in our available funds of more than $3.5 billion, 
representing a 13 percent cut below what we had to work with 
last July, was far from ideal.
    It also meant an overall decrease of $2.35 billion, or 10 
percent below a freeze at the fiscal year 2010 enacted level, 
making for some tough choices. The fiscal year 2012 forecast 
does not look rosy. I fully expect to face equally complicated 
and challenging funding requirements.

                           PREPARED STATEMENT

    I'm going to ask that the remainder of my statement be 
placed in the record, and I'd like to now turn it over to my 
Ranking Member, Senator Moran of Kansas, for any opening 
remarks he might have.
    [The statement follows:]

            Prepared Statement of Senator Richard J. Durbin

    Good morning. I am pleased to convene this hearing to consider the 
fiscal year 2012 funding requests of two key Federal regulatory 
agencies within the jurisdiction of the Appropriations Subcommittee on 
Financial Services and General Government: the Commodity Futures 
Trading Commission (CFTC) and the Securities and Exchange Commission 
(SEC).
    I welcome my distinguished ranking member, Senator Jerry Moran, and 
other colleagues who have joined me on the dais today, and others who 
may arrive during the course of these proceedings.
    Joining us today to present testimony on the critical work of their 
agencies, to share how they have used the resources provided over the 
past couple years, and to explain the details of their budgetary needs 
for fiscal year 2012 are the Honorable Gary Gensler, Chairman of the 
CFTC and the Honorable Mary L. Schapiro, Chairman of the SEC.
    The CFTC and the SEC both occupy pivotal positions at the forefront 
of stimulating and sustaining economic growth and prosperity in our 
country--while protecting the marketplace from fraud and manipulation.
    Market users, financial investors, and the U.S. economy rely on 
vigilant oversight by these two agencies in today's rapid-paced, 
evolving, and often volatile global marketplace.
    It is clear that both Chairman Gensler and Chairman Schapiro, their 
fellow Commissioners, and their respective staff have invested 
inestimable hours in paving the way toward a more reliable regulatory 
foundation--one that will safeguard the stability and integrity of the 
futures and securities markets. Particularly at this time in history, 
we depend on their foresight and leadership to promptly, prudently, and 
transparently implement the array of comprehensive reforms designed to 
strengthen our regulatory framework.
    The CFTC carries out market surveillance, compliance, and 
enforcement programs in the futures arena. The CFTC detects, deters, 
and punishes abusive trading activity and manipulation of commodity 
prices, which could have negative impacts on consumers and the economy.
    Adding to the challenge of the CFTC's mission is a significantly 
transformed, globalized, electronic, round-the-clock, and highly 
diversified marketplace. With the enactment of Dodd-Frank financial 
regulatory reform, the CFTC's mission was substantially expanded to 
embrace oversight of the swaps marketplace--the vast ``once-in-the-
shadows'' world of over-the-counter (OTC) derivatives.
    To grasp the vast scope of the CFTC's additional responsibilities, 
it is useful to consider that the long-regulated U.S. futures 
marketplace historically policed by the CFTC has a notional value of 
approximately $40 trillion. Enormous--by anyone's calculation. But it 
pales in comparison to the U.S. OTC derivatives marketplace now coming 
under the CFTC's purview--with a notional value estimated at $300 
trillion--nearly eight times the notional amount of the regulated 
futures markets.
    As the ``investors advocate,'' the SEC is responsible for 
maintaining fair, orderly, and efficient stock and securities markets. 
The SEC conducts day-to-day oversight of the major market participants, 
monitors corporate disclosure of information to the investing public, 
and investigates and pursues civil and criminal enforcement actions 
against securities law violations.
    To fulfill its market oversight and investor protection functions, 
the SEC must monitor 1,800 investment advisers, 7,500 mutual funds, and 
more than 5,000 broker-dealers with more than 160,000 branch offices. 
The SEC reviews the disclosures and financial statements of 
approximately 10,000 reporting companies, oversees approximately 500 
transfer agents, 15 national securities exchanges, 9 clearing agencies, 
10 nationally recognized statistical rating organizations (NRSROs), as 
well as the Public Company Accounting Oversight Board, Financial 
Industry Regulatory Authority, Municipal Securities Rulemaking Board, 
and the Securities Investor Protection Corporation.
    With the enactment of the Dodd-Frank Act last July, the SEC's 
responsibilities grew considerably. Now the SEC is in the driver's seat 
for issuing 100 new rules, creating five new offices, producing more 
than 20 studies and reports, overseeing the over-the-counter 
derivatives market and hedge fund advisers; registering municipal 
advisers and security-based swap market participants; enhanced 
supervising of NRSROs and clearing agencies; regulating asset-backed 
securities; and creating a new whistleblower program.
    I welcome the opportunity today to conduct critical oversight of 
these two agencies through a candid discussion of where they are today, 
where they need to be, and how we can work to provide resources they 
need to satisfy their vital missions.
    I am pleased that over the past several years, this subcommittee 
has been able to substantially boost the funding approved for the CFTC 
and the SEC to help address pressing resource needs.
    In terms of resources in recent years, since fiscal year 2007, 
funding for the CFTC has increased from $97.981 million to the $202.675 
million recently enacted in the fiscal year 2011 continuing resolution, 
a 107 percent hike in funding. The SEC's funding has grown from $892.6 
million in fiscal year 2007 to $1.185 billion in fiscal year 2011, a 33 
percent hike in funding over the time span.
    Compared to the allocation available to this subcommittee last July 
when we prepared our fiscal year 2011 recommendations, we experienced a 
significantly reduced overall level for purposes of funding decisions 
for the recently enacted fiscal year 2011 full-year continuing 
resolution. Encountering a substantial reduction in our available funds 
of more than $3.5 billion, representing a 13 percent cut, below where 
we were last July was far from ideal. It also meant an overall decrease 
of $2.35 billion, or 10 percent, below a freeze at the fiscal year 2010 
enacted level--making for many tough choices and painful sacrifices.
    The fiscal year 2012 forecast does not look rosy. I fully expect to 
face equally complicated and challenging funding decisions as we 
prepare our bill for the ensuing fiscal year.
    Looking ahead, for fiscal year 2012, the President seeks funding of 
$308 million for the CFTC, an increase of $105 million (52 percent) 
more than the fiscal year 2011 enacted level of $206.7 million, which 
itself is an increase of $33.98 million, a 20 percent hike, above the 
fiscal year 2010 enacted level of $168.8 million.
    For the SEC, the President's fiscal year 2012 budget seeks base 
funding of $1.407 billion. This is an increase of $222.5 million (19 
percent) above the fiscal year 2011 enacted level of $1.185 billion, 
not including an additional $33 million in prior-year unobligated 
balances. The fiscal year 2011 base funding represents an increase of 
$74 million, or 7 percent, more than the fiscal year 2010 enacted level 
of $1.111 billion.
    Oversight Responsibility.--The Congress probably exercises its most 
effective oversight of agencies and programs through the appropriations 
process. It allows an annual check-up and review of operations and 
spending. Today's hearing provides a valuable opportunity to ask some 
key questions:
  --Are the CFTC and the SEC keeping pace with developments in the 
        markets particularly the emerging prevalence of new-fangled, 
        more complex financial products?
  --Do these agencies have the right mix of talent and specialized 
        expertise to be vigilant watchdogs rather than timid lap dogs?
  --Are they ahead of the curve, rather than trailing behind, when it 
        comes to stopping unscrupulous, greed-driven schemers who 
        pursue selfish gain at the expense of the unwary and unwitting?
  --Do they have nimble, state-of-the-art, sophisticated information 
        technology to augment and support their human capital?
  --What are the likely consequences of budget belt-tightening and 
        possibly reduced resources?
    I look forward to hearing more about what each of these agencies 
have been able to accomplish since our last hearing, what resource gaps 
remain to be filled to make them more robust, responsive regulators, 
and how do we best get there amid growing deficits and spending cut 
sentiments.
    It will be helpful to hear from both Chairmen their honest 
appraisals about the resources they will require to achieve their 
missions, keep pace with change, and becomes as sophisticated as, if 
not more so, than the entities they monitor--while responsibly managing 
taxpayer dollars.

                    STATEMENT OF SENATOR JERRY MORAN

    Senator Moran. Chairman Durbin, thank you very much. Thank 
you for your kindness and your graciousness to me, and thank 
you for calling this hearing.
    And I welcome the two chairmen, Chairman Gensler and 
Chairman Schapiro.
    As we review the budget submissions for the CFTC and the 
SEC for fiscal year 2012, I look forward to hearing the details 
of your requests, your plans to carry out your core missions, 
and how you propose to implement the Dodd-Frank Act.
    Chairman Gensler, as you have said, derivative markets and 
effective oversight of those markets matter to corporations, 
farmers, homeowners, and small businesses. We all benefit from 
effective oversight that promotes fair and orderly derivative 
markets.
    However, to promote such markets and to assist the 
businesses that are dependent upon them, we must also have an 
orderly and transparent process which outlines how they should 
work.
    I have heard many concerns expressed that the CFTC is 
moving too quickly and has not adequately established the cost 
of new regulations, valuing speed over deliberation. I was 
pleased to see the CFTC acted last week to give the public more 
time to comment on the new regulations that you are proposing. 
While I welcome this extension, I also think that rules have 
been proposed in a sequence that has created some confusion.
    I've heard Chairman Gensler's recent comment about how the 
CFTC has revealed its mosaic of rules. However, I think a 
roadmap for implementation, rather than a random mosaic of 
rules, would be more helpful in getting us on the path to a 
fair and orderly marketplace and help us establish 
appropriation priorities. This call for a roadmap is intended 
to foster transparency and broaden understanding, and for any 
new regulatory framework to be effective, everyone involved 
must have a clear appreciation of their roles and 
responsibilities in the new system and how these changes will 
evolve in a logical sequence.
    In reviewing the budget requests of both the CFTC and the 
SEC, we recognize that protecting investors is important as 
first-time investors have turned to markets to help secure 
their retirements, pay for homes, and send their children to 
college. We also understand that your agencies are faced with 
innovations in the financial services arena that present 
regulators with increasingly complex markets to regulate. 
However, we're all aware of our budget deficit and fiscal 
constraints that will require all agencies to make decisions as 
to how best to allocate resources.
    Technological solutions will be necessary to keep up with 
the next generation of trading platforms and systems that 
operate at record-breaking pace. Staffing levels will have to 
be carefully considered so that they do not become 
unsustainable. This is not a new challenge. All agencies should 
be making strategic decisions on resource allocations driven by 
the agency's mission responsibilities, and grounded in analysis 
of their workload and their human capital resources and needs. 
Simply increasing funding does not ensure that an agency can 
successfully achieve its mission.
    In addition to making wise decisions about how to strike a 
balance between investments in new technology and staffing 
levels, agencies also must make sound decisions about what type 
of staff to hire and how best to utilize those positions. In 
reviewing the recent Inspector General (IG) report on the CFTC 
rulemaking process, I have concerns about how the CFTC has 
chosen to utilize staff the last year. For instance, as 
discussed in the IG report, the CFTC has ineffectively used its 
Office of the Chief Economist. Not only was this office left 
unfilled for nearly a year, but the CFTC went on a hiring spree 
for new lawyers during the same time. The IG report suggests 
that unless the CFTC can make a wiser hiring decision and 
engage in meaningful economic analysis, the Congress may need 
to provide additional direction on how the commission can spend 
money on hiring and how it should utilize its staff.
    In addition to the budget concerns I have another one is 
that the CFTC, despite tight budget deficits, has engaged in 
rulemakings that are discretionary and unnecessary according to 
the CFTC--the only economic analysis available. For example, 
proposed rulemakings on position limits and core principles are 
not required by the Dodd-Frank Act. This is not necessary for 
the CFTC to immediately move toward these rulemakings. 
Furthermore, the only reliable quantitative data available from 
the CFTC is a staff report that suggests such rules are 
unnecessary and, at most, premature. Pursuit of position limits 
and core principle rulemakings are direct examples of how the 
CFTC has failed to listen to the economist and failed to 
prioritize rulemakings under existing budget constraints.

                           PREPARED STATEMENT

    Chairman Gensler and Chairman Schapiro, you both have 
challenges--significant ones--in front of you. You must improve 
transparency in our securities market and uncover fraud and 
deception, while not over-regulating our markets and hindering 
our economic recovery.
    Chairman Durbin, I look forward to working with you as we 
consider the fiscal year 2012 budget requests for the CFTC and 
the SEC. Thank you.
    [The statement follows:]

               Prepared Statement of Senator Jerry Moran

    Mr. Chairman, thank you for calling this hearing. Chairman Gensler 
and Chairman Schapiro, welcome.
    As we review the budget submissions for the Commodity Futures 
Trading Commission's (CFTC) and the Security and Exchange Commission 
(SEC) for fiscal year 2012, I look forward to hearing the details of 
your requests, your plans to carry out your core missions, and how you 
propose to implement the Dodd-Frank Act.
    Chairman Gensler, as you have said, ``derivatives markets and 
effective oversight of those markets matters to corporations, farmers, 
homeowners and small businesses.'' We all benefit from effective 
oversight that promotes fair and orderly derivatives markets. However, 
to promote such markets and assist the businesses that are dependent on 
them, we must also have an orderly and transparent process which 
outlines how they should work. I have heard many concerns expressed 
that the CFTC is moving too quickly and has not adequately established 
the cost of new regulations, valuing speed over deliberation. I was 
pleased to see that the CFTC acted last week to give the public more 
time to comment on the new regulations you are proposing. While I 
welcome this extension, I also think rules have been proposed in a 
sequence which has created confusion. I have heard Chairman Gensler's 
recent comment about how the CFTC has revealed its ``mosaic'' of rules. 
However, I think a roadmap for implementation, rather than a random 
mosaic of rules, would be more helpful in getting us on the path to a 
fair and orderly marketplace and help establish appropriations.
    This call for a road map is intended to foster transparency and 
broaden understanding. For any new regulatory framework to be 
effective, everyone involved must have a clear understanding of their 
roles and responsibilities in the new system and how those changes will 
evolve in a logical sequence.
    In reviewing the budget request of the both the CFTC and the SEC, 
we recognize that protecting investors is important as first-time 
investors have turned to the markets to help secure their retirements, 
pay for homes, and send their children to college. We also understand 
that your agencies are faced with innovations in the financial services 
arena that present regulators with increasingly complex markets to 
regulate.
    However, as we are all aware, our budget deficit and fiscal 
constraints will require all agencies to make decisions as to how to 
best allocate resources. Technological solutions will be necessary to 
keep up with next generation trading platforms and systems that operate 
at a record-breaking pace. Staffing levels will have to be carefully 
considered so that they do not become unsustainable. This is not a new 
challenge. All agencies should be making strategic decisions on 
resource allocation driven by the agency's mission responsibilities, 
and grounded in analysis of their workload and their human capital 
resources and needs. Simply increasing funding does not ensure that an 
agency can successfully achieve its mission.
    In addition to making wise decisions about how to strike a balance 
between investments in new technology and staffing levels, agencies 
must also make sound decisions about what type of staff to hire and how 
best to utilize those positions. In reviewing a recent Inspector 
General (IG) report on the CFTC rulemaking process, I have concerns 
about how the CFTC has chosen to utilize staff over the last year. For 
instance, as discussed in the IG report, the CFTC has ineffectively 
used the Office of the Chief Economist. Not only was this office left 
unfilled for nearly a year, but the CFTC went on a hiring spree for new 
lawyers during the same time. The IG report suggests that unless the 
CFTC can make wiser hiring decisions and engage in meaningful economic 
analysis, the Congress may need to provide additional direction about 
how the CFTC can spend money on hiring and how it should utilize its 
staff.
    An addition to budget concern I have is that the CFTC, despite 
tight budgets, has engaged in rulemakings that are discretionary and 
unnecessary, according to the only the CFTC economic analysis 
available. For example, proposed rulemakings on position limits and 
core principles are not required by Dodd Frank. Thus, it is not 
necessary for the CFTC to immediately move forward with these 
rulemakings. Furthermore, the only reliable quantitative data available 
from the CFTC is a staff report that suggests such rules are 
unnecessary and at most premature. Pursuit of position limits and core 
principle rulemakings are direct examples of how the CFTC has failed 
listen to its economists and failed to prioritize rulemakings under 
existing budget constraints.
    Chairman Gensler and Chairman Schapiro, you both have challenging 
tasks in front of you. You must improve transparency in our securities 
markets and uncover fraud and deception, while not over-regulating our 
markets and hindering our economic recovery.
    Chairman Durbin, I look forward to working with you as we consider 
the fiscal year 2012 budget requests of the CFTC and the SEC.

    Senator Durbin. Thank you Senator Moran.
    Senator Lautenberg.

                STATEMENT OF SENATOR FRANK R. LAUTENBERG

    Senator Lautenberg. Mr. Chairman, thanks very much for 
holding the hearing and I ask for unanimous consent that my 
full statement will be included in the record.
    Senator Durbin. Without objection.
    Senator Lautenberg. And I take a moment of that time to 
just say that, how pleased I am to see each of you in your 
positions. And how delighted I am--delight's the wrong word--
how satisfied I am that we're on to something, that we're going 
to change the way we did business in the past as a result of 
the finance reform legislation, to make sure that companies 
understand that there are obligations that they're going to 
have to meet.
    And I look at history. I used to run a company, a very big 
company--ADP. ADP does the Bureau of Labor statistics every 
month now, and the company pays more than 35 million people 
their paychecks and has fresh data to work from. And I learned 
something as the CEO of that company. As the company grew, I 
learned that the most satisfied investors are those who see a 
transparent approach to what's going on in the company. And I 
see that, the shortcuts to increased compensation without 
regard for the performance of the company or of the need of the 
employees.
    I furnished the Columbia Business School, my alma mater, 
with a chair. The chair was endowed in 2001, when I was out of 
the Senate for 2 years, and the chair was to say that we have 
to pay more attention to business ethics and corporate 
governance. And I point out without patting myself too hard on 
my, on the shoulder, that, that was in 2001, my friends. It was 
2001, which preceded 2008 by a long time.

                           PREPARED STATEMENT

    And so, I'm pleased to see that we're finally going to 
say--hey, you can't get away with the kinds of things that you 
did before. The public's entitled to know what happens when 
they put money into an investment, and its our responsibility 
to help guide them--and not worry so much about whether we're 
overburdening, but I worry about whether we're underburdening 
the, your respective agencies and letting things go back to 
where they were. That should never happen again in America. And 
I'm going to fight like the devil to make sure you have the 
resources to do your job with.
    [The statement follows:]

           Prepared Statement of Senator Frank R. Lautenberg

    Mr. Chairman, each week brings another reminder that our country is 
slowly--but steadily--recovering from the worst economic downturn since 
the Great Depression.
    Letting Wall Street regulate itself helped trigger this crisis, 
sending millions of Americans to the unemployment line and causing 
their retirement accounts to shrink.
    Under President Obama's leadership, we're rebuilding the economy 
from the ground up--laying a foundation that will make our country 
stronger and better prepared for the future.
    The cornerstone of this effort is last year's Wall Street reform 
law, which includes critical safeguards to protect the economy from 
another meltdown.
    This new law reins in the recklessness of the big banks and creates 
a watchdog to look out for consumers and make sure financial 
institutions follow the rules.
    In addition, these reforms ensure that ordinary investors get the 
information they need to make sound decisions--and bring the secretive 
derivatives market out of the shadows and into the sunlight.
    Unfortunately, House Republicans have been persuaded by their 
friends on Wall Street that the financial industry can regulate itself.
    They are trying to stop Wall Street reform by gutting funding for 
the new law.
    Make no mistake: without these new reforms and the funding to carry 
them out, Wall Street will return to its reckless ways, which will 
threaten our economic recovery and undermine our ability to create 
jobs.
    As a former CEO, I understand the need for a strong financial 
sector.
    But nothing is more important than putting people back to work and 
making sure that our economy is never again threatened by the risky 
bets of Wall Street gamblers.
    So I look forward to hearing from today's witnesses about how we 
can make sure the reform law works the way it was designed and protects 
the American economy and the American people.

    Senator Lautenberg. Thank you very much.
    Senator Durbin. Thanks a lot, Senator Lautenberg.
    And we'd like to invite our guests to make an opening 
statement if they'd care to.
    Mr. Gensler.

                   SUMMARY STATEMENT OF GARY GENSLER

    Mr. Gensler. Good morning. Thank you, Chairman Durbin, 
Ranking Member Moran, and members of the subcommittee. I thank 
you for inviting me to testify on behalf of the CFTC about the 
2012 budget request.
    I'm honored also to testify along with SEC Chair, Mary L. 
Schapiro, with whom we've worked very closely to implement the 
Dodd-Frank Act, and many other matters.
    The CFTC is a good investment for the American public. And 
though the CFTC is not a price-setting agency, rising prices 
for basic commodities, agriculture, energy and the like, 
highlight the importance of having effective market oversight 
to ensure integrity and transparency.
    Each part of our Nation's economy relies on a well-
functioning derivatives marketplace. It's essential, as 
producers, merchants, and other end-users manage their risk. In 
essence what it does is allows a company to lock in a price at 
some future date. That's at the core of what we oversee.
    This price certainly allows companies to better invest and 
plan for their business. The business certainty that 
derivatives markets can provide exists to the degree only that 
people have confidence in the integrity of the markets, 
however. And the CFTC was created to oversee futures markets--
first in the agriculture markets, later other commodities. But, 
of course, in the 1980s came along the swaps marketplace, and 
this new type of derivatives remained unregulated until the 
Dodd-Frank Act. With the passage of the Dodd-Frank Act, the 
U.S. swaps market, as the chairman noted--nearly $300 trillion 
in size, or roughly seven times the size of what we currently 
oversee--largely comes under our jurisdiction. Some of it, of 
course, is over at the SEC.
    So, we're working deliberately and efficiently, and I 
believe transparently, to put in place the rules that the 
Congress directed us to do. We've now at this point 
substantially completed that process. And as the Ranking Member 
said, we have the mosaic out, and we are allowing the public to 
look at that whole mosaic. We'll only move forward with final 
rules after we summarize the comments--and with 16,000 comments 
in, that's going to take some time to summarize and get 
commissioner feedback--but I think we'll be moving on final 
rules throughout the summer and into the fall of this year.
    As relates to the budget request of $308 million that the 
President put forward, there are many priorities. I'd like to 
just highlight, very quickly, four. One is technology. The 
budget request builds upon the support of this subcommittee 
that gave us $37 million in technology this year, to move up to 
$66 million. The swaps marketplace being seven times the size 
of the futures marketplace, we need that information. And 
though the Dodd-Frank Act established something called Swap 
Data Repositories, we're faced with the responsibility of 
aggregating futures data with swaps data and bringing it 
together. And what's more--there may be more than one data 
repository by asset class. And so we'll have to aggregate that 
information so that we can police the markets, and we need the 
technology to make sure that we can do that.
    Second, is the swap dealers themselves. The Dodd-Frank Act, 
for the first time, calls for comprehensive regulation of swaps 
dealers. To accomplish this, the CFTC will establish a new swap 
dealer and intermediary oversight program, or actually, 
division. We'll be moving some people over into this. But this 
area will need about 30 more staff, building upon a base of 
about 80 people that we currently have in that effort.
    Third, is clearinghouses. The Dodd-Frank Act requires a 
mandate that swaps that are standardized enough, be in central 
clearing. We currently oversee about 15 clearinghouses. We 
think that will grow to 20 or 21. With that roughly 50 percent 
increase of clearinghouses and an eight-fold increase in the 
underlying product, we're asking for about 30 new staff, 
bringing the staff in our clearing oversight from 40 up to 70.
    And then, last, among these four key priorities is 
transparency. The Dodd-Frank Act has real-time price reporting. 
It also has oversight of a new market mechanism called Swap 
Execution Facilities (SEFs). We're not entirely sure how many 
there will be. We think, our best estimate is at least 30 or 40 
of these new SEFs. We believe that we need at least 60 
additional staff, to oversee the markets. That jump is to about 
100 in this area, but it's for real-time reporting and 
transparency.
    Now, this is not to say we don't have other priorities--
enforcement, overseeing position limit authority, market 
surveillance--but overall it's bringing our staff up from about 
720, where we think we'll end this year, with your help with 
this $202 million, to a request for 983 people.

                           PREPARED STATEMENT

    We recognize this budget deficit for the Nation presents 
enormous challenges for this subcommittee and the Congress and 
the public, but we cannot forget that the 2008 crisis was very 
real, and it still is very real. Reform will only be effective 
once we've completed final rules, but, yes, also only after we 
have significant resources to fulfill this extended mission.
    So, I thank you.
    [The statement follows:]

                   Prepared Statement of Gary Gensler

    Good morning Chairman Durbin, Ranking Member Moran and members of 
the subcommittee. I thank you for inviting me to today's hearing on the 
Commodity Futures Trading Commission's (CFTC) fiscal year 2012 budget 
request. I am pleased to testify on behalf of the Commission.

                     CFTC DEG.CFTC MISSION

    The CFTC is a good investment for the American public, overseeing 
vast markets with a relatively small staff. At its core, the mission of 
the CFTC is to ensure the integrity and transparency of derivatives 
markets so that hedgers and investors may use them with confidence. 
Derivatives emerged as tools to allow producers and merchants to be 
certain of the prices of commodities that they planned to use or sell 
in the future. Derivatives markets are used to hedge risk and discover 
prices and work best when they are transparent and free from fraud and 
manipulation.
    The CFTC historically has been charged with overseeing one part of 
the derivatives market--the commodity futures markets. These markets 
have been around for more than a century. Initially, there were futures 
on agricultural commodities, such as wheat, corn, and cotton. The 
markets have grown to include contracts on energy and metals 
commodities, such as crude oil, heating oil, gasoline, copper, gold and 
silver, and contracts on financial products, such as interest rates, 
stock indexes, and foreign currency. These markets--and our regulatory 
oversight--affect tens of thousands of farmers, ranchers, oil 
producers, corporations, municipalities, pension funds, and anybody 
else who wants to hedge a risk and get the benefits of transparent 
pricing in competitive markets.
    Each part of our Nation's economy relies on a well-functioning 
derivatives marketplace. It is essential so that producers, merchants, 
and other end-users can manage their risks. It allows those companies 
to lock in prices for the future. Such price certainty allows companies 
to better make essential business decisions and investments. Thus, it 
is critical that market participants have confidence in the integrity 
of these price discovery markets.
    Though the CFTC is not a price-setting agency, rising prices for 
basic commodities--agricultural and energy--highlight the importance of 
having effective market oversight that ensures integrity and 
transparency.
    The CFTC fulfills its statutory mandate through market 
surveillance, industry oversight and enforcement. We pursue fraud, such 
as Ponzi schemes, and market manipulation. We oversee futures exchanges 
and clearinghouses. We process registration applications, rule reviews, 
appellate filings, and examinations of exchanges and clearinghouses. 
The CFTC is a cop on the beat that protects markets in commodities and 
derivatives from fraud, manipulation, and other abuses.

                      CFTC DEG.CFTC SCOPE

    The CFTC and its predecessors have overseen the commodity futures 
markets since the 1920s. A new type of derivatives called swaps, 
however, came around in the 1980s and remained unregulated until the 
passage of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank). That legislation expanded the CFTC's oversight to, 
for the first time, include both the futures and swaps markets. It also 
gave the CFTC new regulatory responsibilities. The Securities and 
Exchange Commission (SEC) will have similar jurisdiction over the 
securities-based swaps markets.
    The swaps market that Dodd-Frank tasks the CFTC with regulating has 
a notional amount roughly seven times the size of that of the futures 
market and is significantly more complex. The notional value of the 
U.S. futures market in December was approximately $36 trillion. Based 
upon figures compiled by the Office of the Comptroller of the Currency, 
the largest 25 bank holding companies currently have $277 trillion 
notional amount of swaps.
    Further, Dodd-Frank expands the CFTC's regulatory authority to 
include new types of entities, such as swap dealers, swap execution 
facilities (SEFs), and swap data repositories (SDRs). The swaps market 
is more complex than the futures markets because it includes customized 
bilateral hedging arrangements. Whereas all futures trade on exchanges, 
some swaps will continue to be traded over-the-counter.

           CFTC DEG.IMPLEMENTING THE DODD-FRANK ACT

    The CFTC is working deliberatively, efficiently, and transparently 
to implement the Dodd-Frank Act. At this point, as we have 
substantially completed the proposal phase of our rule-writing to 
implement the Dodd-Frank Act. Since the President signed the Dodd-Frank 
Act last July, the CFTC has promulgated rules covering all of the areas 
set out by the act for swaps regulation, with the exception of the 
Volcker Rule, for which the act set a different timeline.
    With the substantial completion of the proposal phase of rule-
writing, the public now has the opportunity to review the whole mosaic 
of rules. This will allow market participants to evaluate the entire 
regulatory scheme as a whole.
    To further facilitate this process, last week the CFTC approved 
reopening or extending the comment periods for most of our Dodd-Frank 
proposed rules for an additional 30 days.
    This time will allow the public to submit any comments they might 
have after seeing the entire mosaic at once. As part of this, I am 
hopeful that market participants will continue to comment about 
potential compliance costs as well as phasing of implementation dates 
to help the agency as we go forward with finalizing rules.
    We will begin considering final rules only after staff can analyze, 
summarize and consider comments, after the Commissioners are able to 
discuss the comments and provide feedback to staff, and after the CFTC 
consults with fellow regulators on the rules.
    One component that we have asked the public about is phasing of 
rule implementation. Over the last 2 days, CFTC staff has worked with 
the SEC staff to host a roundtable to hear directly from the public 
about the timing of implementation dates of Dodd-Frank rulemakings. We 
also opened a public comment file last month to hear specifically on 
this issue. The roundtable and public comments help inform the CFTC as 
to what requirements can be met sooner and which ones will take a bit 
more time.

           CFTC DEG.FISCAL YEAR 2012 BUDGET REQUEST

    The President's budget proposes that $308 million be appropriated 
for the CFTC for fiscal year 2012 to remain available until expended 
through fiscal year 2013. This funding level would enable the 
Commission to perform its responsibilities both in the oversight of 
commodity futures markets and in beginning to oversee the swaps 
markets.
    In 2008, both the financial system and the financial regulatory 
system failed the test for the American public. Though there were many 
causes to the crisis, the unregulated swaps market played a central 
role. The President's budget request asks for $106 million more than 
our fiscal year 2011 funding level because the 2008 financial crisis 
was very real, and the Congress mandated that regulation be brought to 
the swaps market. An investment in the CFTC is warranted, because, as 
we saw in 2008, without oversight of the swaps market, billions of 
taxpayer dollars may be at risk.
    The CFTC's resources are used primarily on staff and technology.
    The CFTC peaked in staff in 1992 at 634, but staff levels were cut 
nearly 25 percent in the early 2000s to our lowest level of 
approximately 440 in 2007 and 2008. With the help of the Congress, CFTC 
staffing levels just this past year returned to our levels of the late 
1990s--the level needed to oversee the commodity futures markets at 
that time.
    At the end of fiscal year 2010, the CFTC employed 682 thoughtful, 
experienced, and hardworking staff. In the last 10 years, however, 
futures trading volume has increased more than fourfold. The number of 
actively traded futures and options contracts increased more than 
ninefold. We have moved from an environment with open-outcry pit 
trading to highly sophisticated electronic markets.




    The recently passed continuing resolution appropriates 
approximately $202 million to the CFTC, which would allow the 
Commission to grow modestly to approximately 720 employees. The 
President's fiscal year 2012 budget request would provide funding for 
983 employees. Though we are asking for an increase in funding to 
support approximately 37 percent more staff, it is in light of a 
congressional mandate that expands our scope more than sevenfold.




    Effective oversight of the markets requires that we invest in both 
staff and technology. We need staff to process registration 
applications, conduct surveillance, and rule enforcement reviews, 
investigate fraud and manipulation, and perform many other functions 
that computers alone cannot. But we also need technology to pursue 
automated surveillance to oversee the markets and to make our oversight 
more efficient.
    Despite rapid advances in technology and the increased size of 
regulated derivatives markets, funding for the CFTC has lagged behind 
the growth of the markets. While market participants have the 
technology to automate their trading, we do not yet have the resources 
to employ modern technology to automate our surveillance.
    Last year, we used about 18 percent of our budget--$31 million--on 
technology initiatives. The continuing resolution requires that we 
allocate $37.2 million toward technology in fiscal year 2011. The CFTC 
needs to make further investment in technology to efficiently oversee 
both the futures and swaps markets. Only through investment in the CFTC 
will we be able to adequately oversee the commodity futures and swaps 
markets and protect the American public. The President's fiscal year 
2012 budget provides for $66 million to be used on technology, which 
would increase the proportion of our budget used on technology to more 
than 21 percent.
    To put the CFTC's funding request in perspective, I might note that 
the CFTC's fiscal year 2010 year-end staff of 682 compares to 
approximately 800,000 people employed by U.S. brokerage firms, 
according to the Department of Labor's Bureau of Labor Statistics. That 
is out of a financial industry that employs 5.6 million people. 
Furthermore, the CFTC's funding request of $308 million compares to 
approximately $814 billion in annual revenues of the top 25 bank 
holding companies according to industry filings with the Federal 
Reserve. The CFTC's technology budget of approximately $31 million 
during fiscal year 2010 compares to about $20-25 billion spent by U.S. 
broker/dealers on technology initiatives per year, according to a 
presentation recently given to the CFTC's Technology Advisory Committee 
by the TABB Group.

               CFTC DEG.DETAILED FUNDING REQUEST

    The requested funding increase to cover statutory authorities 
includes resources to accomplish the following goals:
      Modernizing Information Technology and Establishing a New Group 
        for Data.--The CFTC's fiscal year 2012 budget request includes 
        $66 million for technology. The requested budget includes $41 
        million to fulfill our pre-Dodd-Frank information technology 
        requirements. This increase allows the CFTC to invest in 
        technology in an effort to keep pace with the futures 
        marketplace that is becoming increasingly populated by 
        algorithmic and high-frequency traders.
      Technology will play a critical role in leveraging financial and 
        human resources as the CFTC executes its expanded oversight and 
        surveillance responsibilities pursuant to the Dodd-Frank Act. 
        Accordingly, the CFTC will establish a new group for the 
        collection, management, and analysis of data. This group will 
        facilitate improved oversight and enforcement in the 
        derivatives markets through the use of technology and data. It 
        also will serve as the primary interface for market 
        participants in adapting to the new data standards and 
        reporting requirements for market data required under Dodd-
        Frank.
      The CFTC's fiscal year 2012 budget request includes $25 million 
        for technology needed to implement Dodd-Frank. The resources 
        requested are necessary for the CFTC to invest in direct data 
        links to SDRs that are being established in the United States 
        and internationally. The CFTC also must have the technology to 
        aggregate and summarize the data for purposes of oversight and 
        surveillance.
      Establishing and Staffing a New Swap Dealer and Intermediary 
        Oversight Program.--Dodd-Frank creates two new categories of 
        registrants: ``swap dealer'' and ``major swap participant.'' 
        Staff will be needed to regulate them for robust business 
        conduct standards, record-keeping and reporting requirements, 
        and capital and margin requirements. To effectively oversee 
        swap dealers and major swap participants, the CFTC will create 
        a new oversight program for these registrants.
      Initial estimates are that there could be approximately 300 
        entities--compared to 127 Futures Commission Merchants (FCMs) 
        that are currently registered with the CFTC (though other 
        intermediaries are registered with the Commission, such as 
        commodity trading advisers and commodity pool operators, the 
        Commission only reviews FCMs due to resource constraints)--that 
        will seek to register as swap dealers, FCMs or retail foreign 
        exchange dealers.
      Given the resource needs of the CFTC, we are working very closely 
        with self-regulatory organizations, including the National 
        Futures Association (NFA), to determine what duties and roles 
        they can take on in the swaps markets. In particular, we 
        proposed rules that swap dealers would be required to be 
        members of the NFA. This could facilitate the NFA taking on 
        responsibilities related to registration and examination of 
        swaps dealers. Nevertheless, the CFTC has the ultimate 
        statutory authority and responsibility for overseeing these 
        markets. Therefore, it is essential that the CFTC have 
        additional resources to reduce risk and promote transparency in 
        the swaps markets.
      The CFTC had 82 staff at the end of fiscal year 2010 responsible 
        for overseeing intermediaries relating to pre-Dodd-Frank 
        authorities. An additional 30 full-time equivalent (FTE) staff 
        are requested for the new Swap Dealer and Intermediary 
        Oversight Program for fiscal year 2012, for a total of 112 FTE. 
        The requested FTE resources will be essential to fulfill 
        significant responsibilities related to registrants.
      Clearing of Standardized Swaps Through CFTC-registered 
        Derivatives Clearing Organizations (DCOs).--The Dodd-Frank Act 
        requires that standardized swaps be cleared through CFTC-
        registered DCOs. It also requires that the CFTC review and 
        examine systemically important DCOs for compliance on a yearly 
        basis, which we do not currently have the resources to do. 
        Clearing has lowered risk in the futures marketplace since the 
        1890s. As of the end of the last fiscal year, the CFTC oversaw 
        14 DCOs. Based on information we have received from potential 
        new clearinghouses, we anticipate a 50 percent increase in DCOs 
        to 20 or 21. The CFTC currently has 40 FTE allocated to 
        clearing oversight and risk surveillance. We are requesting an 
        increase of 30 FTE during fiscal year 2012 for that team to 
        address the significant increase in the number of DCOs, the 
        more complex nature of the swaps markets and the Congressional 
        mandate that we annually examine systemically important DCOs. 
        This would bring total staffing levels to 70. The requested FTE 
        resources will be essential to fulfill responsibilities related 
        to clearing.
      Oversight of SEFs and Designated Contract Markets (DCMs).--The 
        CFTC will need additional staff to implement many new 
        provisions related to the oversight of swaps trading activity 
        as well as to oversee futures trading activities. These include 
        procedures for the review and oversight of an entirely new 
        regulated market category: SEFs. Staff in the Division of 
        Market Oversight must establish and implement procedures for 
        the review of new SEF applications and for the annual 
        examination of the operations of SEFs, as well as any DCMs that 
        offer swaps for trading. While the CFTC currently oversees 16 
        DCMs, based on industry comments, we that anticipate 30-40 
        entities will apply to register as SEFs.
      Further, additional staff is necessary to evaluate data on swaps 
        trading activity to implement the Dodd-Frank Act's real time 
        reporting provisions and to establish appropriate block trade 
        levels. At the end of fiscal year 2010, the CFTC had 40 staff 
        responsible for our pre-Dodd-Frank responsibilities to oversee 
        futures exchanges. The President's request would increase that 
        level to 62 FTE while adding 38 FTE to implement new Dodd-Frank 
        Authorities during fiscal year 2012 for a total of 100 FTE.
      Market Surveillance, Position Limits, and SDRs.--The Dodd-Frank 
        Act substantially expanded the responsibilities of the CFTC's 
        Market Surveillance Unit in a number of critical ways. The 
        Market Surveillance Unit currently administers a CFTC-set 
        position limit regime for a total of nine agricultural futures 
        contracts listed on DCMs. Under the Dodd-Frank Act, resources 
        must be dedicated to implementing and enforcing new aggregate 
        position limits that are required to be adopted that will cover 
        both the futures market and some portion of the swaps market. 
        These limits would apply to 28 agricultural, energy, and metals 
        commodities.
      The CFTC also must establish and implement new procedures and 
        monitoring mechanisms to ensure that swaps data is 
        appropriately reported to SDRs. Such data must be properly 
        monitored, maintained and made available to the CFTC and other 
        regulators. In addition, the Commission must have sufficient 
        resources to analyze swaps data, detect and prevent market 
        abuses and systemic problems, and to prepare semi-annual 
        reports on the swaps markets mandated by the Dodd-Frank Act. 
        Initial estimates are that the CFTC will receive at least five 
        SDR applications upon the general effective date of Dodd-Frank.
      The CFTC requests resources for 42 FTE to implement these new 
        authorities during fiscal year 2012. The CFTC also is 
        requesting 105 FTE to carry out pre-Dodd-Frank authorities in 
        the areas of market surveillance, trade practice surveillance 
        and data management, and analysis responsibilities. This would 
        bring total FTE for these functions to 147 FTE.
      Enhanced Enforcement Authority.--The CFTC's enforcement program 
        is operating with approximately 167 FTE. The Dodd-Frank Act 
        significantly enhanced and expanded the CFTC's responsibility 
        to police the markets for fraud, manipulation, and other abuses 
        and will result in a substantial increase in the Commission's 
        workload. The CFTC requires 68 additional FTE for the 
        enforcement program in fiscal year 2012 over fiscal year 2010 
        levels to reach a total of 235 FTE.
      Enhancing Consumer Education.--To enhance consumer protection, 
        the CFTC will reorganize the Commission's current consumer 
        education and protection functions into a single office. This 
        group will focus on the design, implementation, and oversight 
        of the CFTC's customer education and outreach program. This 
        program will allow a significant increase in the CFTC's 
        consumer outreach and education. In addition, we will establish 
        a program to implement and administer the whistleblower 
        requirements of the Dodd-Frank Act.
      Enhancing Legal Analysis.--As novel and complex legal and 
        economic issues arise in the development and application of 
        rules to implement Dodd-Frank, the Office of General Counsel 
        need to grow from a fiscal year 2010 level of 50 FTE to 70 FTE 
        during fiscal year 2012. This staffing level is essential to 
        support all of its programs.
      Regulating Foreign Boards of Trade.--Currently, the Chief 
        Counsel's Office in the CFTC's Division of Market Oversight has 
        a single FTE dedicated to the processing of no-action requests 
        from foreign boards of trade (FBOTs) seeking to permit direct 
        access to their trading platforms by members based in the 
        United States. Currently, 20 FBOTs operate in the United States 
        based upon no-action letters dating back to 1999. We expect 
        those 20 FBOTs to register with the CFTC, plus an additional 6 
        to 10 FBOTs who have recently expressed an interest in becoming 
        registered. The Dodd-Frank Act's establishment of the new 
        category of registered FBOTs requires an increase of two FTE 
        dedicated to FBOT matters to raise the total to three FTE.
      Ensuring U.S. Interests in the Global Marketplace.--The Office of 
        International Affairs, which currently has 9 staff, requires 4 
        additional professional staff to address the increasing global 
        reach of the futures and swaps markets for a total of 13 staff. 
        Dodd-Frank specifically mandates that the CFTC consult and 
        coordinate with foreign regulatory authorities on the 
        establishment of consistent international standards with 
        respect to the regulation of swaps and futures. Additional 
        staff is required to negotiate memoranda of understanding with 
        other regulatory authorities.
      Broadening Economic Analyses.--Swaps vary substantially in terms 
        of economic structure and will require expanded economic 
        analyses. The Office of the Chief Economist, which employed 14 
        FTE at the end of fiscal year 2010, requires 6 additional FTE 
        for a total of 20 to expand the use of econometric and analytic 
        techniques to the swaps marketplace to gauge the effects of 
        market activities and the regulation of those activities.

                               CONCLUSION

    Financial markets are complex, global and interconnected, and they 
perform essential functions for American businesses. The derivatives 
markets allow producers, merchants, corporations, municipalities, 
nonprofit organizations, pension funds, and other end-users to lower 
their risk by locking in prices and rates in the future. This helps 
promote a vibrant economy.
    We recognize that the budget deficit presents significant 
challenges to the Congress and the American public. But we cannot 
forget that the 2008 financial crisis was very real. Thus the Congress 
responded and said that the swaps market must be regulated and 
overseen, significantly expanding the scope of the CFTC. It is 
important that we align the CFTC's funding with its expanded mission.
    The CFTC looks forward to working with the Congress and the 
administration to address the challenges outlined here and to secure 
the necessary funding to strengthen market integrity, lower risk, 
protect investors, promote transparency, and continue to restore health 
to the economy.

    Senator Durbin. Thank you Chairman Gensler.
    Chairman Schapiro.

                   SECURITIES AND EXCHANGE COMMISSION

STATEMENT OF HON. MARY L. SCHAPIRO, CHAIRMAN
    Ms. Schapiro. Chairman Durbin, Ranking Member Moran, and 
Senator Lautenberg. Thank you for the opportunity to testify in 
support of the President's fiscal year 2012 budget request for 
the SEC. And I am, of course, pleased to appear with my 
colleague, Chairman Gensler.
    The $1.4 billion that we are requesting will allow us to 
adequately staff the SEC to fulfill our core mission of 
protecting investors, expand our information technology systems 
so that we can realize operational efficiencies and better keep 
pace with increasingly sophisticated financial market 
participants, and carry out our new responsibilities over hedge 
funds, derivatives and credit rating agencies.
    As you know, we have worked tirelessly to make the SEC a 
more vigilant, agile, and responsive agency over the past 2 
years. And we continue moving forward on multiple fronts 
designed to enhance our effectiveness and ensure robust 
oversight of the markets.
    In addition, we've embarked on a vigorous rulemaking agenda 
addressing critical issues, including equity market structure, 
money market fund resiliency, asset-backed securities, 
consolidated audit trail, and municipal securities disclosure. 
I believe we've made a number of necessary changes and 
accomplished a great deal.
    But this year we find ourselves at a critical juncture, and 
that is because the Congress has challenged us not only to 
continue our reform efforts and to carry out our core 
responsibilities, but also to fulfill the significant new 
responsibilities given to the SEC under the Dodd-Frank Act.
    As you know, separate and apart from that legislation, the 
SEC is responsible for essential market--financial market 
activities, such as pursuing fraud; reviewing public company 
disclosures; inspecting the activities of investment advisers, 
investment companies, and broker dealers; and ensuring fair and 
efficient markets.
    Over the past decade, the size and complexity of the 
securities markets have grown at a rapid pace. Indeed, during 
the past decade trading volume more than doubled, listed equity 
market volume alone now averages approximately 8.5 billion 
shares a day, the number of investment advisers grew by 50 
percent, and the assets they manage increased to $38 trillion. 
Today, the SEC has responsibility for approximately 35,000 
entities, including direct oversight of more than 11,000 
investment advisers, 7,500 mutual funds, 5,000 broker dealers 
with more than 160,000 branch offices.
    We also review the disclosures and financial statements of 
approximately 10,000 reporting companies, and we oversee 
transfer agents, exchanges, clearing agencies and credit rating 
agencies. Indeed, we oversee some financial firms that 
regularly spend many times more just on their technology 
operations than the SEC's entire budget.
    And because of the new legislation, we are taking on 
considerable new responsibilities for oversight of the OTC 
derivatives market and hedge fund advisers, registration of 
municipal advisers and security-based swap market participants, 
enhanced supervision of credit rating agencies, heightened 
regulation of asset-backed securities, and the creation of a 
new whistleblower program.
    A budget of $1.4 billion would allow us to hire the experts 
and acquire the technology we need to effectively carry out 
both our core responsibilities and to begin to implement the 
Dodd-Frank Act. Of the 2012 requested amount, we estimate that 
$123 million will be allocated to begin implementing the 
provisions of the new law.
    This funding request also will support information 
technology investments of $78 million, including vital new 
technology initiatives ranging from data management and 
integration to internal accounting and financial reporting. It 
will permit the SEC to continue development of risk analysis 
tools to help us triage and analyze tips, complaints, and 
referrals. And it will permit us to complete a digital 
forensics lab that enforcement staff will use to recreate data 
from computer hard drives and cell phones, to capture evidence 
of sophisticated frauds.

                          PREPARED STATEMENTS

    Finally, it is important to note that under the Dodd-Frank 
Act the SEC's fiscal year 2012 funding request will be fully 
offset by matching collections of fees on securities 
transactions. Beginning with 2012, the SEC is required to 
adjust its fee rates so the amount collected will match the 
total amount appropriated for the SEC by the Congress. Because 
of this mechanism, the SEC funding will be deficit neutral.
    I thank the subcommittee for your support, and I look 
forward to working with you to improve the SEC's performance of 
its core mission, to implement our new responsibilities, and to 
continue protecting investors. And I am, of course, happy to 
answer any questions that you have.
    [The statements follow:]

                 Prepared Statement of Mary L. Schapiro

    Chairman Durbin, Ranking Member Moran, members of the subcommittee: 
Thank you for the opportunity to testify in support of the President's 
fiscal year 2012 budget request for the Securities and Exchange 
Commission (SEC).\1\ I welcome this opportunity to answer your 
questions and provide you with additional information on how the SEC 
would make effective use of the $1.407 billion that is requested for 
the coming fiscal year.\2\
---------------------------------------------------------------------------
    \1\ A copy of the SEC's FY2012 Budget Congressional Justification 
can be found on our Web site at http://www.sec.gov/about/
secfy12congbudgjust.pdf.
    \2\ The views expressed in this testimony are those of the Chairman 
of the Securities and Exchange Commission and do not necessarily 
represent the views of the President or the full Commission.
---------------------------------------------------------------------------
    Over the past 2 years, we have worked tirelessly to make the SEC 
more vigilant, agile, and responsive, and are moving on multiple fronts 
to enhance the Commission's effectiveness and provide robust oversight 
of the financial markets. We have new senior leadership in all key 
positions and have embarked on a vigorous rulemaking agenda, addressing 
areas such as equity market structure, investment adviser custody 
controls, money market fund resiliency, asset-backed securities, large 
trader reporting, pay-to-play, and municipal securities disclosure.
    In addition to carrying out our longstanding core responsibilities, 
last year's enactment of the Dodd-Frank Act has added significantly to 
the SEC's workload. In the short term, it requires the SEC to 
promulgate more than 100 new rules, create five new offices, and 
produce more than 20 studies and reports. The law assigns the SEC 
considerable new responsibilities that will have a significant long-
term impact on the Commission's workload, including oversight of the 
over-the-counter (OTC) derivatives market and hedge fund advisers; 
registration of municipal advisers and security-based swap market 
participants; enhanced supervision of nationally recognized statistical 
rating organizations (NRSROs) and clearing agencies; heightened 
regulation of asset-backed securities (ABS); and creation of a new 
whistleblower program.
    My testimony will provide an overview of the SEC's actions and 
initiatives during the past year. I will then discuss the fiscal year 
2012 budget request and the activities that these resources would make 
possible.

 SEC DEG.NEW LEADERSHIP, ORGANIZATIONAL REFORM, AND EXPERTISE

    Without a doubt, the most critical element to our success in 
improving the SEC's operations is the Commission's talented staff. Over 
the past 2 years, we have installed new management across the major 
divisions and offices of the SEC. These new senior managers are playing 
a vital role in our efforts to transform the Commission.
    During my first year, we brought in new leadership to run the four 
largest operating units--the Division of Enforcement, the Office of 
Compliance Inspections and Examinations (OCIE), the Division of 
Corporation Finance, and the Division of Trading and Markets. We also 
created a new Division of Risk, Strategy, and Financial Innovation to 
re-focus the SEC's attention on--and response to--new products, trading 
practices, and risks.
    This past year, we brought on board a new director to oversee the 
Division of Investment Management, and hired deputy directors in the 
Divisions of Trading and Markets and Corporation Finance. We also 
brought on board key leaders to help improve internal operations. This 
includes the creation of a new Chief Operating Officer position; the 
hiring of a new Chief Financial Officer to oversee the SEC's budget, 
accounting, and financial reporting; the hiring of a new Chief 
Information Officer to oversee the SEC's information technology 
program; and the hiring of the SEC's first Chief Compliance Officer. At 
all levels we have focused on hiring individuals with key skill sets 
that reflect the rapidly changing markets under our supervision.
    We're continuing to make significant progress in reforming how the 
SEC operates. Since 2009, the SEC has carried out a comprehensive 
review and restructuring of its two largest programs--enforcement and 
examinations--to ensure effective performance. The Enforcement Division 
has streamlined its procedures to bring cases more swiftly, removed a 
layer of management, created national specialized units, and added new 
staff with new skills to pursue complex fraud and market abuses. The 
SEC's examinations unit restructured its exam program after a top-to-
bottom review, becoming more risk-based in its approach, enhancing 
staff training, and installing better systems to support examiners. And 
more recently, we have begun analyzing and implementing recommendations 
from the Boston Consulting Group, Inc., which the SEC retained to 
perform an independent organizational assessment pursuant to section 
967 of the Dodd-Frank Act.
    Also during the past year, to the extent permitted by available 
resources, we worked to improve training and education of SEC staff, to 
establish a deeper reservoir of experts throughout the SEC, and to 
modernize information technology, including a centralized system for 
tips and complaints, enforcement and examination management systems, 
risk analysis tools, and financial management systems.

                   SEC DEG.ENFORCING THE LAW

    Enforcement of the securities laws is the foundation of the SEC's 
mission. Swift and vigorous proceedings directed at those who have 
broken the law are at the heart of the SEC's efforts to protect 
investors.
    In the past year, the SEC has continued our structural reforms of 
the enforcement program. We have created five national specialized 
investigative groups dedicated to high-priority areas of enforcement; 
adopted a flatter organizational structure to permit more staff to be 
allocated to front-line investigations; and created a new Office of 
Market Intelligence (OMI) to serve as the hub for the effective 
handling of tips, complaints, and referrals.
    The Dodd-Frank Act substantially expands the SEC's authority to 
compensate whistleblowers who provide the Commission with high-quality 
information about violations of the Federal securities laws. Last 
November, the SEC proposed rules mapping out the procedure for would-be 
whistleblowers to provide information to the Commission. The proposed 
rules describe how eligible whistleblowers can qualify for an award 
through a transparent process that provides them an opportunity to 
assert their claim to an award. Pending the adoption of final rules, 
enforcement staff has been reviewing and tracking whistleblower 
complaints submitted to the SEC.
    We also have added a series of additional measures to encourage 
corporate insiders and others to come forward with evidence of 
wrongdoing. These new cooperation initiatives establish incentives for 
individuals and companies to fully and truthfully cooperate and assist 
with SEC investigations and enforcement actions. This program will 
encourage ``insiders'' with knowledge of wrongdoing to come forward 
early, thus allowing us to shut down fraudulent schemes earlier than 
would otherwise be possible.
    These reforms, which were intended to maximize our use of resources 
and permit the SEC to move more swiftly and strategically, are already 
showing improvements. Over the past calendar year, court-ordered 
disgorgements are up 20 percent, while the amount of monetary penalties 
has almost tripled. Of course, numbers alone don't fully capture the 
complexity, range, or importance of our enforcement accomplishments. 
During the past year, the SEC:
  --brought significant actions involving issues arising from the 
        financial crisis, including actions against the former Chief 
        Executive Officer and other executives of Countrywide 
        Financial; Citigroup and its former Chief Financial Officer and 
        Head of Investor Relations, Morgan Keegan; Goldman Sachs; State 
        Street Bank; former executives of New Century Financial and 
        IndyMac Bancorp; Brookstreet Securities; and ICP Asset 
        Management and its president;
  --obtained multi-million dollar settlements with Tyson Foods, 
        Alcatel-Lucent, Technip, General Electric, and Johnson & 
        Johnson for violations of the Foreign Corrupt Practices Act;
  --filed our first case against a State involving municipal 
        securities;
  --brought accounting fraud cases against Dell, Diebold, DHB 
        Industries, and Satyam Computer Services;
  --charged a corporate attorney and Wall Street trader with insider 
        trading in advance of at least 11 merger and acquisition 
        announcements involving clients of the law firm where the 
        attorney worked;
  --charged a Food and Drug Administration (FDA) chemist with trading 
        on confidential information about upcoming announcements of FDA 
        drug approval decisions;
  --brought a significant case alleging inappropriate use of 
        confidential customer information by a proprietary trading desk 
        at Merrill Lynch and an action against AXA Rosenberg in the 
        challenging and rapidly evolving area of computer-based 
        quantitative investment management;
  --filed a variety of cases to halt Ponzi scheme operators and 
        perpetrators of offering frauds, including those brought in 
        conjunction with the Financial Fraud Enforcement Task Force's 
        Operation Broken Trust sweep--indeed, in each of the past 2 
        fiscal years we have filed more than twice as many Ponzi cases 
        as we filed in fiscal 2008;
  --brought actions alleging illegal trading on confidential 
        information obtained from technology company employees 
        moonlighting as expert network consultants and illegal trading 
        by major hedge funds based on illegal tips; and
  --brought an action alleging a $1.5 billion mortgage securities fraud 
        scheme to defraud the U.S. Treasury's Troubled Asset Relief 
        Program.

                SEC DEG.STRENGTHENING OVERSIGHT

    Strong regulation is essential to the fair, orderly, and efficient 
operation of markets. A vigorous examination program not only reduces 
the opportunities for wrongdoing and fraud, but also provides early 
warning about emerging trends and potential weaknesses in compliance 
programs.
    This past year, the SEC reorganized the Commission's national 
examination program in response to rapidly changing Wall Street 
practices and lessons learned from the Madoff and Stanford frauds. The 
SEC strengthened the national exam program to provide greater 
consistency and efficiencies across our 11 regions and to focus more 
sharply on identifying the higher-risk firms that it targets for 
examination. We also implemented new policies requiring examiners to 
routinely verify the existence of client assets with third-party 
custodians, counterparties, and customers. Additionally, the exam unit 
now assembles individual specialists with the appropriate skill-sets 
for the firm they are examining or the issues on which they are 
focusing. Finally, the SEC has also worked to enhance the training of 
examiners and bring on board specialists in risk management, trading, 
and complex structured products.
    These reforms are helping to deliver results in the exam program's 
work to evaluate risks, inform policy, and identify potential 
wrongdoing. In fact, in January 2011 alone, the Enforcement Division 
brought three significant cases stemming directly from exams. And going 
forward, the national exam program will continue to conduct sweeps in 
critical areas from trading practices to market manipulation to 
structured products.

              SEC DEG.IMPROVING MARKET STRUCTURE

    No discussion of the SEC's actions over the past year would be 
complete without a discussion of May 6, 2010--the day our markets 
dropped more than 500 points in a matter of minutes, only to bounce 
back minutes later. That event reinforced the importance of our ongoing 
review of market structure, which we had launched months earlier with a 
concept release inviting comment on regulation of the changing 
financial markets.
    The U.S. equity market structure has changed dramatically in recent 
years. A decade ago, most of the volume in stocks was executed 
manually, whether on the floor of an exchange or over the telephone 
between traders. Now nearly all orders are executed by fully automated 
systems at great speed. The fastest exchanges and trading venues are 
now able to accept, execute, and send a response to orders in less than 
one-thousandth of a second.
    Speed is not the only thing that has changed. As little as 5 years 
ago, the great majority of U.S. equities capitalization was traded on a 
listing market--the New York Stock Exchange (NYSE)--that executed 
nearly 80 percent or more of volume in those stocks. Today, the NYSE 
executes approximately 22 percent of the volume in its listed stocks. 
The remaining volume is split among 15 public exchanges, more than 30 
dark pools, 3 electronic communication networks, and more than 200 
internalizing broker-dealers. Currently, more than 30 percent of the 
volume in U.S.-listed equities is executed in venues that do not 
display their liquidity or make it generally available to the public, 
reflecting an increase over the last year.
    The evolution of trading technologies has dramatically increased 
the speed, capacity, and sophistication of the trading functions that 
are available to market participants. The new electronic market 
structure has opened the door for entirely new types of professional 
market participants. Today, proprietary trading firms play a dominant 
role by providing liquidity through the use of highly sophisticated 
trading systems capable of submitting many thousands of orders in a 
single second. These high-frequency trading firms can generate more 
than 1 million trades in a single day and now account for more than 50 
percent of equity market volume.
    Over the past year, the SEC has engaged in a dedicated effort to 
study and learn from the experiences of May 6, with the aim of taking 
action to preserve the benefits of the current structure while 
minimizing its downsides. The SEC worked with Financial Industry 
Regulatory Authority (FINRA) and the exchanges to develop rules that 
trigger circuit breakers for certain individual stocks, clarify up 
front how and when erroneous trades would be broken, and effectively 
prohibit ``stub quotes'' in the U.S. equity markets. We adopted a rule 
that prohibits broker-dealers from providing their clients with 
unfiltered access to exchanges, and proposed the creation of a large 
trader reporting system that would enhance our ability to identify 
large market participants, collect information on their trades, and 
analyze their trading activity.
    We also proposed a new rule that would require the creation of a 
consolidated audit trail that would enable regulators to track 
information about trading orders received and executed across the 
securities markets. Today, there is no standardized, automated system 
to collect data across the various trading venues, products, and market 
participants. Each market has its own individual and often incomplete 
data collection system, and as a result, regulators tracking suspicious 
activity or reconstructing an unusual event must obtain and merge an 
immense volume of disparate data from a number of different markets. 
And even then, the data does not always reveal who traded which 
security, and when. To obtain individual trader information, the SEC 
must make a series of manual requests that can take days or even weeks 
to fulfill. In brief, the SEC's tools for collecting data and 
surveilling our markets are wholly inadequate to the task of overseeing 
the largest equity markets in the world.

                    SEC DEG.KEY RULEMAKING

    Over the past year, the SEC has pursued an active rulemaking agenda 
aimed at making our financial markets more secure, providing investors 
with more and better information, finding ways to make securities 
markets less volatile and more transparent, and promoting effective 
corporate governance. Even before passage of the Dodd-Frank Act, the 
SEC was in the midst of a productive period of rulemaking on diverse 
topics. Among the key ongoing and recently completed rulemakings are 
the following:
      Municipal Securities.--The SEC adopted rules that provide market 
        participants with more meaningful and timely information 
        regarding the health of municipal securities. In addition, as 
        discussed below, we adopted rules to curtail pay-to-play 
        practices by investment advisers seeking to manage public 
        pensions.
      Proxy Enhancements.--The SEC adopted rules to facilitate exercise 
        of shareholders' traditional State law right to nominate 
        directors to corporate boards. We also improved disclosure 
        relating to risk and compensation and revised the e-proxy rules 
        so that additional materials could be provided to shareholders 
        with the company's notice. And, we issued a concept release 
        requesting public input on the mechanics of proxy voting and 
        shareholder communications.
      Investment Adviser Disclosure.--In order to ensure that investors 
        receive clear and accurate information from their advisers, the 
        SEC adopted rules requiring advisers to provide clients with 
        brochures that plainly disclose their business practices, fees, 
        conflicts of interests, and disciplinary information.
      Mutual Funds Fees and Marketing.--The SEC proposed rules to 
        create a more equitable framework for mutual fund marketing 
        fees, known as 12b-1 fees. We proposed rules to help clarify 
        the meaning of a date in a target date fund's name, as well as 
        enhance information in fund advertising and marketing 
        materials.
      Target Date Funds.--The SEC proposed rules that are intended to 
        provide enhanced information to investors concerning target 
        date retirement funds and reduce the potential for investors to 
        be confused or misled regarding these funds.
      Money Market Funds.--The SEC took action to permit investors, for 
        the first time, to access detailed information that money 
        market funds now file with the Commission, including their 
        ``shadow NAV'' (net asset value). While the SEC uses this 
        information in its real-time oversight of money market funds, 
        public disclosure can provide investors and market analysts 
        with useful insight for their evaluation of funds. We also 
        tightened the quality standards that apply to the funds' 
        investments and are working with our regulatory colleagues to 
        assess the various options for making sure these funds are as 
        safe and resilient in the face of market stresses as investors 
        are led to believe.
      Asset-backed Securities.--The SEC proposed rules that would 
        revise the disclosure, reporting and offering process for ABS 
        to better protect investors in the securitization market.
      Market Access.--The SEC took an important step to promote market 
        stability by adopting a new market access rule. Broker-dealers 
        that access the markets themselves or offer market access to 
        customers will be required to put in place appropriate pre-
        trade risk management controls and supervisory procedures. The 
        rule effectively prohibits broker-dealers from providing 
        customers with ``unfiltered'' access to an exchange or 
        alternative trading system. The rule should prevent broker-
        dealers from engaging in practices that threaten the financial 
        condition of other market participants and clearing 
        organizations, as well as the integrity of trading on the 
        securities markets.
      Pay-to-play.--The SEC adopted in June of last year a new rule to 
        address so-called ``pay-to-play'' practices in which investment 
        advisers make campaign contributions to elected officials in 
        order to influence the award of contracts to manage public 
        pension plan assets and other government investment accounts. 
        The rule, adopted in response to a growing number of reports of 
        such activities across the country, is intended to combat pay-
        to-play arrangements at the State and local government level in 
        which advisers are chosen based on their campaign contributions 
        to political officials rather than on merit.
    In addition to these items, enactment of the Dodd-Frank Act added 
significant new work to the SEC's agenda, including more than 100 
rulemaking provisions applicable to the SEC. To date, the SEC has 
issued 34 proposed rule releases, 7 final rule releases, and 2 interim 
final rule releases in connection with the Dodd-Frank Act. We have 
received thousands of public comments, held hundreds of meetings with 
market participants, completed seven studies, and hosted five 
roundtables. Key rulemakings under the Dodd-Frank Act include 
regulations for the supervision of OTC derivatives, private fund 
advisers, asset-backed securities, credit rating agencies, corporate 
governance, rewards for whistleblowers, and specialized disclosure 
provisions related to conflict minerals, mine safety, and resource 
extraction.

                     SEC DEG.SEC RESOURCES

    This year finds the SEC at an especially critical juncture in its 
history. Not only does the Dodd-Frank Act create significant additional 
work for the SEC, both in the short and long term, but the Commission 
must also continue to carry out its longstanding core responsibilities. 
These responsibilities--pursuing securities fraud, reviewing public 
company disclosures and financial statements, inspecting the activities 
of investment advisers and broker-dealers, and ensuring fair and 
efficient markets--remain essential to investor confidence and trust in 
financial institutions and markets.
    Over the past decade, the SEC has faced significant challenges in 
maintaining a staffing level and budget sufficient to carry out its 
core mission. The SEC experienced 3 years of frozen or reduced budgets 
from fiscal year 2005 to 2007 that forced a reduction of 10 percent of 
the Commission's staff. Similarly, the SEC's investments in new or 
enhanced information technology (IT) systems declined about 50 percent 
from fiscal year 2005 to 2009.
    As a result of increased funding levels in fiscal year 2009 and 
fiscal year 2010, current SEC staffing levels have only recently 
returned to the level of fiscal year 2005, despite the enormous growth 
in the size and complexity of the securities markets since then. During 
the past decade, for example, trading volume has more than doubled, the 
number of investment advisers has grown by 50 percent, and the assets 
they manage have increased to $38 trillion. Six years ago, the SEC's 
funding was sufficient to provide 19 examiners for each $1 trillion in 
investment adviser assets under management. Today, that figure stands 
at 12 examiners per $1 trillion. A number of financial firms spend many 
times more each year on their technology budgets alone than the SEC 
spends on all of its operations.
    Today, the SEC has responsibility for approximately 35,000 
entities, including direct oversight of 11,800 investment advisers, 
7,500 mutual funds, and more than 5,000 broker-dealers with more than 
160,000 branch offices. We also review the disclosures and financial 
statements of approximately 10,000 reporting companies. The SEC also 
oversees approximately 500 transfer agents, 15 national securities 
exchanges, 9 clearing agencies, 10 NRSROs, as well as the Public 
Company Accounting Oversight Board, FINRA, Municipal Securities 
Rulemaking Board, and the Securities Investor Protection Corporation.
    In addition to our traditional market oversight and investor 
protection responsibilities, the enactment of the Dodd-Frank Act has 
added significant new responsibilities to the SEC's workload. These new 
responsibilities include a parallel set of responsibilities to oversee 
the OTC derivatives market, including direct regulation of participants 
such as security-based swaps dealers, venues such as swap execution 
facilities, warehouses such as swap data repositories, and clearing 
agencies set up as long-term central counterparties. In a similar 
fashion, under the Dodd-Frank Act the SEC has been given 
responsibilities for hedge fund advisers that are similar to those that 
the Commission has long overseen with respect to traditional asset 
managers. These hedge fund advisers include those that trade with 
highly complex instruments and strategies. Additionally, the SEC has 
new responsibility for registration of municipal advisers, enhanced 
supervision of NRSROs, heightened regulation of asset-backed 
securities, and the creation of a new whistleblower program.

                SEC DEG.FISCAL YEAR 2011 BUDGET

    Under the agreement that was recently approved by the Congress and 
signed by the President, the SEC's fiscal year 2011 appropriation is 
$1.185 billion, an increase of $74 million more than the fiscal year 
2010 enacted level. While the SEC is still working to finalize an 
operating budget for the balance of the year that will make effective 
use of these funds, I want to provide you with some insight into some 
of the Commission's priorities for the remainder of fiscal year 2011. 
Specifically, the fiscal year 2011 funding level provided by the 
Congress will allow the SEC to fill vacancies to meet key strategic 
needs, perform tasks required by the Dodd-Frank Act, and continue to 
improve Commission operations.
    It will permit us to address important staffing needs, particularly 
within the Division of Trading and Markets, Division of Enforcement, 
and OCIE, which will permit us to partially address the SEC's 
significant staffing capacity gap. These needs include revitalizing 
core programs such as enforcement and inspections activities, as well 
as addressing new responsibilities such as enhancing oversight of 
credit rating agencies and adding staff with expertise in critical 
areas such as derivatives.
    Additionally in the last 5 months of fiscal year 2011, we plan to 
make needed investments in the development, modernization, and 
enhancement of information technology that can lead to additional 
savings or aid staff productivity. We will be making key investments in 
general IT infrastructure modernization, including refreshing old 
technology and system hardware and software to avoid loss of 
productivity, facilitating the migration of the SEC's financial systems 
to a shared service provider, increasing system capacities to 
accommodate data growth, and increasing operational efficiencies 
through better monitoring of system performance. We will also continue 
making needed investments in systems and technologies needed to 
facilitate reporting of information required by the Dodd-Frank Act.
    Finally, in fiscal year 2011 we will also continue to advance the 
SEC's efforts to improve Commission operations. I have recently 
submitted a reprogramming request to improve efficiency by 
consolidating the functions of the Office of the Executive Director 
into the Office of the Chief Operating Officer. Also in fiscal year 
2011, we expect to undertake major reforms in the Office of Information 
Technology and Office of Human Resources, which provide critical back-
office support to all SEC divisions and offices. The SEC also plans 
significant investment in the current fiscal year to respond to the 
recommendations made by the BCG as part of its recent independent 
assessment of SEC operations and organizational structure.

               SEC DEG.FISCAL YEAR 2012 REQUEST

    The SEC is requesting $1.407 billion for fiscal year 2012, an 
increase of $222 million more than the new fiscal year 2011 
appropriation level. If enacted, this request would permit us to add 
about 780 positions by the end of fiscal year 2012 for both 
improvements to base operations and implementation of the SEC's new 
responsibilities.
    It is important to note that the SEC's fiscal year 2012 funding 
request would be fully offset by matching collections of fees on 
securities transactions. Currently, the transaction fees collected by 
the SEC are approximately 2 cents per $1,000 of transactions. Under the 
Dodd-Frank Act, beginning with fiscal year 2012, the SEC is required to 
adjust fee rates so that the amount collected will match the total 
amount appropriated for the Commission by the Congress. Under this 
mechanism, SEC funding will be deficit-neutral, as any increase or 
decrease in the Commission's budget would result in a corresponding 
rise or fall in offsetting fee collections.
    The fiscal year 2012 request is designed to provide the SEC with 
the resources required to achieve several high-priority goals: to 
adequately staff the Commission to fulfill its core mission; to 
continue to implement the requirements of the Dodd-Frank Act; and to 
expand the Commission's IT systems and management infrastructure to 
serve the needs of a more modern and complex organization. For purposes 
of my testimony today, I would like to summarize the request in each of 
these priority areas:
      Reinvigorating Core SEC Programs.--Forty percent (312) of the new 
        positions would be used to strengthen and support core SEC 
        operations, including protecting investors, maintaining orderly 
        and efficient markets, and facilitating capital formation. As 
        mentioned before, SEC staffing levels are just now returning to 
        fiscal year 2005 levels, even as the Commission's 
        responsibilities have grown along with the size and complexity 
        of the securities markets. To help restore core capabilities, 
        this budget request would permit us to add 49 positions to the 
        enforcement program that would grow the 5 new specialized 
        investigative units, bolster the agency's litigation program, 
        and expand the new OMI which conducts risk assessment and 
        handles thousands of tips, complaints, and referrals. In our 
        examination program, this request would allow us to add 55 
        personnel to augment risk assessment, monitoring, and 
        surveillance functions and to conduct additional adviser and 
        fund inspections. The request would also permit 37 staff to be 
        added to the Division of Corporation Finance primarily to 
        conduct more frequent disclosure reviews of the largest 
        companies, 15 additional staff to the Division of Investment 
        Management primarily to enhance oversight of money market funds 
        and specialized products, and 11 new positions to be added to 
        the Division of Risk, Strategy, and Financial Innovation to 
        better equip the SEC to identify and address emerging risks and 
        long-term issues of critical importance.
      Implementing the Dodd-Frank Act.--Sixty percent (468 positions) 
        of the new positions would be used to implement the Dodd-Frank 
        Act. Many of these new positions would be used to hire experts 
        in derivatives, hedge funds, data analytics, credit ratings, 
        and other new or expanded responsibility areas, so that the SEC 
        may acquire the deeper expertise and knowledge needed to 
        perform effective oversight. These new positions would support 
        157 new positions focused on the derivatives markets; 102 
        focused on hedge fund advisers; 43 to expand investigations of 
        tips received from whistleblowers; 35 focused on municipal 
        securities and examinations of newly registered municipal 
        advisers; 33 focused on clearing agencies, including annual 
        reviews of those determined to be systemically important; and 
        26 focused on NSRSOs principally to perform the annual 
        examinations required by the act. Also in fiscal year 2012, the 
        SEC would invest in technology to facilitate the registration 
        of additional entities and capture and analyze data on the new 
        markets.
      The total fiscal year 2012 costs to implement the Dodd-Frank Act 
        through these new positions and technology investments will be 
        approximately $123 million. In addition to the new positions 
        requested in fiscal year 2012, we also anticipate that about 
        300 additional positions and additional technology investments 
        will be required in fiscal year 2013 for full implementation of 
        the Dodd-Frank Act.
      Investing in Information Technology.--The SEC's budget request 
        for fiscal year 2012 will support information technology 
        investments of $78 million. This level of funding would support 
        vital new technology initiatives including data management and 
        integration, document management, EDGAR modernization, market 
        data, internal accounting and financial reporting, 
        infrastructure functions, and improved project management. This 
        funding will permit the SEC to develop risk analysis tools to 
        assist with triage and analysis of tips, complaints, and 
        referrals and to complete a digital forensics lab that 
        enforcement staff can use to recreate data from computer hard 
        drives and cell phones to capture evidence of sophisticated 
        frauds. The budget request would also permit the hiring of 
        additional staff in the Office of Information Technology, 
        including experienced business analysts and certified project 
        managers to oversee IT projects and staff to address financial 
        statement and information technology deficiencies identified by 
        the Government Accountability Office (GAO).
      Improving the SEC's Management Infrastructure.--The SEC's fiscal 
        year 2012 request would permit the Commission to make further 
        improvements to the Commission's basic internal operations and 
        to bring administrative and support services capabilities into 
        alignment with the requirements of today's SEC, and ensure that 
        the Commission manages its resources wisely and efficiently. 
        The budget request would permit the strengthening of the newly 
        established Office of the Chief Operating Officer, including 
        the development of a more robust operational risk management 
        program and the build-out of a data management program. The 
        budget request also contemplates an appropriate expansion of 
        the SEC's administrative support functions, including the 
        Offices of Financial Management, human resources, 
        administrative services, and Freedom of Information Act and 
        records management. The request also includes the necessary 
        space rent and other noncompensation expenses necessary to 
        support the level of staffing requested for fiscal year 2012. 
        Additionally, the SEC is devoting significant management 
        attention to improving program and management controls, 
        including in response to audits and assessments by the Office 
        of the Inspector General, the GAO, and management's own 
        internal assessments.
      Addressing Material Weaknesses in Internal Controls.--In November 
        2010, the SEC completed its Performance and Accountability 
        Report, the equivalent of a company's annual report. A GAO 
        audit found that the financial statements and notes included in 
        the report were presented fairly and in conformity with U.S. 
        GAAP. It also, however, identified two material weaknesses in 
        internal controls over financial reporting: one in information 
        systems, and a second in financial reporting and accounting 
        processes. The root causes of these weaknesses are gaps in the 
        security and functionality of the SEC's financial system, 
        resulting from years of underinvesting in financial system 
        technologies.
      These material weaknesses are unacceptable. Rather than try and 
        solve each particular deficiency in piecemeal fashion, the SEC 
        has committed to investing the time and resources to implement 
        a long-term, comprehensive solution. To avoid the development 
        risks of creating new technology and systems, the SEC is 
        switching to a Shared Service Provider approach, migrating the 
        Commission's financial system to the Department of 
        Transportation (DOT). Other agencies, including the GAO, have 
        migrated to DOT, and they have had very positive results, with 
        clean audits free of material weaknesses. This will be a 
        significant undertaking, which, assuming adequate funding, will 
        culminate in the cutover to the new system in April 2012.

                               CONCLUSION

    Thank you, again, for your support for the SEC's mission, and for 
allowing me to be here today to present the President's budget request. 
I am happy to answer any questions that you might have.
                                 ______
                                 
 Prepared Statement of Colleen M. Kelley, President, National Treasury 
                            Employees Union

    For a decade now, the National Treasury Employees Union (NTEU) has 
represented the men and women who work at the Securities and Exchange 
Commission (SEC). When the NTEU first began to represent the employees, 
we were able to help make great strides forward in improving the 
efficiency and effectiveness of the agency. The NTEU supported 
Investors and Capital Markets Relief Act gave the SEC the authority to 
develop a personnel system best suited to the Commission's needs and 
curtailed the staff turnover crisis that vexed the Commission. Employee 
morale and retention improved dramatically.
    However, starting in fiscal year 2005, the SEC began to take a 
wrong turn. It suffered through 3 years of frozen or reduced budgets 
resulting in a 10 percent reduction in staff as well as a failure to 
fully fund merit pay and retirement benefits which both labor and 
management agreed were needed to attract a workforce with the desired 
skills and experience. Some employees wondered if the leadership really 
supported strong and meaningful action against those who would engage 
in fraud and deception towards consumers and investors.
    Under Chairman Mary L. Shapiro, we believe there is a renewed 
commitment to rigorous protection of consumers. This protection is also 
enhanced by the Dodd-Frank Wall Street Reform and Consumer Protection 
Act which will help give the SEC the resources, tools, and authority it 
needs so that the staff can effectively protect investors. The NTEU had 
strongly supported passage of this legislation. We are also pleased 
that recent funding improvements at the SEC have now restored staffing 
to the 2005 levels.
    However, the job is far from done. During the recent period of 
almost flat funding for the SEC, trading volume more than doubled. 
Since 2003, the number of investment advisers has grown by roughly 50 
percent, as have the number of funds they manage. A $33 trillion 
industry of 35,000 separate entities is policed for fraud and illegal 
activities by a mere 3,800 employees of the SEC.
    With insufficient funding for even its historic duties, the SEC now 
has significant new duties under the Dodd-Frank Act. The NTEU believes 
that the President's request of $1.4 billion is the minimum needed to 
make sure that the SEC is able to do its job effectively. We ask that 
the Senate fund the SEC at an amount no less than the President's 
request.
    We understand these are difficult financial times both for the 
Federal Government and the American public. Therefore, several facts 
need to be understood. First, while the SEC is an appropriated agency, 
its funding is offset by fees collected from the securities industry. 
Because these fees offset the entire SEC budget, proper funding of the 
SEC does not contribute to the deficit. Second, as American families 
struggle in the current economic downturn, the SEC has returned 
billions of dollars to cheated investors. In 2010, the SEC distributed 
double its budget ($2.2 billion) to these innocent victims. The 
Congress should not be penny wise and pound foolish when it comes to 
protecting the investments of American consumers, only to see the 
victimized lose retirement investments or like time savings.
    During the difficulties in passing the fiscal year 2011 budget, the 
public already saw the flaws of an underfunded SEC. Operating under the 
fiscal restrictions of the continuing resolution, it was not possible 
to pursue some quality tips and investigations of potential misconduct, 
while other investigations were slowed down or delayed. The SEC 
suffered under a reduced ability to hire expert witnesses for trial and 
to take testimony of certain witnesses. Funding limitations lessened 
the number of exams that could be conducted of high-risk registrants, 
thus increasing the risk of undetected violations.
    Rather than a hiring freeze, as was put into place at the SEC 
during the continuing resolution, the SEC should have funding to hire 
needed new personnel to implement the provisions of the Wall Street 
Reform and Consumer Protection Act, as well as to be able to offer a 
competitive compensation package which allows the SEC to retain and 
attract staff with skill sets vital to keeping pace with rapidly 
changing markets and to identify systemic risks that may be created by 
entities subject to the SEC regulation. The SEC must have a budget that 
will fully fund its merit pay program as well as agreed-upon retirement 
benefits.
    The NTEU remains ready to work with the subcommittee and the SEC 
management to help meet the goals needed so employees can do their job 
of protecting the American consumer and investor.

       CFTC deg.SEC deg.RULE-WRITING TIMETABLE

    Senator Durbin. Thank you, Chairman Schapiro, and Chairman 
Gensler, as well.
    I don't think it's any surprise that the tables have turned 
politically here on Capitol Hill since the passage of the Dodd-
Frank Act. And with the new Republican majority in the House of 
Representatives and a larger Republican presence in the Senate, 
some of the critics of the Dodd-Frank Act and those who voted 
against it now are questioning not only whether it was a good 
decision, but whether or not it's being implemented fairly and 
effectively.
    And they have gone so far--many of them--as to just flat 
out say, ``We want to delay this''--for 1 year, 18 months, 
maybe longer. In the instance of one issue that I'm involved 
in--2\1/2\ years they want to put off the implementation of 
some of the Dodd-Frank Act provisions. So this go-slow approach 
is being argued and justified as necessary because the Dodd-
Frank Act, in their opinion, either did the wrong thing or, 
whatever they did, did it too fast, and can't be implemented 
effectively.
    Now, I take a look at some of the comments that have been 
made, Chairman Gensler, about this, and wonder if you would 
comment on whether or not the timetable in the Dodd-Frank Act 
for the new rules, the comment periods and the promulgation of 
these rules, is in fact one that you can live with, that you 
can produce a good work product with.
    Second, I look at the report of your IG which, who said 
back in April, just a few weeks ago, that it was their office's 
feeling that you were focusing too much on the legal side of 
these rules and not enough on the economic or cost-benefit side 
of these rules. And that is a legitimate question that I think 
you should address as well. So could you address those two 
issues?
    Mr. Gensler. I thank you, Mr. Chairman.
    I think that the financial crisis was very real. There are 
still 7 million people probably out of work because of it, and 
millions who have homes that are worth less than their 
mortgages, and pensions that aren't securing their futures. And 
I think part of it was the derivatives market. It's not the 
only reason for the crisis, but it was a key part of it. Let us 
not forget AIG.
    In terms of our rule-writing, I think that we've been very 
deliberate. We've been very public. We've had, I think, close 
to a dozen roundtables and 14 public hearings. We had more than 
700 meetings that we posted on our Web site with market 
participants and investors and the like, and end-users. And we 
have now out for comment these roughly 50 rules that will be 
the whole mosaic, and people will come in and give us comments 
on them.
    In terms of the time schedule, the Congress did lay out 1 
year. We'll not complete the task in 1 year. We've done the 
proposal phase in roughly 9 months, working closely with the 
SEC. I think that we'll only take up final rules as we 
summarize those comments, get commissioner feedback, regulatory 
feedback, Congressional feedback. And I think it will take us 
well through the summer and fall to finalize the rules.
    In terms of implementation, we had 2 days of public 
roundtables. We have a public file on how to implement and 
phase in the implementation. It will significantly lower the 
cost to the American public if we phase in the implementation. 
A big bang at one date doesn't work.
    But I think a delay is being considered elsewhere in the 
Congress. A delay of the effective date to the end of 2012, I 
think, would be a delay that would put the American public at 
risk--at risk of markets that are still dark by and large, at 
risk of a market that's unregulated by and large. The reforms 
only come into being if we actually get these rules finalized.

               CFTC deg.INSPECTOR GENERAL REPORT

    In terms of the IG report, we welcomed it. We seriously 
considered, as we moved to final rules, to incorporate 
recommendations that the IG has made to us. We do have a very 
fine Office of the Chief Economist with a staff of about 14 
economists. We are wishing in this budget request to grow it to 
20. But there are also a lot of economists in the rule-writing 
teams that aren't in the Office of Chief Economist.

           CFTC deg.COST OF UNREGULATED DERIVATIVES

    Senator Durbin. So, I agree with your premise--that the 
recession that we're still living through can be traced to many 
sources, and one of those was an unregulated derivatives 
market.
    Can you give me any examples of what you saw in that market 
that showed that the lack of regulation, the lack of oversight, 
led to decisions which were ultimately negative for our 
economy, and for many families and investors?
    Mr. Gensler. Well, at the core was a lightly regulated, 
ineffectively regulated insurance company called AIG that had 
about a $2 trillion derivatives book. And that book had a lot 
of product called credit default swaps. And then the American 
public ended up bailing out AIG with $180 billion.
    That wasn't the only piece of the crisis, because, also, 
derivatives make these large financial institutions very 
interconnected. I believe there should be a freedom to fail--
that large financial institutions should be allowed to fail--
but the derivatives marketplace so ties them, like in a 
spider's web, that it's hard for a government, whether it's the 
Federal Reserve or the Treasury, to allow that. And so, the 
solution that the Congress passed was--bring transparency to 
the marketplace, ensure that what can be brought to 
clearinghouses--a mechanism that's worked more than 100 years--
is done, and also to make sure that dealers are well-
capitalized and well-regulated.
    Senator Durbin. So who would benefit, if we would either 
repeal the Dodd-Frank Act when it came to this derivatives 
market, or if we would delay indefinitely the oversight and 
regulation which the Dodd-Frank Act calls for?
    Mr. Gensler. I think the American public would be put at 
great risk. I think that a $300 trillion marketplace--$20 for 
every $1 in our economy--would still be a dark market. So I 
don't think many people benefit. There may be some who would 
benefit and rationally would like a darker market, where 
they're in the financial community. But the tens of thousands 
of end-users of these products need to have confidence in a 
marketplace where they can rely on that marketplace, see the 
pricing in the market place. Whether it's a farmer, rancher, a 
corporation hedging an interest rate risk--they'll benefit from 
this being well-regulated.
    Senator Durbin. If I can ask you one last question more 
specific, and one of the criticisms is that, instead of 
investing in the technology which the CFTC needs, you're in 
fact adding employees. Would you comment on that? I know you 
testified that you're requesting more money for technology.

                      CFTC deg.TECHNOLOGY

    Mr. Gensler. The request for 2012 is about doubling 
technology, and about 35 percent more staff. So, we believe 
technology is the only way for us to really do this. But since 
we're taking on a market that's about seven or eight times the 
size, asking for 35 percent more staff we think is relevant.
    Again on technology, at $66 million we'll be a fraction of 
Wall Street. It's estimated by the TABB Group, investment banks 
spent $20 billion to $25 billion per year on technology. So 
we're, you know, we're kind of coming with a pea shooter here, 
frankly, to a sophisticated market that has a lot more than pea 
shooters.
    Senator Durbin. When you talk in most general terms about 
what we're trying to achieve here with the Dodd-Frank Act, if 
we're going to have regulatory oversight in a market place that 
was clearly unregulated and led, at least partially led to the 
decline of the American economy and the loss of so many jobs, 
the way to stop that reform is to fail to fund an agency like 
your own, to make sure there are no cops on the beat. And I 
think that's a serious mistake.
    I think what we've got to do is to push forward on this 
law, to give you the time you need to promulgate these rules, 
and to give you the resources to enforce them. Otherwise we 
invite a similar disaster to the one we went through just a few 
years ago in our economy.
    Senator Moran.
    Senator Moran. Mr. Chairman, thank you.
    First of all, I'd follow up on your question, because I 
wasn't certain that I understood Chairman Gensler's answer 
about--I guess criticism perhaps is a too strong a word, but a 
belief that the CFTC has focused on hiring individuals to the 
workforce as compared to investing in technology.
    And I think what Chairman Durbin asked you to do was to 
explain your rationale and to respond to that criticism.
    Mr. Gensler. Well, I think we need both. I think that we 
can't oversee markets just with computers. You can't send a 
computer into a judge to plead a case. I'm not aware of any 
court that allows that. So we really do need humans, as well. 
On a market that's seven times the size of the markets we 
currently oversee, we need humans, as well, to answer the 
questions. We think there may be as many as 200 swap dealers 
that will look to us for regulatory guidance, interpretations, 
and so forth. So, in terms of staffing we're just about back to 
where we were in the 1990s. We had been shrunk, actually by 23 
percent. And then with this subcommittee's help, we grew back.
    But on this base of about 680 people that we had at the end 
of 2010, we believe that to oversee the markets we need to grow 
at the budget request to 983. But technology is absolutely 
critical. And technology spending is the larger increase 
percentage-wise.
    Senator Moran. Mr. Chairman, you and I had a conversation 
in the Banking Committee about the mosaic. I think there's been 
a call for a road map. How do you see the difference between 
those two terms? Your mosaic and perhaps my, or, an industry 
request for a road map, so that we know what the sequencing is 
of the rules?
    That the mosaic, as I understand the word, would be a set 
of puzzle pieces that, we're not certain how they all fit 
together, as compared to, this is the sequence in which we will 
implement rules under the Dodd-Frank Act at the CFTC.

                       CFTC deg.PHASE IN

    Mr. Gensler. I think they're both important. We've now 
substantially completed the proposal phase, though we have to 
address ourselves to the Volcker Rule. What we've asked is the 
public to give us comments on how to implement the, or phase, 
the effective dates. And we put out last Friday--and I'm glad 
to meet with you and go through it--the staff put out 13 
concepts in a 4-page document as to how to phase in the 
implementation. Some people might call it a road map. Some 
might not.
    But those concepts, for instance, say that the 
clearinghouses, the execution platforms, the dealers have to be 
open for business, so to speak, have their rulebooks in place 
at a certain time. The first, the most important thing is that 
they are compliant with the Dodd-Frank Act and they're open for 
business. And then market participants would be phased later, 
like a clearing mandate, later. And we actually laid out in 
this concept piece how to bucket that into sort of three or 
four different buckets and how to phase that.
    But we're hoping to get more public comment. We have a 
public comment file through June 10 on this. And then based 
upon that, the CFTC, working with the SEC, would think about 
how to phase the implementation, which I think will go well 
into 2012, the phasing of this.
    Senator Moran. Does the concept that you're talking about 
speak to each individual rule as to what the sequence is for 
its implementation, or just within that rule the phase in of 
that rule?
    Mr. Gensler. The concepts take the entire rule set. So, it 
speaks to some of them individually, but it was trying to give 
the public a sense for the entire rule set, so that 
clearinghouses, execution facilities, and dealers would have to 
be, sort of, open for business. The concept even said, if we 
finish for rules, they have to be open for business by December 
31 of this year, for instance. But then the transaction 
compliance would follow later. It laid out six different 
chapter headings with regard to that. So it was, it wasn't all 
the way into the granular level, but it was pretty detailed.
    Senator Moran. Would there be information in that concept 
that would be valuable to us as a subcommittee to determine 
priorities in funding, so that we could make decisions about 
the level of funding necessary to implement this series of 
rules over the period of time that you're contemplating?
    Mr. Gensler. I think it would be helpful to have that 
dialogue, though I would say our request is anticipating that 
we would complete our rules during the course of the calendar 
2011 and that we'd be able to be hiring people to actually 
oversee these markets over fiscal 2012.
    There's a commitment that our President made back in 
September 2009--the G20 commitment--that all of this would be 
completed and implemented by the end of 2012. We think the 
Congress, when they said to finish the rules by July 2011, had 
in mind that this was a very real crisis, and second, that the 
market needs to lower uncertainty. Our rule-writing creates 
some uncertainty. To the extent we can finish that, it helps 
lower uncertainty, and people get on with their work to 
implement it.
    Senator Moran. Chairman, I appreciate that statement. I 
think that has great significance. I think one of the real 
challenges we have for economic recovery is all the uncertainty 
that's out there in regard to new rules and regulations. And 
certainty would be a good thing, although we need to make 
certain that we're doing it in the appropriate manner. So, I 
share that, in my view there's a balance between getting an 
answer to the industry, but also making sure it's the right 
answer.
    Finally, let me ask about position limits and core 
principles. It's a conversation that we've had at every 
opportunity, both in my days in the House and on the Banking 
Committee, and now here in the Appropriations Subcommittee. 
Those are not required rules and regulations. Is there a 
different priority placed at the CFTC on rulemaking that is not 
mandatory but discretionary?

         CFTC deg.POSITION LIMITS AND CORE PRINCIPLES

    Mr. Gensler. What we're doing is trying to bring together 
the whole package. On position limits, the Congress says 
specifically that we shall. The word S-H-A-L-L, shall, is in 
there. Some of the comment letters have come back in and people 
debate what was the Congress's intent. But there were numerous 
Congressional hearings. So we put out a proposed rule on 
position limits, we believe, following Congressional mandate.
    In terms of core principles for clearinghouses and for 
exchanges, we think that we really need to move forward on this 
because it's the only way that the clearinghouses will be safe. 
There's a mandate that hundreds of trillions of dollars of 
swaps have to come into these clearinghouses. And so, our rule-
writing in that regard is to make sure the clearinghouses are 
up to international standards, and that the Europeans will 
recognize United States clearinghouses.
    So I think that, though we can debate whether the Congress 
said ``shall'' or ``may'' in that regard, I think if we didn't 
write the rules on the clearinghouses, that we wouldn't be up 
to international standards.
    Senator Moran. My understanding is that the law does say 
``shall, as appropriate.'' And so the question about what's 
appropriate, and, as I understand the law, when you read ``as 
appropriate'' in context of the Commodity Exchange Authority, 
it requires the CFTC to make a finding that excessive 
speculation caused an unwarranted or unreasonable price 
fluctuation in particular commodity markets.
    And I, we've had this conversation before. I keep waiting 
for the finding by the CFTC. You have an old staff report that 
somewhat addresses this issue, but I've yet to see the finding 
by the CFTC that excessive speculation was found in the 
markets.
    Mr. Gensler. Well, we are not a price-setting agency. But 
what the agency has used since the 1930s is position limits, as 
the Congress has mandated since the 1930s, to ensure that the 
markets have a diversity of actors. Basically that, bona fide 
hedgers don't come under this, but speculators don't get so 
concentrated.
    We actually had position limits in the energy markets 
working with exchanges in the 1980s and 1990s. In 2001, the 
exchanges backed away from that to something called 
accountability levels, which, on a very regular basis market 
participants go over the accountability levels. They're no 
longer stop signs. They're not even yield signs, really. 
They're just, maybe, honk if you go by it.
    And so we've re-proposed, in essence, position limits. 
We're going to hear from the public. We've gotten 11,000 
comments on this. Of our total 16,000, this is where the 
largest number of comments are. And I think that's partly 
because of high energy prices and high agricultural prices 
right now. But it's something the public very much wants us to 
get right, as you do. And we're going to sort through those 
11,000 comments.
    Senator Moran. Thank you, Mr. Chairman.
    Senator Durbin. Senator Lautenberg.
    Senator Lautenberg. Thanks, Mr. Chairman.
    Again, I welcome each of you here to change the game that 
has been played in the past, and ultimately responsible for the 
financial disaster, in my view, that we've seen.
    Now, Chairman Schapiro, the House recently passed a budget 
that would reduce funding to 2008 levels. You discuss it in 
your comments. That would put the SEC funding at $0.5 billion, 
below the President's request. And yet the SEC expenses, as you 
mentioned, fully offset by industry fees, and therefore don't 
add anything to the budget deficit. If the budget was, wound up 
that way, with that cut to 2008 level, what, in summary, what 
might that do to prevent you from fully doing the job that 
you're assigned to do?
    Ms. Schapiro. Senator, going back to the 2008 level would 
have a very profound impact on the agency. It would take our 
appropriation back to about $906 million. And even after major 
cuts and factoring in attrition, we would probably have to 
reduce our staff by more than 740 full-time equivalents to meet 
the $906 million number. And if the cuts didn't happen until 
perhaps January 2012, the reduction in staff would exceed 1,000 
people on a base of about 3,800. So it would be enormous.
    We would have to also eliminate all of our new information 
technology investment, which is really critical to getting this 
agency in a position to do the kind of market surveillance and 
market monitoring that I think we should be doing.
    We would do fewer examinations. We would detect fewer 
violations of the law. We would bring fewer enforcement cases. 
And our enforcement program brings lots of money back to harmed 
investors. Last year, we returned--on a $1 billion budget--$2.2 
billion to harmed investors directly, as well as hundreds of 
millions of dollars to the United States Treasury.
    We would have to suspend development of new systems, like 
the Tips, Complaints and Referrals system, which is allowing us 
to bring together the massive numbers of tips and complaints 
the agency receives, track those, triage them and handle them 
in a more professional and diligent way than has been done 
historically.
    And then, with respect to some of our internal operations--
for example, the movement of our financial management systems, 
which have been flawed over the last several years, to a 
Federal shared service provider--efforts like that would have 
to be put on hold.
    So, I think it would have a devastating impact on the 
agency's ability to protect the public from financial fraud.
    Senator Lautenberg. This, to me it looks like we might wind 
up back in the 2008 situation if we had to restrict ourselves 
to the things that you're now planning to do and improve the 
supervision and the reliability of the marketplace. So it, by 
no means, in my view, can help to cut the budget or, as I said 
earlier, to cut staffing when so much is needed.
    If we look back at 2008 and even earlier, a whistleblower 
brought information to the SEC about the evidence, with 
evidence of the ultimate public swindle, the Madoff scam, stole 
billions of dollars from investors. And the SEC apparently did 
very little or almost nothing to pay attention to that 
opportunity, to learn and to adjust. And I wonder whether any 
of that was caused by a limited number of people on the staff, 
or a smaller agency.
    Is there a view, Ms. Schapiro, about what might have put 
the SEC in that kind of a static position, where nothing was 
done?
    Ms. Schapiro. Senator, I think resources, perhaps, was a 
contributing factor. But I really can't blame the SEC's failure 
to catch Madoff much earlier on in his fraud and shut it down, 
solely on a lack of resources. There were a lot of 
institutional issues within the agency over a long period of 
time--a lack of cooperation and coordination between 
enforcement and examinations; a lack of expertise and 
understanding of the information, perhaps, that the 
whistleblower brought to the SEC; the lack of tools and 
supervision of the front-line examiners in getting the job 
done.
    We've done, as you know, an enormous amount of work to try 
to ensure that we can prevent anything like that from ever 
happening again, including the new Tips, Complaints and 
Referrals system, which didn't exist then, but----
    Senator Lautenberg. But which might--forgive me, but which, 
all of which can be considerably improved if we put through the 
budget as the President requested.
    Ms. Schapiro. Absolutely. Not just the technology, but also 
the ability to bring in people with deeper expertise; the 
ability to train our employees in deeper and more cutting-edge 
ways; our ability to have more people bring more cases and shut 
down more Ponzi schemes faster. Over the last 2 years we've 
brought twice as many Ponzi scheme cases as we did the prior 2 
years before I arrived at the agency. So resources, absolutely, 
would help.
    But I just, I don't want to say that the Madoff failures at 
the SEC are solely the result of inadequate resources.
    Senator Lautenberg. Yes. I note the effort that would be 
put forth to make sure that transparency really is there in all 
kinds of situations.
    One of them that's disturbed me--and, again, I come with a 
corporate background. I spent 30 years with a giant, a company 
that turned out to be a giant company. And the shareholders 
very often are not kept up to date with what's taking place.
    And one of the most significant, in my view, is the 
variation in the relationship between the CEO compensation and 
the average worker in these companies. In 1980, it was a ratio 
of about 40 to 1. And now we're well more than 300 at times. 
And the difference in wages is incredible. I mean, the CEO, if 
the average wage was $40,000 in 1980, the CEO might earn, then, 
$1.6 million. And now, if that same situation took place, it's 
well more than $13 million. And that maladjustment, in my 
view--and I speak to, as a long-time executive, a long-time 
member of the board of directors, and still a member of the 
board of directors at the Columbia Business School--that one of 
the things that's so problematic is that our society is getting 
lopsided here. And any way that we can produce evidence of 
what's, the changes that are taking place, is incredibly 
valuable.
    And I thank you, Mr. Chairman, and we have, I have other 
questions, which I'd like to submit for the record.
    Senator Durbin. Thanks, Senator Lautenberg. Of course, 
those questions will be submitted in writing.

                   CFTC deg.GASOLINE PRICES

    There are, Chairman Gensler, there are a variety of rites 
of spring in America--the opening of the baseball season; Seder 
dinners, which I shared this year with Senator Lautenberg; the 
Easter bunny; and an obscene run-up in gasoline prices, which 
seems to come about every spring. And Members of Congress--
Senate and the House--get into a high state of excitement and 
anxiety as they hear from their constituents about what these 
gasoline prices are doing to families and businesses.
    Now, over the years I've developed a very careful watchdog 
of gasoline prices--my wife. And I called her this morning, and 
she says, ``It's up to $4.20 a gallon in Springfield. What are 
you doing about it?''
    And I said, ``Luckily, Chairman Gensler is going to be 
testifying today, and I'm going to ask him a question about 
it.''
    And the question comes down to this: I understand, when we 
talk about the futures markets and the oil prices, that 
speculation is not illegal, and it serves as a necessary 
ingredient to add liquidity to the market. But oil prices have 
risen to $113 a barrel over the last few months--a one-third 
increase in price, right before the summer driving season, 
surprise, surprise. And unrest in the Middle East and North 
Africa has been blamed, though the countries involved represent 
a very tiny fraction of the sources of oil in America.
    The President has called for this integrated look at 
whether or not there are problems related to speculation and 
fraud and the like. Your CFTC Commissioner, Bart Chilton, 
indicated that hedge funds and other speculators have increased 
their positions in energy markets by 64 percent since June 
2008, to the highest level on record. When it comes to 
speculation, can the CFTC differentiate between normal 
speculation, excessive speculation, and manipulation?
    Mr. Gensler. Let me say I share with your wife's view. Last 
night, I filled up on Connecticut Avenue for $84 for the tank. 
So I, it's on my mind, too.
    We're not a price-setting agency. But, as an agency, we're 
to make sure that these markets, that hedgers and speculators 
meet in a marketplace that's transparent, it's open, it's 
competitive, free of manipulation and fraud, and also using 
position limits, that there's some diversity, a lack of 
concentration in these speculators. That's why I think it's so 
important that we continue to move forward on the rules. The 
Congress gave us new anti-fraud and anti-manipulation 
authority. We've proposed rules to implement that. We're yet to 
finalize the rules, but that broader authority is very 
important. We do use our current authority, but the broader 
authority is important. And----
    Senator Durbin. So, the Dodd-Frank Act gives you more tools 
to deal with----
    Mr. Gensler. Absolutely.
    Senator Durbin [continuing]. Market speculation and 
manipulation, as it relates to oil prices. And, looking at this 
from the other side of the coin, efforts to slow down or stop 
your agency's implementation of the Dodd-Frank legislation will 
limit the availability of those tools when it comes to things 
like oil prices speculation.

                       CFTC deg.MARGINS

    Mr. Gensler. Mr. Chairman, that is absolutely correct.
    Senator Durbin. I'm glad you said that.
    Now let me ask about margins. I understand that oil 
speculators provide 6 percent of the value of a futures 
contract up front when they buy a stock. And some have argued 
that increasing the margin requirement will reduce the 
volatility, but still allow for some speculation in the 
industry. What is your thought?
    Mr. Gensler. The Dodd-Frank Act also addressed margin. Our 
authorities are limited. They're just to set margin with regard 
to cleared swaps, as it relates to the safety and soundness of 
the clearinghouse, and for uncleared swaps, the safety and 
soundness of the dealers, the financial system as the dealers. 
And we've put proposed rules out with regard to that.
    So it doesn't necessarily address Mr. Chairman's question, 
but the Dodd-Frank Act's pretty clear that it's about the 
safety and soundness of the clearinghouses or the dealers 
themselves when we set these margins.
    Senator Durbin. Thank you, Chairman Gensler. I have to 
leave and be in a meeting in the House. But Senator Lautenberg 
has said he'll preside through the close of questions from 
Senator Moran and himself.
    And I thank you both for coming today. We'll submit some 
questions in writing for you, and I hope you get a chance to 
respond to them in a timely fashion.
    Senator Moran.
    Senator Moran. Mr. Chairman, thank you.
    I, too, will submit a number of questions in writing.
    I just have one follow-up question, and then a general 
question for both chairpersons.
    I want to go back to our position limit conversation. You 
said that you put the position limit rule out for comment--in 
my view, what you were telling me is for, to determine its 
appropriateness. I was suggesting that position limits are to 
be determined, are to be under rulemaking where appropriate. 
And I would just make the point that whether or not it's 
appropriate is a determination to be made by the economists. 
And this goes back to the IG report--that determination about 
the appropriateness should be done by economists, not by 
lawyers.
    And to date, to my knowledge, the only report you have from 
economists is the 2008 staff report that found no connection 
between excessive speculation and unwarranted price 
fluctuations. So, I'd be glad to have this ongoing conversation 
with you in, in that regard.

                       CFTC deg.SAVINGS

    And then, just generally, for both of you, are there any 
examples of where you and your agency are finding savings--
reduced spending--for purposes of helping us offset the 
increased costs that you're requesting?
    Chairman Schapiro.
    Ms. Schapiro. I'd be happy to do that, yes. We have a new 
leadership team in our technology group and a new chief 
operating officer of the SEC, and one of the charges I've given 
them is to look for those opportunities to save--particularly 
when we were under the continuing resolution for such a long 
period of time.
    And so, particularly in the technology space, we've been 
able to retire some old equipment and utilize more efficient, 
more cost-effective technologies. That's an opportunity. We are 
moving to more risk-based approaches with respect to our 
examination program, so that we are using less of a broad sweep 
and check the box mentality, and a more focused, deeper dive 
into those regulatees that might actually present the greatest 
risk to the investing public.
    We are trying to deploy knowledge management systems and e-
discovery tools that will allow us again to leverage 
technology, rather than necessarily having to bring on a lot of 
human resources to do certain functions that technology does 
very well.
    And if I can give you one sort of quirky example, we 
learned that at our alternative data center, we could save 
$375,000 a year on an investment of $120,000, simply by 
changing our power configuration. So, it gives you a very micro 
idea of what we're looking at.
    But we are trying to go through the SEC very carefully and 
look for every opportunity to find savings that we can then re-
deploy to higher value uses that we think will do more to 
protect the investing public and to ensure that the markets are 
operating with efficiency.
    That also includes leveraging other entities like self-
regulatory organizations as we develop the consolidated audit 
trail. There will be costs for the SEC in that, but the great 
majority of the costs will be borne by the exchanges and FINRA, 
that will have to develop the plan for the consolidated audit 
trail, set up the repository for the data, and then we'll 
develop our own tools to access that data. We're leveraging the 
Public Company Accounting Oversight Board, we're leveraging 
private accounting firms--anywhere we can leverage third 
parties with rigorous oversight by the SEC, we look at those as 
opportunities to both do a better job, and to find some savings 
that we can then re-deploy.
    Senator Moran. If you can quantify that, I'd welcome the 
piece of paper that demonstrates those savings within the SEC.
    Ms. Schapiro. We'd be happy to do that.
    Senator Moran. Thank you.
    [The information follows:]

                                            COST-SAVINGS INITIATIVES
----------------------------------------------------------------------------------------------------------------
                                                                                                        Total
                                                                                                    upfront cost
         Opportunity description              Savings opportunity         Potential cost savings     (spend  to
                                                                                                      save) \1\
----------------------------------------------------------------------------------------------------------------
Data Storage System and Retirement and    Reduce data storage          $1.4 million over 3 years..      $470,000
 Replacement.                              maintenance costs by
                                           purchasing new equipment.
Server Virtualization and Storage.......  Eliminate number of          $18.6 million over 3 years.    $9,100,000
                                           physical severs.
Operational Monitoring and Metrics        Eliminate 30 contractor      $5.3 million over 6 years..    $3,900,000
 Management.                               FTEs.
Power Savings at SEC Alternative Data     Eliminate dedicated power    $380,000 each year after          $10,000
 Center.                                   circuits through             first year.
                                           consolidation at Equinix.
HQ Building and 11 Regional Buildings     Replace contract for         $6 million over 5 years....       ( \2\ )
 Facilities Access Control Contract.       electronic facilities
                                           access control system and
                                           surveillance systems with
                                           less expensive contract.
Delegate Section 31 Fee Verification....  Opportunity as noted in BCG  Current process uses 10 FTE       ( \3\ )
                                           study: rather than           for 4 months.
                                           utilizing OCIE examination
                                           resources, redirect to
                                           SROs compliance costs for
                                           ensuring SROs are paying
                                           SEC the correct amount in
                                           section 31 transaction
                                           fees.
----------------------------------------------------------------------------------------------------------------
\1\ Cost projections are estimates and thus are subject to change.
\2\ Not applicable.
\3\ To be determined.

    Senator Moran. Chairman Gensler.
    Mr. Gensler. Similar to Chair Schapiro's answer, through 
the continuing resolution, we did. We're only just people and 
technology, by and large with, of course, some real estate. So, 
there were a number of savings. Unfortunately, in technology we 
cut so much that I think that, you know, we need to really, as 
we earlier talked about, go the other way, to leverage 
technology to be more efficient.
    One of the significant things we've been looking at is, 
what duties, can we ask the self-regulatory organization, the 
NFA to do, particularly in terms of registering the new swap 
dealers, examining the new swap dealers, and we've worked very 
closely with them as to how they can stand up. They're probably 
going to have to stand up between 100 and 200 new people to do 
that, rather than us doing it. But we're working very closely 
with them.
    In terms of technology, it's really, how can we leverage 
off of what's in the Dodd-Frank Act and these new data 
repositories so that as much as possible can be picked up by 
the data repositories? They will charge fees for that, by the 
way. But it won't be through the taxpayers. And that, we then 
get direct data access. And we've already had our chief of 
technology be, in direct dialogue with each of the data 
repository aspirants--they're not yet registered--as to how we 
can link up the systems and leverage off of their data.
    Senator Moran. Well, Chairman Gensler you, too, if there's 
a piece of paper that you could present to me, or to the 
subcommittee, that outlines the cost savings that are 
occurring. What I'm looking for is that you would be asking for 
more money from us, but for these savings within your agency 
that you've developed for fiscal year 2012.
    [The information follows:]

    Checklist of Commodity Futures Trading Commission Cost-cutting 
                              Initiatives

    The Commodity Futures Trading Commission (CFTC) is committed to 
reducing its operating costs. Over the last 2 fiscal years, more than 
$65 million over the next 15 years in cost reductions were achieved 
using proactive contracting practices. The results are presented below.

               CFTC DEG.RENEGOTIATE SPACE LEASES

    The estimated negotiated savings cited below totals approximately 
$48.4 million:
  --The CFTC expanded and extended its existing D.C. lease to produce 
        an estimated saving of $42 million over 15 years when compared 
        to the estimated cost to relocate.
  --The CFTC expanded and extended its existing Chicago lease resulting 
        in an estimated savings estimated of $6.4 million over 12 years 
        versus the estimated cost to relocate.
    cftc deg.negotiate cost reductions on active contracts
    The estimated negotiated savings cited below totals approximately 
$17.6 million over 5 years.
    A brief summary focusing on negotiated cost savings:
      IT Support Services.--Estimated savings associated with the award 
        of five contracts totals approximately $15 million over 5 
        years.
      IT Hardware.--Estimated savings associated with the award of two 
        contracts totals approximately $700,000.
      Software.--Estimated savings associated with the award of one 
        contract totals approximately $106,000.
      HR Benefits and Support Services.--Estimated savings associated 
        with the award of two contracts totals approximately $1.5 
        million over 5 years.

   CFTC DEG.RENEGOTIATE ON-LINE LEGAL RESEARCH SERVICE RATES

    Negotiated rate reductions for online services in the amount of 
$259,000. Future savings are expected to exceed this amount on an 
annual basis.

  CFTC DEG.LEVERAGE NASA GOVERNMENT-WIDE ACQUISITION CONTRACT

    The estimated negotiated savings cited below totals approximately 
$688,000.
      Administrative Support Services.--Estimated savings associated 
        with the award of two contracts totals approximately $400,000.
      Saved $235,000 in the purchase of routers by converting a 
        proposed GSA schedule purchase to a competitive buy.
      Saved $53,000 in the purchase of blade servers by converting a 
        GSA schedule purchase to a competitive buy.

  CFTC DEG.CONVERT SOFTWARE LICENSES TO ENTERPRISE AGREEMENTS

    Negotiated an enterprise license for law office services that saved 
the CFTC $145,000 compared to the price of individual licenses.
    The CFTC is committed to reducing its operating costs. Over the 
last 2 fiscal years CFTC estimates it saved at least $500,000 in cost 
reductions were achieved by changing its operating practices.
  --Reduce travel costs;
    --Use more teleconferencing and web technology;
    --Modernize travel policies to use restricted fares where 
            appropriate;
    --Centralize employee registration and negotiate larger discounts 
            with conference vendors; and
    --Recover State lodging taxes inadvertently paid by CFTC travelers; 
            and
  --Consolidate purchases for common goods and services;
  --Implemented 4-digit dialing eliminating the long distance charges 
        on calls made between CFTC offices;
  --Put more documents online to cut back on FOIA requests; and
  --Set shared printer default settings for ``two-sided printing''.

    Senator Moran. I thank you for your testimony today and 
look forward to our ongoing conversation. Thank you.
    Mr. Lautenberg.

                      CFTC deg.USER FEES

    Senator Lautenberg. Thanks.
    And just a couple of things that I'd like to get answers 
to. Mr. Gensler, the CFTC, the only financial regulator that 
does not offset a portion of the cost through industry user 
fees. Now, if the derivatives traders don't pay fees to defray 
the costs of the market oversight, then the taxpayers are the 
ones who pay the bill. Should the traders continue to--it's 
always in the way--should the traders continue to get a free 
ride while the taxpayers foot the bill?
    Mr. Gensler. We think to fulfill our mission, we look 
forward to working with the Congress in any way that the 
Congress sees fit to help fulfill the mission and secure the 
funding. The President's request did put forward a concept of 
user fees with regard to the swaps marketplace, and if that's 
beneficial to this subcommittee for us to work with you on 
that, we'd look forward to doing that, whatever the Congress 
thinks is the best way to secure the funding.
    Senator Lautenberg. What would you recommend?
    Mr. Gensler. I'd recommend that we work with you in any way 
that helps secure the funding.
    Senator Lautenberg. Thank you.
    Ms. Schapiro, credit rating agencies play an influential 
role in helping investors to make decisions. Part of the SEC's 
budget request is devoted to closely regulating and examining 
these agencies. But credit rating agencies continue to be paid 
by the very people whose products the agencies are evaluating.
    What might the SEC do to address this, what I see as a 
fundamental conflict of interest?
    Ms. Schapiro. Senator, there is a conflict of interest 
there, and so the Dodd-Frank Act did a couple of things to help 
us address that. One is that we're required to examine credit 
rating agencies on an annual basis, regardless of the risk a 
particular agency presents. And so part of our budget request 
is staffing for the credit rating agency examination team. 
We're also required to set up an independent office of credit 
rating agencies, reporting directly to me.
    In addition, we have about 10 different rules that we're 
required to do under the Dodd-Frank Act to address conflicts of 
interest, governance, enhanced public disclosure about the 
performance of ratings, and so forth. And we're working on 
those rules right now.
    I think to get directly to your question, though, there is 
a requirement for three different studies on credit rating 
agencies, one of which is to study the feasibility of a wholly 
different model for credit rating agencies when they're rating 
structured assets. So that there would be a model potentially 
where the rating agency would be assigned, by the SEC or by a 
self-regulatory organization, to the issuer of the structured 
product, rather than the issuer of the structured product 
picking the rating agency and perhaps creating a very real 
conflict of interest.
    That study is not due until July 2012. But we're just about 
to go out with our request for comment to get that study 
launched. And that will, I think, give us some other ideas 
about alternative compensation structures that might get at 
this very important conflict of interest issue.
    Senator Lautenberg [presiding]. Thank you.
    In New Jersey we have a nationally known philosopher whose 
name is Yogi Berra. And Yogi has an expression that I think is 
appropriate at the moment. Because if we continue to look at 
the cost side without the benefit side of putting additional 
staff to work, of investing in additional technology, it's 
going to be, as Yogi would say, deja vu all over again. So, I'd 
recommend care, thought, and investments that can really pay 
off handsomely for the future.
    With that, I thank, in the words of our chairman, all of 
you who've participated in preparing for the hearing. I 
appreciate hearing from the top officials of these two pivotal 
agencies about their implementation activities and funding 
needs. And it's fair to say that today's discussion has 
provided helpful insights into these agency operations, which 
will be instructive as we further consider the budget proposals 
and develop our fiscal year 2012 bill over the coming months.

                     ADDITIONAL COMMITTEE QUESTIONS

    The hearing record, as Senator Durbin said, will be, remain 
open until next Wednesday, May 11, at 12 noon for subcommittee 
members to submit statements and/or questions to be submitted 
to the witnesses for the record.
    And with that, I thank Senator Moran for his contribution.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]

                  Questions Submitted to Gary Gensler
            Questions Submitted by Senator Richard J. Durbin

   CFTC DEG.ADAPTING OPERATIONS TO EXPANDED RESPONSIBILITIES

    Question. The Commodity Futures Commission (CFTC) regulates a 
futures and options industry that increased from 580 million contracts 
in 2000 to more than 3.1 billion contracts in 2010--a change of more 
than 434 percent. During that same decade, customer funds held in 
Futures Commission Merchants accounts increased from $56.7 billion to 
more than $170.1 billion, and the value of these contracts is 
notionally estimated at $40 trillion. With the Dodd-Frank Act signed 
into law last July, the CFTC is tasked with regulating the swaps 
markets with an estimated notional value of approximately $300 
trillion--roughly 7 to 8 times the size of the regulated futures 
markets.
    How will your staffing and organization need to adapt to keep pace 
with this growth surge?
    Answer. The CFTC must be adequately resourced to police the markets 
and protect the public. The CFTC is taking on a significantly expanded 
scope and mission. By way of analogy, it is as if the agency previously 
had the role to oversee the markets in the State of Louisiana and was 
just mandated by the Congress to extend oversight to Alabama, Kentucky, 
Mississippi, Missouri, Oklahoma, South Carolina, and Tennessee.
    With seven times the population to police, far greater resources 
are needed for the public to be protected. Without sufficient funding 
for the agency, our Nation cannot be assured of effective enforcement 
of new rules in the swaps market to promote transparency, lower risk 
and protect against another crisis. It would hamper our ability to seek 
out fraud, manipulation, and other abuses at a time when commodity 
prices are rising and volatile.
    Until the CFTC completes its rule-writing process and implements 
and enforces those new rules, the public remains unprotected.
    Question. Does CFTC's current organizational structure allow you to 
meet the challenge?
    Answer. The CFTC has been meeting the challenge of writing rules to 
implement Dodd-Frank though its existing structure supplemented by rule 
writing teams whose members cut across divisions. As the agency moves 
out of the rule-writing phase to ongoing oversight of the futures and 
swaps markets, some changes to the existing organizational structure 
will be needed to meet the need to oversee new entities such as swaps 
dealers and better utilize technology.
    Question. Are you contemplating restructuring your operations? How? 
By when do you expect to realign the organization?
    Answer. Yes, the agency is undertaking a staff reorganization to 
effectively implement the Dodd-Frank Act, oversee an increasingly 
electronic marketplace and manage and utilize agency resources. The 
agency plans to create two new groups reporting to the chairman's 
office: a Division of Swaps and Intermediary Oversight and an Office of 
Data and Technology. Some realignment will occur within existing 
Divisions and Offices. Further changes are noted in the attached 
memoranda. The CFTC is planning for the realignment to become effective 
October 9, 2011. Notice of this planned staff reorganization was 
provided to the Congress by letter on May 6, 2011, presented below.

                      Commodity Futures Trading Commission,
                                       Washington, DC, May 6, 2011.
Hon. Daniel K. Inouye, 
Chairman, Senate Committee on Appropriations, Washington, DC.
Hon. Thad Cochran,
Vice Chairman, Senate Committee on Appropriations, Washington, DC.
Hon. Harold Rogers,
Chairman, House of Representatives Committee on Appropriations, 
        Washington, DC.
Hon. Norm Dicks
Ranking Member, House of Representatives Committee on Appropriations, 
        Washington, DC.
    Dear Senators Inouye and Cochran and Representatives Rogers and 
Dicks: The Commodity Futures Trading Commission is undertaking a staff 
reorganization to effectively implement the Dodd-Frank Wall Street 
Refoun and Consumer Protection Act, oversee an increasingly electronic 
marketplace, and manage and utilize agency resources. We are providing 
this notice pursuant to the Department of Defense and Full-Year 
Continuing Appropriations Act, 2011.
    The enclosed document describes the details of the reorganization. 
Please do not hesitate to contact me if you have any questions.
            Sincerely yours,
                                              Gary Gensler,
                                                          Chairman.
    Enclosure
                          CFTC Reorganization
    AUTHORITY:
    Title 5, United States Code (USC)
    Commodity Exchange Act
    Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank)
    CFTC FY 2011-2015 Strategic Plan
    GPRA Modernization Act of 2010 (OMB Memorandum M-I1-17, April 14, 
2011)

Recommended CFTC Reorganization
    The Commodity Futures Trading Commission (CFTC) is undertaking 
reorganizing, effective October 9, 2011, to structure its stall for 
implementation oldie Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act); oversee an increasingly electronic 
marketplace; and plan for, manage and utilize agency resources. The 
changes are consistent with the CFTC FY 2011-2015 Strategic Plan 
approved February 28, 2011.

Create new groups reporting to the Chairman's Office
    Create a Division of Swap Dealer and Intermediary Oversight (DS10).
    Create a new Office of Data and Technology (ODT).

Realign within Existing Divisions and Offices
    Division of Market Oversight (DMO).
    Division of Clearing and Intermediary Oversight (DCIO) into the 
Division of Clearing and Risk (DCR).
    Office of the Executive Director (OED).

Other
    Rename the Office of Equal Employment Opportunity the Office of 
Diversity and Inclusion.
    Set up a process fir determining the organizational assignment of 
whistleblower and consumer outreach functions.

Functions
            Division of Swap Dealer and intermediary Oversight (DSIO)

    With an expanded mission due to the Dodd-Frank Act mandate to 
regulate the swaps markets, the CFTC will take on new responsibilities, 
including the registration and oversight of new categories of 
registrants such as swap dealers and major swap participants. Staff 
will be needed to regulate them for robust business conduct standards, 
record-keeping and reporting requirements and capital and margin 
requirements. To effectively oversee swap dealers and major swap 
participants, the CFTC will create a new oversight program for these 
and other registrants.
    The primary focus of this new Division will be to oversee the 
regulation of swap dealers, future commission merchants and other 
intermediaries to ensure they have adequate financial resources and 
standards of conduct. This new Division initially Will be staffed 
through reassignment of employees currently responsible for 
intermediary oversight in DCIO.

Office of Data and Technology (ODT)
    Effective oversight of the highly electronic derivatives 
marketplace requires a technology organization at the program level 
directly accountable to the Chairman. Increased mission scope over a 
broader and more complex data-centric marketplace requires an 
enterprise-wide, integrated data and technology strategy. Elevating the 
CFTC technology program to the office level reporting directly to the 
Chairman recognizes its importance in achieving agency strategic and 
operational goals and brings focus and transparency to program 
priorities as addressed in the FY 2011-2015 Strategic Plan. This 
reprioritization of functions will align the ODT Director, as Chief 
Information Officer, with the CFTC division and program leadership to 
foster a shared strategic CFTC technology portfolio, assets and budget. 
The ODT will have two branches:
      Data Management Branch (DMB).--This branch is crucial to 
        effective oversight of an increasingly electronic marketplace. 
        All CFTC mission programs are fundamentally dependent on the 
        timely capture and management of and access to quality and 
        meaningful data. The DMB will ensure a CFTC information 
        architecture based on data integration, integrity and quality. 
        Working across all divisions, DMB will establish agency-wide 
        data needs and an effective CFTC data strategy.
      Technology Services Branch (TSB).--The existing functions 
        performed by the Office of Information and Technology Services 
        (OITS), currently located in the Office of the Executive 
        Director (OED), will be reassigned to ODT to partner with DMB 
        and the program divisions/offices to implement technology 
        solutions within a secure and stable IT environment. The 
        Technology Services Branch will maintain the CFTC hardware and 
        software platforms and deliver storage, security and redundancy 
        capacity and capabilities.

Division of Market Oversight (DMO)
    With the evolution of the markets and the fundamental changes made 
to the U.S. financial regulatory system, including new obligations with 
respect to the oversight of the swaps markets, the CFTC will have 
increased market monitoring responsibilities over new entities, such as 
swap execution facilities (SEFs) and swap data repositories (SDRs). 
Furthermore, the Dodd-Frank Act adds to the CFTC's authorities with 
regard to real time reporting of swaps transactions, review of new 
products, aggregate position limits and appropriate block trade levels. 
Restructuring DMO will enable the CFTC to implement oversight 
requirements of these new entities and authorities to ensure that the 
markets operate with a robust surveillance and compliance review 
system.

Division of Clearing and Risk (DCR)
    The Dodd-Frank Act mandates that standardized swaps be cleared 
through CFTC-registered derivatives clearing organizations (DCOs.) It 
also requires that the CFTC review and examine systemically important 
DCOs for compliance with CFTC regulations on a yearly basis, which the 
CFTC does not currently do. Based on information received from 
interested parties, a 50 percent increase in the number of DCOs is 
anticipated. The Division of Clearing and Risk will consist of staff 
currently assigned to DCIO. It will conduct risk surveillance and 
examination of DCOs for swaps and futures as well as assess compliance 
with statutory Core Principles. In addition, it will create an 
organizational focus on the review and assessment of over-the-counter 
swaps and other derivatives instruments to determine their suitability 
for clearing.

Office of the Executive Director (OED)
    OED reorganization will facilitate improved agency management and 
rationalize the structure of new functions that it absorbs, including 
planning, business management, physical security, Privacy Act 
compliance, intranet content management and the Office of the 
Secretariat. Changes also will accommodate increased compliance 
standards, including records management, personnel security and 
contingency planning, as well as the transfer of the technology 
program. This includes standardizing and formalizing business processes 
and decision-making to support the operational and management 
activities of the Commission.
    Ensuring that the agency has the capacity and capability to 
effectively manage an expanded mission requires the establishment of 
one new functional program and the consolidation of a number of 
functions. These changes will reduce the number of Executive Director 
direct reports from eight to five. The direct reports will now consist 
of Business Management and Planning; Financial Management; Human 
Resources; Records Management; and Diversity and Inclusion.

Office of Diversity and Inclusion
    The Office of Equal Employment Opportunity will be renamed the 
Office of Diversity and Inclusion to accurately reflect the 
programmatic responsibilities of the Office. In addition to handling 
complaints filed pursuant to 29 CFR 1614, the current EEO Office 
ensures that the CFTC has a positive and progressive affirmative 
employment program that will assist the agency in attracting a diverse 
workforce. The Office will continue to assess and evaluate the CFTC 
environment and identify any potential barriers to inclusion, including 
reviewing practices and policies. The proposed name change is 
consistent with the names of other Federal agencies (e.g., Federal 
Reserve Board, Department of Treasury and Office of Personnel 
Management).

Consumer Outreach Program
    The Dodd-Frank Act establishes the CFTC Customer Protection Fund 
(Fund). The Fund is to be available for payments to whistleblowers who 
provide information in connection with violations of the Commodity 
Exchange Act (the Act) and to finance education initiatives designed to 
help customers protect themselves against fraud and other violations of 
the Act. A Consumer Outreach Program Working Group of Commission staff 
will make recommendations by May 31, 2011, for the appropriate 
organizational structure of the outreach effort.
                                 
                                 ______
                                 
                                 
                                 

                                 
                                 

                                 
                                 

                                 
                                 
                                 
                                 

                                 
                                 

                                 
                                 

                                 
                                 

                                 
                                 

                                 
                                 

                                 
                                 

    Question. What resources will this require?
    Answer. The President's budget proposes $308 million for the CFTC 
for fiscal year 2012 to remain available until expended through fiscal 
year 2013. This funding level would enable the Commission to perform 
its responsibilities both in the oversight of commodity futures markets 
and in beginning to oversee the swaps markets.
    The fiscal year 2012 budget request would provide funding for 983 
employees. Though increased funding will support approximately 37 
percent more staff, it is in light of a congressional mandate that 
expands the CFTC's scope by more than seven times. The request also 
includes $66 million for technology, of which $41 million would be used 
to fulfill pre-Dodd-Frank Act information technology requirements. This 
increase would allow the CFTC to invest in technology in an effort to 
keep pace with the futures marketplace that is increasingly populated 
by algorithmic and high-frequency traders.
    Question. Chairman Gensler, in your prepared remarks, you mentioned 
the proposal for setting up a new group for the collection, management, 
and analysis of data for improved oversight and enforcement in the 
derivatives markets and as the primary interface for market 
participants in adapting to the new data standards and reporting 
requirements for market data required under the Dodd-Frank Act.
    When do you anticipate this being launched?
    Answer. It is anticipated that the Office of Data and Technology 
and its Data Management Branch will be launched as part of the staff 
reorganization discussed above on October 9, 2011.

         CFTC DEG.TECHNOLOGY MODERNIZATION INVESTMENTS

    Question. As emphasized in the CFTC's 2011-2015 strategic plan, 
``effective oversight can only be accomplished if the regulator has 
access to all revelant activity in the markets.''
    The volume of information and data is vast. Promptly collecting, 
synthesizing, managing, and analyzing all of it is paramount in your 
surveillance work and real-time public reporting. Without question, 
enhanced cutting-edge technology is essential to the CFTC's capacity to 
leverage financial and human resources to execute not only your core 
mission, but for fulfilling the expanded responsibilities under Dodd-
Frank reforms.
    During the period of successive short-term continuing resolutions 
(October 1-April 15), the budget for the Office of Information 
Technology Services was reduced 36 percent in order to preserve 
existing CFTC staffing levels.
    What is your vision for the critical role of technology and 
automation in policing the futures and swaps marketplaces?
    Answer. The CFTC's fiscal year 2012 budget request includes $66 
million for technology. This will allow us to pursue automated 
surveillance to oversee the markets and to make our oversight more 
efficient.
    Despite rapid advances in technology and the increased size of 
regulated derivatives markets, funding for the CFTC has lagged behind 
the growth of the markets. While market participants have the 
technology to automate their trading, we do not yet have the resources 
to employ modern technology to automate our surveillance.
    In fiscal year 2010, we used about 18 percent of our budget--$31 
million--on technology initiatives. The continuing resolution requires 
that we allocate $37.2 million toward technology in fiscal year 2011. 
The CFTC needs to make further investment in technology to efficiently 
oversee both the futures and swaps markets. Only through investment in 
the CFTC will we be able to adequately oversee the commodity futures 
and swaps markets and protect the American public. The President's 
fiscal year 2012 budget provides for $66 million to be used on 
technology, which would increase the proportion of our budget used on 
technology to more than 21 percent.
    Question. How would you characterize the CFTC's current state as 
compared to the industry you regulate?
    Answer. The CFTC's fiscal year 2010 year-end staff of 682 compares 
to approximately 800,000 people employed by U.S. brokerage firms, 
according to the Department of Labor's Bureau of Labor Statistics. That 
is out of a financial industry that employs 5.6 million people. 
Furthermore, the CFTC's funding request of $308 million compares to 
approximately $814 million in annual revenues of the top 25 bank 
holding companies according to industry filings with the Federal 
Reserve. The CFTC's technology budget of approximately $31 million 
during fiscal year 2010 compares to about $20-25 billion spent by U.S. 
broker/dealers on technology initiatives per year, according to a 
presentation recently given to the CFTC's Technology Advisory Committee 
by the TABB Group.
    Question. What new investments are called for?
    Answer. Technology will play a critical role in leveraging 
financial and human resources as the CFTC executes its expanded 
oversight and surveillance responsibilities pursuant to the Dodd-Frank 
Act. Accordingly, the CFTC will establish a new group for the 
collection, management, and analysis of data. This group will 
facilitate improved oversight and enforcement in the derivatives 
markets through the use of technology and data. It also will serve as 
the primary interface for market participants in adapting to the new 
data standards and reporting requirements for market data required 
under the Dodd-Frank Act.
    The CFTC's fiscal year 2010 budget request includes $25 million for 
technology needed to implement the Dodd-Frank Act. The resources 
requested are necessary for the CFTC to invest in direct data links to 
swap data repositories that are being established in the United States 
are internationally. The CFTC also must have the technology to 
aggregate and summarize the data for purposes of oversight and 
surveillance.
    Question. What is your timetable for enhancing the CFTC's automated 
capabilities?
    Answer. The President's budget request for fiscal year 2012 would 
support $66 million in information technology spending for the CFTC. Of 
that amount $25 million will be required to begin the implementation of 
Dodd-Frank Act rules. The CFTC will begin developing a number of 
technology solutions in fiscal year 2011 and 2012. This includes: 
automated surveillance of commodity futures, options and swap markets; 
ensuring that the CFTC data is compatible with industry data; 
identifying fields that describe transactions and transacting entities; 
associating swaps market data with futures market data; and 
implementing a number of other technology priorities. The technology 
implementation timetable will be driven by the sequence and phasing of 
the effective dates of final rulemakings. In fiscal year 2011 and 2012, 
the focus will be support for registration and compliance filings, 
providing connectivity for direct access to SDRs, addressing margin 
requirements and assimilating data needed for determining and enforcing 
position limits. The CFTC plans to update automated surveillance 
systems and integrate swaps and futures data and systems.
    Question. What can reasonably be accomplished this year?
    Answer. The fiscal year 2011 information technology (IT) program 
budget is $37.2 million. The largest percentage of the CFTC IT budget 
supports the ongoing operations of mission-essential systems and 
infrastructure for all divisions. With this funding, the CFTC can meet 
emerging business requirements, determine business requirements for new 
technology solutions, implement new technology solutions, and provide 
operations support.
    Question. When you testified before the subcommittee a year ago, 
you stressed that ``timely reporting of quality and meaningful market 
information is not possible with current legacy systems (one with 
position data and one with trade data)''. Has anything changed on that 
front?
    Answer. The CFTC has continued to improve the quality of the trade 
data that it receives by migrating additional exchanges to a standards-
based data feed. We expect to complete the migration for exchanges with 
relatively low volume by the end of fiscal year 2011. Overall, the 
quality of futures trade and position data is improved. Challenges 
remain regarding a consistent ability to correlate trade and position 
data, but we have begun work on the high-level design of the IT 
architecture needed to solve them.
    Question. What impediments does the CFTC currently face in 
becoming--and remaining--as sophisticated and savvy as possible when it 
comes to technological support for your work?
    Answer. The swaps marketplace is seven times the size of the 
futures marketplace, and technology is necessary to manage our 
regulatory responsibilities. The CFTC will require significantly more 
resources to undertake regulation of the swaps market, to assimilate 
and analyze data from SDRs and to respond in a timely fashion to 
inquiries from market participants.

                      CFTC DEG.RULEMAKING

    Question. Before the ink was dry on the Dodd-Frank Act last July, 
the CFTC hit the ground running to comport with explicit statutory 
timetables for issuance of proposed rules and studies for the 
governance of the swaps marketplace and other components of the 
comprehensive reform.
    Under your leadership, Chairman Gensler, the CFTC established 31 
discrete staff teams concentrated on specific aspects of the array of 
rules. As of today, the CFTC has issued more than 40 proposed rules for 
public comment and has demonstrated laudable transparency in making 
available on its Web site the public comments it has received as well 
as information about meetings held with external stakeholders and 
interested persons.
    The staff of the CFTC has assumed an unprecedented workload and 
uninterrupted schedule to develop the rule proposals.
    What are the lessons learned since July as you have pursued the 
rulemaking challenge?
    Answer. Since July, the CFTC has issued more than 50 notices of 
proposed rulemaking to implement the Dodd-Frank Act. During that time, 
Commissioners and CFTC staff have held hundreds of meetings with the 
public and market participants and have received more than 20,000 
comments. From these meetings and comments, the CFTC has learned a 
great deal about existing market structures, including how swaps are 
transacted and how market participants structure their clearing and 
credit arrangements. This information has been extremely valuable in 
crafting proposed rules and will be important in finalizing those 
rules.
    Question. What benefits do you expect to derive from extending and 
reopening the comment period on the proposed rules?
    Answer. In late April, the CFTC voted to reopen the comment period 
on most of the Dodd-Frank proposed rules for an additional 30 days to 
give market participants another opportunity to comment on the entire 
mosaic of the rulemakings. The additional comment period allowed the 
CFTC to gain further insights from market participants and the public 
regarding proposed rules and their interaction.
    Question. What guidance has emerged from the 2-day session the CFTC 
and the Securities and Exchange Commission (SEC) jointly held this week 
for how the final rules will be phased-in?
    Answer. On May 2 and 3, the CFTC and SEC jointly held a staff 
roundtable to obtain the views of the public and market participants 
concerning the implementation of title VII of the Dodd-Frank Act. 
During those sessions, participants described what steps they would 
need to take to implement proposed Dodd-Frank rules. Participants also 
provided information about the interdependencies of various parts of 
title VII, including clearing, trading and reporting, and advised the 
CFTC about how implementation might be logically phased.
    Question. What's next on your agenda?
    Answer. The CFTC will consider final rules through the summer and 
fall months. To that end, the CFTC has scheduled five Commission 
meetings thus far: two in July, one in August and two in September.
    Question. When do you project that the full mosaic of rules will be 
finalized?
    Answer. The CFTC is beginning to take up final rules this summer 
and expects to continue finalizing rules through the fall.
    Question. Is there a nexus between your timetable for finalizing 
the rules and having the trained staff on board and supportive 
technology in place to ensure that transactions are monitored and rules 
enforced?
    Answer. We anticipate issuing final rules to implement the Dodd-
Frank Act through the summer and fall and bringing on necessary staff 
and technology improvements throughout fiscal year 2012 and fiscal year 
2013. We have begun the process to fill many important positions.

CFTC DEG.POSITION LIMIT REQUIREMENTS AND OIL SPECULATION TASK 
                                 FORCE

    Question. In 2008, as energy and grain prices set new records, 
speculators in derivatives were blamed by some for price volatility and 
for price levels that many observers believed were not justified simply 
by the underlying economic fundamentals of supply and demand. The CFTC 
maintained that markets were functioning normally and that the price 
discovery process was not being distorted.
    The enactment of Dodd-Frank included several provisions designed to 
insulate commodity prices from the impact of excessive speculation and 
manipulation. For example, under section 737, the CFTC is directed to 
establish position limits--a cap on the size of the bets--for both 
swaps and futures.
    January 22, 2011, was the statutory deadline for the new position 
limit rules. It is my understanding that the CFTC has delayed the rules 
issuance in order to collect more data.
    With oil and gas prices soaring daily, there's mounting concern 
about the role of speculators in driving the price surge, and questions 
being raised about what needs to be done to curb it.
    A few weeks ago, President Obama announced the formation of a new 
inter-agency working group led by Attorney General Holder to examine 
the gas price situation. Representatives of both the CFTC and SEC are 
among the membership of this task force. Among the topics to be 
explored are fraud in the oil markets, developments in the commodity 
markets, investor practices, supply and demand factors, and the role of 
speculators and index traders in the futures markets.
    A similar interagency task force was formed back in 2008. The CFTC 
also conducted its own study of swap dealers and index traders to 
determine if their activity was affecting prices in crude oil and 
agricultural markets. In neither of these studies was a connection made 
between speculative trading and rising prices.
    If speculation is not illegal and serves as a necessary ingredient 
that adds liquidity to the markets, are there not other mechanisms, 
such as position limits, margin requirements, and other expectations 
that could--or should--be invoked to address this situation?
    Answer. The CFTC fulfills its mission to oversee the futures 
markets through market surveillance, industry oversight, and 
enforcement. The CFTC pursues fraud and market manipulation and 
oversees futures exchanges and clearinghouses. The CFTC is a cop on the 
beat that protects markets in commodity derivatives from fraud, 
manipulation, and other abuses.
    A critical reform of the Dodd-Frank Act relates to position limits. 
Position limits have served since the Commodity Exchange Act (CEA) 
passed in 1936 as a tool to curb or prevent excessive speculation that 
may burden interstate commerce.
    Importantly, the Dodd-Frank Act directs the CFTC to establish 
position limits for both futures and swaps in a very specific manner. 
First, the act directs the CFTC to establish position limits, as 
appropriate, for futures contracts for agricultural commodities and 
exempt commodities (including crude oil, gasoline, and other energy 
commodities). Second, the act directs that the CFTC concurrently 
establish position limits on swaps that are economically equivalent to 
those futures contracts. Third, the act requires the CFTC to establish 
aggregate limits across the futures and swaps markets. On January 26, 
the CFTC published a proposed rule to implement these statutory 
directives. The comment period closed on March 28. The CFTC will 
evaluate the comments received before proceeding to a final rulemaking. 
It is essential to complete the task of implementing the aggregate 
position limits regime, congressionally mandated to guard against the 
burdens of excessive speculation.
    Question. Chairman Gensler, when do you expect the CFTC to act on 
the requirement for strict position limits on the amount of oil 
speculators could trade in the energy futures?
    Answer. On January 26, the CFTC published a proposed rule to set 
position limits for crude oil contracts and other physical commodities. 
The comment period closed on March 28, and the CFTC received more than 
12,000 comments. The CFTC will thoroughly review these comments and 
proceed to developing a final rule.

    CFTC DEG.ENFORCEMENT: PRESERVING MARKET INTEGRITY AND 
                        PROTECTING MARKET USERS

    Question. Detecting and deterring against illegitimate market 
forces requires CFTC's steady vigilance and swift response. In fiscal 
year 2010, the CFTC filed 57 enforcement actions -14 percent more than 
in fiscal year 2009 and 43 percent more than in fiscal year 2008. The 
enforcement filings involve allegations of manipulation, fraud, abuse, 
and other violations of the CEA.
    Furthermore, the CFTC opened 419 investigations of potential 
violations of the CEA and CFTC regulations. That's an all-time high, 
far exceeded the target, and is a 66 percent increase more than the 251 
investigations opened in fiscal year 2009. In addition, in fiscal year 
2010, The CFTC obtained $200 million in restitution, disgorgement, and 
civil monetary penalties in previously filed or existing cases.
    Let me preface my questions by saying that these statistics are 
impressive. You and your staff are to be commended. However, does this 
mean there is more illicit activity going on or that the CFTC is 
becoming more adept at rooting it out?
    Answer. A combination of factors contributed to increased 
enforcement activity by the CFTC. For example, during the past 2 fiscal 
years the Division of Enforcement hired additional staff attorneys and 
investigators to keep up with the demands of the docket; the Division 
has received a larger number of referrals over the past 2 fiscal years 
from a variety of lead sources (ranging from customer complaints to 
referrals from other financial regulators), which increased the number 
of investigations opened; and the CFTC has been granted new oversight 
authority (for example, the CFTC filed 13 cases in January 2011 based 
upon new FOREX registration obligations imposed earlier this fiscal 
year).
    Question. What's projected for fiscal year 2011? Are you on track 
to build on last year's successes?
    Answer. Yes. With less than two-thirds of fiscal year 2011 
complete, the CFTC has filed 70 enforcement actions--already more than 
the number of cases for fiscal year 2010. Approximately 300 new 
investigations have been opened during this fiscal year.
    Question. How well is the CFTC able to measure the deterrent effect 
of these enforcement actions? Is there a message to fraudsters?
    Answer. In response to violations of the CEA and CFTC regulations, 
the Commission has the authority to seek restitution, disgorgement, 
imposition of civil monetary penalties, trading restrictions, and 
registration bans. These remedies are designed to ensure that 
wrongdoers are punished, and they also serve a deterrent effect. In 
appropriate cases, the CFTC refers matters to the Department of Justice 
(DOJ) for criminal prosecution. The CFTC publicly discloses all 
enforcement actions by posting each case filing on the Commission's Web 
site and issuing press releases in connection with every action filed 
and judgment obtained. The message to wrongdoers is clear: actions that 
harm customers or markets will be prosecuted.
    Question. How rapidly are you able to collect restitution, 
disgorgement of ill-gotten gains, and civil monetary penalties imposed 
against violations of the Federal commodities laws? What is the 
recovery rate?
    Answer. Since fiscal year 2002 more than $1.6 billion has been 
imposed in restitution and disgorgement orders. Judgments entered in 
CFTC enforcement actions for restitution and disgorgement have been 
imposed to compensate victims for their losses and direct violators to 
pay the victims. As a result, restitution and disgorgement are not 
collected by the Government.
    From fiscal year 2002 to March 2011, more than $1.7 billion in 
civil monetary penalties (CMP) have been imposed. Of that amount, more 
than $500 million has been collected and deposited in the U.S. 
Treasury. All CMP debts are handled by the Department of the Treasury 
for collection actions and resolution. If the Department of the 
Treasury is unsuccessful in expeditiously collecting the CMP debt and 
there is sufficient reason to conclude that full or partial recovery of 
the debt can best be achieved through litigation, the CFTC refers the 
debt to the DOJ for enforced collection and resolution as appropriate.
    Question. What has been the impact of more sophisticated 
information technology to monitor and detect fraud more readily given 
the complexity of transactions? How well is the eLaw Program working?
    Answer. The Divisions of Market Oversight and Enforcement employ a 
variety of nonpublic investigative methods to monitor and evaluate 
trading activity. The Division of Enforcement's eLaw Program has proven 
effective as a comprehensive litigation management program, which is 
currently being upgraded. The eLaw Program has facilitated information 
sharing across the Division of Enforcement and increased the efficiency 
of document and audio search and review, as well as data analysis. eLaw 
also has increased the efficiency and organization of case development 
and management, including investigations and litigation, reduced the 
duplication of research and analysis, enhanced coordination with other 
agencies and provided the Division with expanded capacity to retain 
significant historical data.
    The eLaw Program's addition of a computer forensics capability has 
increased the efficiency of electronic evidence preservation, 
collection and analysis. With the addition of in-house computer 
forensics, the Enforcement Division no longer has to incur high-vendor 
costs or delays from outsourcing the work. This includes the addition 
of a forensics lab that facilitates proper storage and control of 
electronic evidence for chain of custody purposes. The forensics 
program has provided a foundational framework for ensuring that 
electronic evidence to be used in enforcement matters is admissible in 
court.
    The workload for the eLaw Program has grown exponentially since its 
inception. Additional staffing and resources will facilitate the timely 
and effective services provided by the systems and personnel upon which 
the program relies. In addition, as derivatives markets expand and 
become more sophisticated, and as the CFTC's authority to regulate 
those markets expands, the updated eLaw Program will ensure that 
personnel can undertake the sophisticated analyses necessary for 
efficient enforcement investigations.
    Question. Are there any statutory or administrative impediments 
that prevent the CFTC from doing more to combat fraud? What tools do 
you lack?
    Answer. In the coming months, the CFTC will begin integrating a 
broad range of enforcement tools, such as increased fraud, 
manipulation, and disruptive trading practices authority authorized by 
the Dodd-Frank Act. The CFTC's proposed anti-manipulation rule would 
set in place a broad new ability to effectively combat fraud and 
manipulation. The proposed rulemaking promotes fair and efficient 
markets, for the first time allowing the CFTC to explicitly act against 
fraud-based manipulation. The Congress also gave the CFTC authority to 
prohibit trading practices that are disruptive of fair and equitable 
trading. With adequate resources, these and other authorities will be 
used by the CFTC to promote and ensure fair and orderly trading, free 
from fraud, manipulation, and other abuses.

                   CFTC DEG.AUDIT FREQUENCY

    Question. The CFTC regulates the activities of 64,700 registrants 
who handle customer funds, solicit or accept orders, or give trained 
advice. Among these registrants are commodity pool operators, futures 
commission merchants, floor brokers, floor traders, and associated 
persons (salespersons). The CFTC delegates oversight authority to the 
National Futures Association, a self-regulatory organization (SRO).
    The CFTC is limited to conducting reviews of Commission 
registrants, on average, just once every 3 years, thereby diluting the 
ability to check compliance. The CFTC also would prefer to perform 
regular and direct reviews of all exchanges and intermediaries and to 
assess their compliance with the CEA rather than relying on designated 
SROs for these reviews.
    What would be the advantages of performing more frequent reviews, 
(e.g., annual ones)?
    Answer. Direct examination of market intermediaries is a key 
component of the oversight program for SROs and registrants. Direct 
examinations are essential to assessing the effectiveness and 
thoroughness if an SRO's financial surveillance program. They also 
provide independent verification of audit work completed by SRO's 
staffs. Direct examinations also allow the CFTC to take immediate 
action when necessary to assess compliance with the CFTC's financial 
requirements to protect customers and ensure orderly markets. As 
registration and other requirements for swap dealers and major swap 
participants come into effect, these examinations will provide CFTC 
staff with critical information about the operation of these entities 
and their compliance with CFTC requirements.
    Question. Would more frequent reviews require adding staff with 
expertise in trading and build CFTC's knowledge base of how exchanges' 
various electronic trading platforms operate and how violations may 
occur on and across electronically traded markets?
    Answer. More frequent reviews would require adding staff with 
trading expertise. Having staff with expertise regarding how exchanges' 
electronic trading platforms operate is key to assessing exchanges' 
self-regulatory programs and compliance with core principles, as well 
as understanding how violations can occur across markets. In the past, 
exchanges typically did not trade the same products. However, in the 
past few years, exchanges have been listing and trading similar 
products. For example, some metals trade at both NYSE Liffe and COMEX 
and ELX trades; Eurodollar futures and Treasury Note futures--products 
that trade on CME and CBT, respectively. Protecting the public interest 
requires that the CFTC understand how all of the exchanges' electronic 
trading platforms work and how a trade on one exchange can be executed 
to facilitate a trading violation at another exchange.
    Question. To what extent do you believe there is a risk that an 
ineffective self-regulatory program may go undetected or a systemic 
risk may not be identified if frequency of reviews remains triennial?
    Answer. More frequent reviews will allow the CFTC to have current 
information on the effectiveness of surveillance programs and to 
identify and address potential issues on a timelier basis. The number 
of entities that must be assessed is expected to increase considerably 
as a result of the Dodd-Frank Act. Swap dealers and major swap 
participants will be required to register and to comply with applicable 
requirements regarding business conduct, reporting and record-keeping, 
capital, and margin. These entities will be subject to review by the 
CFTC or an SRO with respect to their compliance with the applicable 
requirements. Resources will be necessary to establish and implement 
programs for direct review by CFTC staff of these new registrants and 
for oversight of SROs that may have primary responsibility for review 
of these entities.

             CFTC DEG.COST-BENEFIT ANALYSIS ISSUE

    Question. In the CFTC's draft 2011-2015 Strategic Plan, the agency 
declares that the Commission will adopt as policy President Obama's 
Executive order signed January 18, 2011, entitled ``Improving 
Regulation and Regulatory Review'' and apply that standard to all 
future and ending rulemakings under Dodd-Frank and seek to streamline 
existing rules and regulations as well.
    There's been criticism of late that suggests that the CFTC is not 
adhering to this Executive order. I suspect some of that hype may be a 
stalling tactic to put the brakes on Dodd-Frank reforms.
    I think CFTC has made it abundantly clear that as an independent 
agency, the CFTC is exempted from the Executive order, and that the 
CFTC follows its statutory mandate that require the consideration of 
the costs and benefits of the actions before issuing a rulemaking.
    Section 15(a) of the CEA enumerates five broad areas of market and 
public concern that shall be taken into account in evaluating costs and 
benefits. These are:
  --protection of market participants and the public;
  --efficiency, competitiveness, and financial integrity of markets;
  --price discovery;
  --sound risk management practices; and
  --other public interest considerations.
    The CFTC has discretion to give greater weight to any one of these 
criteria, and could determine that, notwithstanding the costs, a 
particular rule is necessary or appropriate to protect the public 
interest or accomplish any of the purposes of the law.
    Can you explain your approach to rulemaking and help dispel the 
myth that you are deviating from the spirit of the Executive order when 
it comes to conducting regulatory cost-benefit analysis as you roll-out 
the implementation of the Dodd-Frank regulations?
    Answer. The CFTC's practices are consistent with the Executive 
order's principles. The CFTC conducts cost-benefit analyses in its 
rulemakings as prescribed by the Congress in section 15(a) of the CEA. 
The statute includes particularized factors to inform cost-benefit 
analyses that are specific to the markets regulated by the CFTC. Thus, 
we will continue to fulfill the CEA's statutory requirements.
    The CFTC has benefited from public comments relating to the costs 
and benefits of proposed rules. To further facilitate this process, the 
CFTC approved reopening or extending the comment periods for most of 
our Dodd-Frank proposed rules for an additional 30 days through June 3, 
2011. Commissioners and staff have met extensively with market 
participants and other interested members of the public about our 
rulemakings. CFTC staff hosted a number of public roundtables so that 
rules could be proposed in line with industry practices, minimizing 
compliance costs while fulfilling the Dodd-Frank Act's statutory 
requirements. Information about each of these meetings, as well as full 
transcripts of the roundtables, is available on the CFTC's Web site.

  CFTC DEG.PROMOTING MARKET TRANSPARENCY THOROUGH PUBLICIZED 
                              INFORMATION

    Question. Each week, the CFTC publishes its ``Commitments of 
Traders'' (COT) report. This provides a breakdown of each Tuesday's 
open interest for markets in which 20 or more traders hold positions 
equal to or above the reporting levels established by the CFTC. Since 
September 2009, the reported data has been disaggregated to break out 
managed money and swap dealer activity in the futures and option 
markets. The CFTC also produces an index investment data report, which 
summarizes index investment activity in commodity markets, a bank 
participation in futures and option markets report, and a Cotton On-
Call report.
    All of these efforts to make information available to the public 
are important.
    What are your plans to continue similar efforts to promote 
transparency in the swaps market through the development and 
publication of reports for that market?
    Answer. The CFTC currently publishes COT reports that include 
aggregate data from futures and options exchanges. Pending the outcome 
of Dodd-Frank rulemakings and the availability of adequate resources, 
similar transparency efforts will be undertaken with respect to the 
swaps market. The CFTC's proposed rule requiring the reporting of 
positions in certain swaps will provide crucial data that will be 
incorporated in COT reports.
    Question. What other efforts are underway--or planned--at the CFTC 
to heighten access to information and thus promote more open 
government?
    Answer. The CFTC is committed to promoting transparency of both the 
markets and the agency. We have posted on our Web site a list of all 
meetings held with outside organizations related to Dodd-Frank 
rulemakings. This allows the public to see what information is provided 
to the agency during the rulemaking process.
    Further, we plan to implement new transparency initiatives in the 
coming weeks. Specifically, we will release data sets that provide 
information on the daily volume of trading that represents changes in 
daily net market exposure. The CFTC also seeks to make COT data more 
user-friendly. At present, users are presented with a fixed list of 
reports. Proposed changes will present options from which users can 
choose to generate the reports and formats that come closest to serving 
their needs.
    Question. The amount and detail of trade data collected and 
analyzed at the CFTC is unprecedented among regulatory financial 
agencies. The backbone of the CFTC's market surveillance program is the 
large trader reporting system. I understand that the SEC is exploring a 
similar system. Based on your experience at the CFTC, what best 
practices or lessons learned might benefit what Chairman Schapiro is 
contemplating?
    Answer. Trader identification that permits aggregation according to 
common ownership and control, and that allows for meaningful 
classification of traders would ease analysis and formatting of 
published reports. We are working closely with the SEC to share our 
experience with large trader reporting.
     cftc deg.working with swap execution facilities (sef)
    Question. Currently the CFTC oversees 17 Designated Contract 
Markets (DCMs) for trading in futures. It is my understanding that the 
CFTC anticipates that some 30-40 entities will apply to become SEF, 
potentially tripling the CFTC's oversight requirements. New 
responsibilities include routine monitoring and surveillance to screen 
for potential market manipulation, disruptive trading practices, and 
violations, as well as changing market conditions and developments.
    Is the range of 30-40 still your projected estimate on the growing 
universe over which the CFTC will need to exercise vigilance?
    Answer. The range of 30-40 possible SEFs was an estimate based on 
the number of entities that expressed interest in establishing SEFs. 
The CFTC staff continue to receive inquiries from entities that may 
register as SEFs. The actual number of entities that ultimately will 
file applications is uncertain.
    Question. What additional resources will be required for CFTC to 
even minimally satisfy its new oversight in the swaps arena?
    Answer. The CFTC will need additional staff to implement many new 
provisions related to the oversight of swaps trading activity. These 
include procedures for the review and oversight of an entirely new 
regulated market category: SEFs. Staff in the Market and Product Review 
and Market Compliance units must establish and implement procedures for 
the review of new SEF applications and for the annual examination of 
the operations of SEFs. The CFTC has requested a total of 62 FTE to 
fulfill its pre-Dodd-Frank responsibilities. A total of 56 FTE are 
requested to implement new Dodd-Frank Authorities. This includes an 
additional 38 FTE for fiscal year 2012 and an additional 18 FTE for 
fiscal year 2013.
    Question. What does the CFTC consider to be the optimum frequency 
for conducting ``rule enforcement reviews'' (RERs) of DCMs and 
eventually SEFs as well?
    Answer. Annually.
    Question. What resource needs does that necessitate?
    Answer. The President's budget request for fiscal year 2012 would 
support the expenditure of $16.6 million for market oversight. This 
would provide the resources necessary to increase the frequency of 
reviews.
                                 ______
                                 
               Questions Submitted by Senator Ben Nelson

    Question. With the ongoing volatility in the marketplace, I think 
we can all agree on the necessity of implementing the Dodd-Frank Act in 
a sound and reasonable timeframe to avoiding reckless speculation.
    However, I also want us to be mindful that we achieve regulation 
without strangulation.
    Dodd-Frank contained critical protections to ensure that 
nonfinancial end-users who use future contracts in a legitimate matter 
to hedge against higher prices are not hampered by unnecessary 
regulations.
    Specifically when it comes to the Commodity Futures Trade 
Commission's (CFTC) implementation of rules relating to the definition 
of a swap dealer, the end user exception, and position limits.
    Chairman Dodd and Chairwoman Lincoln drafted a letter to the CFTC 
urging the Commission to be mindful of these specific protections in 
its implementation of the law, which I would like to introduce for the 
record.
    Is the CFTC following congressional intent when it comes to 
protecting commercial end users so they are not adversely impacted by 
the Dodd-Frank's regulatory framework?
    Answer. To ensure the financial integrity of swap dealers and 
security-based swap dealers, the Congress directed that prudential 
regulators, the Security and Exchange Commission (SEC) and the CFTC 
establish capital and margin requirements. The Dodd-Frank Act also 
requires that standardized swaps be cleared by central counterparties 
to lower risk. The CFTC's proposed rules would not require clearing or 
margin for uncleared swaps to be paid or collected on transactions 
involving nonfinancial end-users hedging or mitigating commercial risk.
    Question. As I mentioned in my opening statement, the run up in 
commodity prices, in particular oil and gas prices are having a major 
impact on Nebraska families, farmers, and businesses that rely on 
affordable fuel for personal commuting, farming, and conducting day-to-
day commerce.
    In 2008, the CFTC found that the oil record was partly driven by 
speculators driving up prices. Does the CFTC believe this to be the 
case again with the run up in commodity prices? How much has this 
speculation inflated oil and gas prices?
    What steps is the CFTC taking to address this?
    Answer. The CFTC fulfills its mission to oversee the futures 
markets through market surveillance, industry oversight, and 
enforcement. The CFTC pursues fraud and market manipulation and 
oversees futures exchanges and clearinghouses. The CFTC is a cop on the 
beat that protects markets in commodity derivatives from fraud, 
manipulation and other abuses.
    A critical reform of the Dodd-Frank Act relates to position limits. 
Position limits have served since the Commodity Exchange Act passed in 
1936 as a tool to curb or prevent excessive speculation that may burden 
interstate commerce.
    Importantly, the Dodd-Frank Act directs the CFTC to establish 
position limits for both futures and swaps in a very specific manner. 
First, the act directs the CFTC to establish position limits, as 
appropriate, for futures contracts for agricultural commodities and 
exempt commodities (including crude oil, gasoline, and other energy 
commodities). Second, the act directs that the CFTC concurrently 
establish position limits on swaps that are economically equivalent to 
those futures contracts. Third, the act requires the CFTC to establish 
aggregate limits across the futures and swaps markets. On January 26, 
the CFTC published a proposed rule to implement these statutory 
directives. The comment period closed on March 28. The CFTC will 
evaluate the comments received before proceeding to a final rulemaking. 
It is essential to complete the task of implementing the aggregate 
position limits regime, congressionally mandated to guard against the 
burdens of excessive speculation.
    Question. In the current fiscal climate we are faced with many 
difficult questions when it comes to funding.
    While were able to boost the CFTC budget by $34 million more than 
fiscal year 2010 levels for the remainder of fiscal year 2011, it 
appears we face an even more difficult situation for funding fiscal 
year 2012.
    Can you speak to the limitations the CFTC would have in regulating 
contracts and providing oversight and transparency to the over-the-
counter derivatives swaps trading market if we are merely able to 
maintain fiscal year 2011 levels in fiscal year 2012?
    What would the impact be if were faced with the prospect of being 
able to only provide fiscal year 2008 levels or the level the House 
recently passed in their fiscal year 2012 budget proposal?
    Answer. A return to the CFTC's fiscal year 2008 funding level would 
represent a 45 percent reduction from current levels. Had such a level 
been enacted for the CFTC mid-way through fiscal year 2011, CFTC 
staffing would have had to be reduced by 442 FTE--a 65 percent 
reduction.
    If the CFTC's funding returned to the fiscal year 2008 level, the 
Commission would be unable to fulfill its statutory mission. Every 
program would be affected, including market surveillance, industry 
oversight and enforcement. We would be unable to pursue fraud, such as 
Ponzi schemes, and market manipulation. We would inevitably develop a 
backlog of registration applications, rule reviews and appellate 
filings. This would leave significant uncertainty in the marketplace.
    Question. Over the Easter recess, President Obama directed Attorney 
General Eric Holder to create an Oil and Gas Price Fraud Working Group 
to ``monitor oil and gas markets for potential violations of criminal 
or civil laws to safeguard against unlawful consumer harm.''
    It is my understanding that in addition to the Department of 
Justice the group is composed of representatives from the Federal Trade 
Commission (FTC), the Department of the Treasury, and the CFTC.
    I was hoping you could speak to the role CFTC is play in this 
working group and what we hope to accomplish with this new working 
group.
    Answer. The CFTC serves as a co-chair of the Oil and Gas Fraud 
Working Group, whose membership also includes State Attorneys General, 
the FTC, the Departments of Energy, Agriculture and the Treasury, the 
SEC, the Board of Governors of the Federal Reserve System and the 
Federal Bureau of Investigations. On May 6, 2011 Attorney General 
Holder, as chairman of the group, informed the members that the 
``[w]orking Group will enable us to formalize our collaborative effort, 
share current oversight activities, avoid duplication, and combine our 
resources and expertise.'' Members are actively working toward these 
goals, covering topics such as confidential information sharing between 
agencies, evaluating lessons learned from prior fraud enforcement 
involving multiple regulator collaboration and coordination, and 
continued discussions regarding market fundamentals, trends and 
oversight.
                                 ______
                                 
               Questions Submitted by Senator Jerry Moran

    Question. The recently enacted continuing resolution states that of 
the funding provided, ``not less than $37.2 million shall be for the 
highest-priority information technology (IT) activities in the 
Commission'' to address important IT needs such as automated 
surveillance, collecting order and trade data, integrating technology 
across swaps and futures markets, improving data transparency and 
linking the Commodities Futures Trading Commission (CFTC) with Swap 
Data Repositories (SDR). Please identify the highest-priority IT 
activities that will be funded from within this amount.
    The highest priority of the CFTC IT budget is to support the 
ongoing operations of mission-essential systems and infrastructure for 
all divisions. With this funding, the CFTC can meet existing business 
requirements, provide operations support, collect business requirements 
for new technology solutions and implement new technology solutions. 
The major services provided in this area include:
  --Establishment of a technology roadmap with the capability and 
        capacity to integrate futures and swaps data and market 
        oversight;
  --Market and financial surveillance;
  --Enforcement litigation support, data discovery and forensics;
  --Automated surveillance modeling; and
  --Large trader data, financial data and trade data receipt, loading 
        and mining.
    Question. As the full-year continuing resolution has been enacted, 
please provide details to the subcommittee as to how the CFTC plans to 
spend remaining fiscal year 2011 funding. According to the Chairman's 
prepared testimony, the CFTC is prepared to hire approximately 40 
additional staff in fiscal year 2011. Please provide the subcommittee 
with specific information on the basis of the Chairman's hiring figure 
and the CFTC's intended deployment of the additional personnel. In 
addition to information about hiring plans, please also provide 
specific information as to the impact those hiring decisions will have 
on the staffing increases requested by the CFTC for fiscal year 2012.
    Answer. The fiscal year 2011 spending plan allocates $202,269,650 
across 2 fiscal years, the majority of which will be obligated before 
September 30, 2011.
    The CFTC expects to have about 720 staff on-board by September 30 
and to utilize 667 full-time equivalent staff-years. Twelve of the new 
positions will implement the CFTC's reorganization. The remaining hires 
will be used to fill critical staffing needs across the CFTC. The 
display below identifies the expected distribution of CFTC staff at the 
end of fiscal year 2011.

                       DISTRIBUTION OF CFTC STAFF
------------------------------------------------------------------------
                                              2011
                                          distribution    Percentage of
            Division/office              by division at       staff
                                          720 FTE level
------------------------------------------------------------------------
Division of Enforcement................             172             23.9
Division of Market Oversight...........             126             17.5
Division of Clearing and Risk..........              59              8.2
Division of Swaps Oversight............              79             11.0
Office of Data and Technology..........              88             12.2
Office of the Executive Director Office              69              9.6
 of General Counsel....................
Office of Chairman and Commissioners...              50              6.9
Office of the Chief Economist Office of              42              5.8
 Proceedings...........................
Office of International Affairs Office               15              2.1
 of Consumer Outreach..................
                                        --------------------------------
      Total............................             720            100.0
------------------------------------------------------------------------

    Question. Please provide more details regarding the CFTC's fiscal 
year 2012 request for its technology budget, including specific 
information as to breakdown of the budget request for the newly 
proposed of Office of Technology.
    Answer. The following table breaks down the request.

                        [In millions of dollars]
------------------------------------------------------------------------
                       Description                            Amount
------------------------------------------------------------------------
Investments in CFTC SDR data aggregation, order Data                  10
 Collection and Standardization, Implement Advanced
 Computing Platforms for High-Frequency, Algorithmic
 Trading Surveillance, and Enforcement..................
Systems integration of existing large trader and trade                 9
 systems with swaps data, for systems enhancement such
 as aggregated position limit surveillance, and
 significant upgrades to the FILAC systems for SEFs and
 SDRs...................................................
Capital equipment and software purchases................              14
Telecommunication services..............................               5
Support services such as financial and legal information              24
 services, operations and maintenance, systems analysis
 for ISS, TSS, eLaw, as well as other smaller mission-
 supporting systems and general operational support.....
IT supplies, operations, and maintenance including intra-              4
 governmental payments or cross-services agreements with
 other government agencies for Internet access and Web
 site maintenance, personnel payroll system, GSA
 telephone services and COOP facilities.................
------------------------------------------------------------------------

    Answer. The CFTC's fiscal year 2012 budget request includes $66 
million for technology. Of that amount $25 million will be required to 
begin the implementation of Dodd-Frank Act rules. The CFTC will begin 
developing a number of technology solutions in fiscal year 2011 and 
2012. This includes: automated surveillance of commodity futures, 
options and swap markets; ensuring that CFTC data is compatible with 
industry data; identifying fields that describe transactions and 
transacting entities; associating swaps market data with futures market 
data; and implementing a number of other technology priorities. The 
technology implementation timetable will be driven by the sequence and 
phasing of the effective dates of final rulemakings. In fiscal year 
2011 and 2012, the focus will be support for registration and 
compliance filings, providing connectivity for direct access to SDRs, 
addressing margin requirements and assimilating data needed for 
determining and enforcing position limits. The CFTC plans to update 
automated surveillance systems and integrate swaps and futures data and 
systems.
    Despite rapid advances in technology and the increased size of 
regulated derivatives markets, funding for the CFTC has lagged behind 
the growth of the markets. While market participants have the 
technology to automate their trading, we do not yet have the resources 
to employ modern technology to automate our surveillance.
    In fiscal year 2010, we used about 18 percent of our budget--$31 
million--on technology initiatives. The continuing resolution requires 
that we allocate $37.2 million toward technology in fiscal year 2011. 
The CFTC needs to make further investment in technology to efficiently 
oversee both the futures and swaps markets. Only through investment in 
the CFTC will we be able to adequately oversee the commodity futures 
and swaps markets and protect the American public. With an 
appropriation to support $66 million to be used on technology, the CFTC 
would increase the proportion of its budget used on technology to more 
than 21 percent.
    Question. The CFTC has recently notified the subcommittee of its 
intent to undertake a reorganization, effective October 9, 2011, to 
restructure its staff, creating a new Division of Swap Dealer and 
Intermediary Oversight, a new Office of Data and Technology, and 
realigning other divisions and offices including the Division of Market 
Oversight, the Division of Clearing and Intermediary Oversight and the 
Office of the Executive Director. The CFTC's fiscal year 2012 budget 
request did not reflect this reorganization. Please provide the 
subcommittee with details on the new spending plan the CFTC is 
proposing for fiscal year 2012, including the impact of the 
reorganization on staffing.
    Answer. The reorganization will require the same FTE level as 
previously requested. The attached document details the breakdown of 
FTE utilization under both the fiscal year 2012 budget request and 
under the planned reorganization.

------------------------------------------------------------------------
                       Department                            Employees
------------------------------------------------------------------------
Fiscal Year 2010 Budget Current Organizational
 Structure:
    DOE.................................................             235
    DMO.................................................             250
    DCIO................................................             182
    OITS................................................              92
    OED.................................................              73
    OGC.................................................              70
    CH/COMM.............................................              38
    OCE.................................................              20
    PRO.................................................              10
    OIA.................................................              13
    CP/WB...............................................  ..............
                                                         ---------------
      Total.............................................             983
                                                         ===============
Fiscal Year 2012 Budget Proposed (February)
 Organizational Structure:
    DOE.................................................             235
                                                         ===============
    OSEF&STDCM \1\......................................             100
    MTPS&DMA \2\........................................             147
    FBOT \3\............................................               3
                                                         ---------------
      Subtotal..........................................             250
                                                         ===============
    SDIO \4\............................................             112
    CORS \5\............................................          \5\ 70
                                                         ---------------
      Subtotal..........................................             182
                                                         ===============
    OITS................................................              92
    OED.................................................              73
    OGC.................................................              70
    CH/COMM.............................................              38
    OCE.................................................              20
    PRO.................................................              10
    OIA.................................................              13
    CP/WB...............................................  ..............
                                                         ---------------
      Total.............................................             983
                                                         ===============
Fiscal Year 2012 Budget Proposed (May) Organizational
 Structure (Effective October 2011):
    DOE.................................................             235
    DMO.................................................         \1\ 229
    DCR.................................................              74
    DSIO................................................             108
    ODT.................................................         \1\ 113
    OED.................................................              73
    OGC.................................................              70
    CH/COMM.............................................              38
    OCE.................................................              20
    PRO.................................................              10
    OIA.................................................              13
    CP/WB...............................................         ( \2\ )
                                                         ---------------
      Total.............................................             983
------------------------------------------------------------------------
\1\ Oversight of Swap Execution Facilities and Swaps Trading on DCMS
  located on page 8 of the electronic version of the CFTC fiscal year
  2012 President's budget.
\2\ Market and Trade Practice Surveillance; Data Management and Analysis
  located on page 8 of the electronic version of the CFTC fiscal year
  2012 President's budget.
\3\ Foreign Boards of Trade located on page 9 of the electronic version
  of the CFTC fiscal year 2012 President's budget.
\4\ Swap Dealer and Intermediary Oversight located on page 7 of the
  electronic version of the CFTC fiscal year 2012 President's budget.
\5\ Clearing Oversight and Risk Surveillance located on Page 7 of the
  electronic version of the CFTC fiscal year 2012 President's budget.
\6\ ODT Total FTE is comprised of 92 OITS FTE and 21 FTE transferred
  from DMO's Information Group.
\7\ Appropriate organization structure to be determined.

    Question. During the question and answer portion of our hearing, 
you referenced that you have economists working on each of the rule-
writing teams. Specifically, you said: ``We do have a very fine staff 
of economists. It's about 14. We are wishing in this budget request to 
grow to 20, but there are also a lot of economists in the rule writing 
teams that aren't in the Office of Chief Economist.'' Beyond the 14 
economists working in the Office of Chief Economist, could you please 
list the names of each of the economists dedicated to the rule-writing 
teams and list the rules they have worked on?
    Answer. When the Dodd-Frank Act was enacted, we established 30 
rulemaking teams made up of staff from across divisions. An additional 
team was added to deal with necessary conforming changes to existing 
CFTC regulations. Below is a list of these teams and lead divisions 
with the subject of their rule writing responsibility. For each team 
the names of economists who are not part of the Office of Chief 
Economist are listed, along with their job titles and divisions.

                            RULEMAKING TEAMS
------------------------------------------------------------------------
                   Team                                 Title
------------------------------------------------------------------------
Team 1--Registration (SD and MSPs)........  ( \1\ )
Team 2--Entity definitions:
    Kuserk, Gregg.........................  Senior Economist
    Seong, Somi...........................  Economist
    Troia, Rosario........................  Financial Economist
Team 3--Business Conduct Standards--        ( \1\ )
 Counterparties.
Team 4--Business Conduct Standards--
 Internal:
    Rothenberg, John Paul.................  Economist
Team 5--Capital and margin for non-banks:
    Rothenberg, John Paul.................  Economist
Team 6--Segregation and bankruptcy          ( \1\ )
 cleared--DCIO.
Team 7--DCO Core Principles--DCIO.........  ( \1\ )
Team 8--Process of Review, Mandatory        ( \1\ )
 Clearing--DCIO.
Team 9--Governance--DCIO..................  ( \1\ )
Team 10--System Important DCO Rules, Title  ( \1\ )
 VIII--DCIO.
Team 11--End-User Exemptions--OGC:
    Horn, Marshall........................  Director, Market
                                             Surveillance Branch
Team 12--DCM Core Principles--DMO:
    Forkkio, John.........................  Supervisory Industry
                                             Economist
    Kass, David...........................  Industry Economist
    Leonova, Irina........................  Financial Economist
    Price, Gregory........................  Industry Economist
    Benton, Steven........................  Industry Economist
    Murray, Martin........................  Supervisory Economist
Team 13--SEF Registration Requirements--
 DMO:
    Benton, Steven........................  Industry Economist
    Kass, David...........................  Industry Economist
    Leonova, Irina........................  Financial Economist
    Price, Gregory........................  Industry Economist
Team 14--FBOT Registration Requirements--
 DMO:
    Colling, Phillip......................  Industry Economist
Team 15--Rule Certification and Approval--
 DMO:
    Babula, Ronald........................  Economist
    Murray, Martin........................  Supervisory Economist
Team 16--SDR Registration Standards--OGC:
    Schubert, Anne........................  Economist
Team 17--Swap Data Recordkeeping and
 Reporting--DMO:
    Irina Leonova.........................  Economist
    Kuserk, Gregory.......................  Senior Economist
    Pullen, George........................  Economist
    Rothenberg, John Paul.................  Economist
    Schubert, Anne........................  Economist
    Larry Grannan.........................  Economist
Team 18--Real Time Reporting--DMO:
    Leahy, Thomas.........................  Chief, Product Review Branch
    Pullen, George........................  Economist
Team 19--Agricultural Swaps and Commodity
 Options--DMO:
    Lachenmayr, Christa...................  Economist
    Murray, Martin........................  Supervisory Economist
Team 20--Retail Forex--DCIO...............  ( \1\ )
Team 21--Product Definitions--OGC:
    Kuserk, Gregory.......................  Senior Economist
    Seong, Somi...........................  Economist
    Troia, Rosario........................  Financial Economist
Team 22--Portfolio Margining Procedures--   ( \1\ )
 DCIO.
Team 23--Anti-Manipulation--ENF:
    Cusimano, Jeremy......................  Economic Advisor to the
                                             Director
    Kass, David...........................  Industry Economist
Team 24--Disruptive Trading Practices--
 ENF:
    Cusimano, Jeremy......................  Economic Advisor to the
                                             Director
    Kass, David...........................  Industry Economist
Team 25--Whistleblowers--ENF..............  ( \1\ )
Team 26--Position Limits--DMO:
    Danger, Kenneth.......................  Industry Economist
    Kass, David...........................  Industry Economist
    Littlefield, Thomas...................  Economist
    Sherrod, Stephen......................  Acting Director of Market
                                             Surveillance
    Outen, James..........................  Industry Economist
Team 27--Investment Advisor Reporting--     ( \1\ )
 DCIO.
Team 28--Volker Rule--DCIO................  ( \1\ )
Team 29--Alternatives to Relying on Credit  ( \1\ )
 Ratings--OGC.
Team 30--Fair Credit Reporting Act and      ( \1\ )
 GLB--OGC.
Team 31--Conforming Rules--DCIO:
    Choo Lee-Ken..........................  Industry Economist
------------------------------------------------------------------------
\1\ Any Economists on these teams are from the Office of the Chief
  Economist.

    In addition, DMO is the lead staff division for eight of the 
rulemaking teams. The division director is Richard Shilts, who is an 
economist.
                                 ______
                                 
                Questions Submitted to Mary L. Schapiro
            Questions Submitted by Senator Richard J. Durbin

                SEC DEG.CREDIT RATING AGENCIES

    Question. Under the Dodd-Frank regulatory reform law enacted last 
July, Federal agencies are required to scrub their rule books of 
references to credit ratings, forcing them to find alternative measures 
for creditworthiness.
    During the credit boom, banks and other investors put great stock 
in the prime ratings given to mortgage bonds that later soured. The 
Congress was concerned that, by referencing ratings in its rules, the 
Federal Government may have been putting its imprimatur on the ratings.
    Recently, the Securities and Exchange Commission (SEC) issued a 
proposed rule to eliminate references to credit ratings from the so-
called ``net capital rule'' that requires a brokerage firm to maintain 
sufficient liquid assets against its proprietary securities in order to 
protect customers in case it fails. Currently, this rule allows 
brokerages to hold less capital against certain securities that hold 
high ratings from at least two registered credit-rating firms.
    The SEC proposal would replace the former credit rating with a 
brokerage's own internal assessment of the securities' 
creditworthiness. This change would affect about 480 brokerages that 
hold proprietary securities, some of which will have to incur costs to 
come up with an in-house process that serves as a replacement for 
outside ratings.
    One of your fellow Commissioners contends that this change would 
harm investors and force the SEC to spend more resources on its broker 
examinations to ensure brokerages are complying with the rules.
    What mechanisms does the SEC plan to put into place to ensure that 
the substitute credentialing by brokerages are sound and reliable?
    If the rating determination is left up to each brokerage won't that 
spawn an array of varied and inconsistent standards?
    Wouldn't it be more prudent and efficient for the SEC to design an 
objective standard?
    Answer. On April 27, 2010, the SEC proposed to remove references to 
credit ratings of Nationally Recognized Statistical Rating 
Organizations (NRSROs) in certain rules under the Securities Exchange 
Act of 1934, including the Commission's net capital rule for broker-
dealers.
    Under the proposal, the SEC sets forth a list of factors that a 
broker-dealer could consider when determining the net capital treatment 
of preferred stock, nonconvertible debt, and commercial paper. The 
factors are intended to facilitate a determination by a broker-dealer 
as to whether a security is subject to a ``minimal amount of credit 
risk.'' If it is, the security could qualify for more favorable net 
capital treatment than securities of lesser credit quality. The range 
and type of specific factors considered would vary depending on the 
type of securities subject to review. A broker-dealer's process for 
establishing creditworthiness and its written policies and procedures 
documenting that process would be subject to review in regulatory 
examinations by the SEC and self-regulatory organizations (SROs). A 
broker-dealer that does not establish, maintain, and enforce written 
policies and procedures reasonably designed to assess creditworthiness 
would be subject to disciplinary action for noncompliance with the rule 
and could be required to recalculate its net capital.
    This is not the first time the SEC has proposed to remove 
references to credit ratings in Commission rules. The SEC issued a 
concept release in 1994 on the general idea of removing references to 
NRSROs in its rules. In 2003, the SEC again sought comment on whether 
it should eliminate the NRSRO designation from Commission rules, and, 
if so, what alternatives could be adopted to meet the Commission's 
regulatory objectives. Most recently, in July 2008, the SEC made 
specific proposals to remove rule references to ratings by NRSROs. In 
response, the SEC received many comments that raised serious concerns 
about removing the credit rating references. In October 2009, the SEC 
adopted several of the proposed reference removals and re-opened for 
comment the remaining proposals. In each of these concept releases and 
rule proposals, commenters generally did not support the removal of 
references to NRSRO ratings from SEC rules and provided few possible 
regulatory alternatives.
    The SEC recognizes the concerns raised by commenters that replacing 
credit ratings--which provide an objective benchmark--with more 
subjective approaches could increase costs to broker-dealers and the 
Commission. Accordingly, in the current proposal, the SEC seeks comment 
on the potential impact of moving from an objective standard to a more 
subjective standard and whether alternate and more reliable means of 
establishing creditworthiness exist.
    Question. Do you think that it is possible to restore the 
reputation of credit rating agencies? What enhanced role does SEC play 
in regulating credit rating agencies?
    Answer. The Dodd-Frank Act augmented the SEC's oversight authority 
for credit rating agencies registered as NRSROs and mandated that the 
Commission adopt rules in a number of areas with respect to NRSROs. The 
SEC began the process of implementing these mandates with the adoption 
of a new rule in January 2011 requiring NRSROs to provide a description 
of the representations, warranties, and enforcement mechanisms 
available to investors in an offering of asset-backed securities--as 
well as how those representations, warranties, and enforcement 
mechanisms differ from those of similar offerings. On May 18, 2011, the 
SEC proposed new rules and amendments to existing rules that would 
implement the balance of the Dodd-Frank Act's NRSRO rulemaking 
mandates. The proposals would enhance the SEC 's existing rules 
governing ratings and rating agencies by, among other things, requiring 
NRSROs to:
  --report on internal controls;
  --protect against conflicts of interest;
  --establish professional standards for credit analysts;
  --provide public disclosure about the credit rating and methodology 
        used to determine the credit rating, when publishing a rating; 
        and
  --enhance their public disclosures about the performance of their 
        credit ratings.
    In addition, as required by the Dodd-Frank Act, the SEC has begun 
conducting annual exams of NRSROs.

          SEC DEG.SEC ORGANIZATIONAL STRUCTURE STUDY

    Question. In response to a directive in section 967 of the Dodd-
Frank Act, the SEC retained the services of an independent consultant 
to analyze the Commission's structure and operation, and to suggest 
reforms. The Boston Consulting Group (BCG) was hired. Among the 
recommendations outlined in the March 10 report are that the SEC should 
``hire staff with high-priority skills,'' ``invest in technology 
systems,'' and ``improve oversight over self-regulatory 
organizations.''
    Has the SEC evaluated the BCG findings and recommendations?
    What has been the internal response to the report?
    Is the SEC unified in its reaction?
    What steps are being taken to address the recommendations?
    What is the estimated cost of implementing the reforms the BCG 
recommended?
    To what extent will resources made available for fiscal year 2011 
be utilized to move forward with any of the changes recommended?
    Although the President's fiscal year 2012 budget was submitted 
about 6 weeks before the BCG report, to what extent does the spending 
proposed for next year incorporate any aspects that would address the 
BCG findings?
    Answer. The BCG report has provided the SEC with valuable insights 
into how the SEC might continue its efforts to ensure a vigilant, 
agile, and responsive organization. Because the scope of the BCG 
report's recommendations touch on virtually every aspect of the SEC's 
operations and offices, determining the appropriate course of action to 
take in response and implementing those actions will require careful 
internal coordination and a significant commitment of staff and other 
resources.
    Both during the period of study by the BCG and now with regard to 
the final report, the SEC has been committed to the concept of this 
independent assessment. We welcome the opportunity to review our 
structure, processes, and the full range of our business operations 
with the goal of improving their efficiency and effectiveness to meet 
our mission objectives. Accordingly, I believe that the overall 
response within the SEC to the BCG report has been a positive one, and 
Commission management is unified in its commitment to excellence.
    Since the report's issuance the SEC has been moving rapidly to 
evaluate, prioritize, and implement many of the BCG findings and 
recommendations. I have designated our Chief Operating Officer, Jeff 
Heslop, to manage the logistics of the follow-up process. We've divided 
the BCG recommendations into two dozen discrete work-streams, each of 
which has been assigned to a division or office director or other 
senior executive tasked to lead the follow-up work. Initially, we are 
analyzing the recommendations to determine whether we agree with them 
and, if so, to develop an implementation plan and schedule. We have 
also established an Executive Steering Committee to provide critical 
oversight, to review implementation plans, and decide how best to 
prioritize, sequence, and coordinate the significant follow-up work 
resulting from the two dozen work-streams. Further, we have established 
a dedicated Program Management Office that is responsible for tracking 
and reporting on the SEC's implementation efforts. These efforts are 
being funded to the extent permitted by the SEC's overall fiscal year 
2011 appropriation.
    In a number of cases, we are already taking follow-up actions. For 
instance, we have agreed with the recommendation to consolidate the 
functions of the Office of the Executive Director and the Office of the 
Chief Operating Officer and received reprogramming approval from our 
House and Senate Appropriations Subcommittees to take this action.
    The BCG has estimated that approximately $42 million to $55 million 
in up-front costs will be required to implement the recommendations, in 
addition to the costs associated with the significant commitment of SEC 
management and staff time. A significant portion of these 
implementation costs ($21 to $28 million) would be for additional 
investments in information technology systems. The SEC did not have the 
opportunity to consider the costs of implementing the BCG 
recommendations in developing its fiscal year 2012 budget request, 
which as you note was submitted to the Congress more than a month 
before the SEC received the BCG's final report.
    One of the key findings from the BCG report is that the SEC does 
not have sufficient human resources to complete the requirements of 
Dodd-Frank while maintaining its activities as currently performed. We 
would note that the BCG's estimate of the size of this staffing 
``capacity gap'' is generally consistent with the SEC's own estimate as 
reflected in our fiscal year 2012 budget request. Specifically, the BCG 
estimates that, in fiscal year 2012, the SEC's five major divisions and 
examinations program collectively will experience a capacity gap of at 
least 400 to 450 full-time equivalent (FTE). This is consistent with 
our budget request for these programs for fiscal year 2012, which seeks 
an increase of 424 FTE for these programs compared to fiscal year 
2011.\1\
---------------------------------------------------------------------------
    \1\ The SEC's fiscal year 2012 budget seeks 424 additional FTE for 
the enforcement program (130); the examinations program (148); 
Corporation Finance (38); Trading and Markets (58), Investment 
Management (24); and RiskFin (26).
---------------------------------------------------------------------------
  SEC DEG.RESPONSIVENESS TO TIPS, COMPLAINTS, AND REFERRALS 
                                 (TCRS)

    Question. What has the SEC accomplished in the past year to address 
concerns that the Commission was historically woefully unresponsive to 
TCRs submitted to the Commission citing potential violations of the 
rules and securities laws?
    Answer. In January 2010, the Division of Enforcement established 
the Office of Market Intelligence (OMI) to be the central intake point 
of all TCRs sent to the SEC by the public. The OMI has established 
policies, procedures, and workflow processes to analyze and research 
TCRs and assign out those TCRs that merit further assessment by 
investigative or exam staff.
    Question. Are all of the incoming TCRs presently channeled to one 
centralized destination within the SEC for review regardless of the 
mode of transmission (e.g., e-mail, letter, hotline, etc.) or 
substantive nature of the issue?
    Answer. All tips and complaints, regardless of the mode of 
transmission or the substantive nature of the issue, are entered into 
the TCR Intake and Resolution System. The system centralizes TCRs and 
provides work flow and audit capabilities such that all tips and 
complaints can be tracked from entry to disposition. With respect to 
referrals, we have a legacy system that we are in the process of 
incorporating into the TCR Intake and Resolution System. As a result, 
referrals are not yet centralized in the TCR Intake and Resolution 
System.
    Question. Which office within the SEC is primarily responsible for 
managing TCRs?
    Answer. The OMI in the Division of Enforcement and the Office of 
Compliance Inspections and Examinations (OCIE) are the two offices 
within the SEC that review all TCRs. These two offices coordinate 
review processes to ensure that tips and complaints receive similar 
analysis. Investor complaints that do not concern violations of the 
Federal securities laws are handled by the Office of Investor Education 
and Assistance.
    Question. Do you have an automated intake system in place at this 
time?
    Answer. Yes. Tips and complaints can be entered by the public into 
the SEC's online electronic questionnaire located at www.sec.gov. The 
information entered automatically populates an internal database of 
tips and complaints--the TCR Intake and Resolution System. The public 
may also send tips and complaints via email, letter, or fax. Tips and 
complaints received by email, letter, or fax are entered by SEC staff 
into the same internal database of tips and complaints.
    Question. Does the system track and monitor the tips?
    Answer. Yes. The TCR Intake and Resolution System has the 
capability to track all tips and complaints from entry to disposition.
    Question. Does it provide a means to link and search for multiple 
similar complaints against a single entity?
    Answer. Yes. The TCR Intake and Resolution System has search 
capabilities that enable staff to link and search for similar 
complaints against a single entity.
    Question. Does the system generate an acknowledgment to the 
individual or firm that submitted the TCR?
    Answer. If the tip or complaint is entered through the SEC's Web 
site using the online questionnaire, the submitter will receive an 
acknowledgment of receipt as well as a reference number associated with 
his or her submission. If the tip or complaint is mailed or emailed, 
the staff will send a letter or email acknowledging receipt of the tip 
or complaint.
    Question. That additional resources are required to further 
strengthen the SEC's capacity to acquire and manage an effective and 
functional automated TCR?
    Answer. The TCR Intake and Resolution System was designed with the 
ability to add additional functionality such as an automated triage 
engine and other analytical tools. We are currently pursuing triage 
functionality to enhance our capabilities.
    Question. To what extent does SEC management interface with your 
Inspector General (OIG) to cross-match complaints and tips and 
referrals that may be routed to each of you to identify redundancy and 
duplication? If that is not occurring, would doing so pose any issues?
    Answer. All tips and complaints received by the SEC are required to 
be entered into the TCR system. Staff in the OIG will forward tips and 
complaints that they receive to the OMI for entry into the system. 
Prior to entry, the staff's protocol requires a search of the system to 
determine whether the tip or complaint has already been entered.

   SEC DEG.STRENGTHENING EXAMS AND OVERSIGHT--FREQUENCY OF 
                                REVIEWS

    Question. A vigorous exam program serves as a vital early warning 
system and weakness detector.
    I understand that the SEC employs a ``risk-based'' strategy for 
conducting exams of investment advisers. Under this approach, resources 
are concentrated on those firms and practices that have the greatest 
potential risk of securities law violations that can harm investors.
    Your fiscal year 2012 budget justification materials indicate that 
the SEC examined only about 9 percent of the investment advisers in 
fiscal year 2010 down from 14 percent in 2008.
    Is that level sufficient or acceptable, in your judgment?
    What are the drawbacks of sporadic inspections of a limited 
universe?
    What would it take to increase the number and frequency of reviews?
    Does the percentage decline from fiscal year 2008 to fiscal year 
2010 suggest that the SEC is reviewing fewer entities or have the 
number of advisers grown such that you are actually conducting more 
exams? (e.g., 14 percent of 1,000 = 140; 9 percent of 1,600 = 144).
    Are you at least conducting initial screenings of the entire 
universe to identify the highest-risk ones?
    Are you potentially missing some high-risk reviews because you are 
not able to examine 91 percent of them?
    Your data also reflect that SEC exams identify deficiencies in 72 
percent of the firms that are reviewed and that 42 percent of the ones 
with deficiencies are categorized as ``significant'' suggesting a high 
potential to cause harm or reflect recidivist conduct. It is also 
noteworthy that SEC intends to use more rigorous exam protocols this 
year and, coupled with growth in the number of regulated entities, SEC 
expects even lower percentages of registrants being examined.
    Isn't it conceivable with new entities coming under regulatory 
purview that more exams are in order rather than fewer?
    What resources would you need to expand exam staffing and support?
    Is it possible to require more detailed and rigorous self-exams and 
reporting requirements imposed?
    In response to the Madoff scandal and the revelation of the 
embarrassing ineptitude that delayed catching this criminal, what new 
mandates are now in place? Are SEC examiners now routinely verifying 
the existence of client assets in the custody of third parties, 
counterparties, and customers?
    Answer. Current examination resources can indeed only cover a small 
portion of the registered investment advisers (IAs) that we are 
responsible for examining. Moreover, several factors are increasing the 
strain on our examination resources:
  --increased development and use of new and complex products, 
        including derivatives and exchange-traded funds;
  --growth of technology to facilitate such activities as high-
        frequency trading; and
  --growth of ``families'' of financial service firms with integrated 
        operations that include both broker-dealer and IA affiliates.
    In addition to these industry factors, the examination program now 
routinely verifies with third parties the assets held by IAs, an 
important, but labor-intensive process. As a consequence of all of 
these factors, fewer IA examinations were conducted in fiscal year 2010 
than in fiscal year 2008, even as the population of IA registrants 
increased during that period.
    Although we expect that, under the Dodd-Frank Act, States will 
assume responsibility for examining most IAs with less than $100 
million in assets under management by early 2012, the act also expanded 
the SEC's examination-related responsibilities to include municipal 
advisors, new categories of securities-based swap registrants, advisers 
to private funds, and other new registrants. Overall, absent any 
increase in resources, the expected size of the SEC-regulated community 
in fiscal year 2012 will dwarf the size of the current examination 
program to an even greater extent than is the case today.
    In light of these resource constraints and in order to more 
effectively carry out our regulatory responsibilities, the OCIE is 
pursuing a more risk-based approach to the examination program. Key 
elements of this approach include:
  --An initial screening of IAs, through the review of all Form ADV 
        filings. We have developed a wide range of metrics to help us 
        identify high-risk firms and improve the chances that our 
        examination resources are focused on the right firms.
  --Sharing the results of this initial risk assessment with regional 
        offices, which add their localized knowledge of firms to 
        develop a more refined list of high-risk firms.
  --Analysis of additional sources of information, including past 
        examinations; SEC filings; third-party information; information 
        from other regulators; and information gathered from other 
        examinations.
  --Analysis of other risk-related information, including the size or 
        interconnectedness of a firm; opportunities for fraud (e.g., 
        direct access to customer funds); financial concerns about the 
        firm; other characteristics of a firm; and the date of last 
        exam.
    Once we have selected a candidate for an examination, we will focus 
the scope of the examination based on a thorough understanding of the 
registrant's business, affiliations and potential conflicts of 
interest, and a high-level review of the firm's management controls and 
compliance systems.
    For each function included in the scope of the examination, we will 
conduct further review of key risk management, compliance and control 
functions, and test selected control processes the registrant has in 
place to manage compliance and fraud risk. This gives us a better sense 
of whether the registrant has an effective ``culture of compliance,'' 
and may also encourage firms to have more rigorous compliance and self-
examination programs.
    While we have been working diligently to improve our exam program, 
we need more examiners, expertise, and further technological resources. 
With the addition of approximately 200 FTE positions sought in the 2012 
budget, we will be able to conduct more examinations and improve our 
overall coverage of the industry, as well as better fulfill our new 
responsibilities under the Dodd-Frank Act. We also should be able to 
improve our risk analysis approach so that those examinations will be 
more likely to focus on the areas in greatest need of attention.
    The SEC recently released a staff report to the Congress on 
enhancing investment adviser examinations. The study, required by 
section 914 of the Dodd-Frank Act (914 Study), concludes that the SEC's 
investment adviser examination program requires a source of funding 
sufficiently stable to prevent examination resources from being 
outstripped by future growth in the number of registered advisers 
(i.e., that the resources are scalable to any future increase--or 
decrease--in the number of registered investment advisers). The 914 
Study identified three options for the Congress to consider:
  --Impose ``user fees'' on SEC-registered investment advisers that 
        could be retained by the Commission to fund the investment 
        adviser examination program;
  --Authorize one or more SROs to examine, subject to SEC oversight, 
        all SEC-registered investment advisers; or
  --Authorize Financial Industry Regulatory Authority (FINRA) to 
        examine dual registrants for compliance with the Advisers Act.
    The SEC expressed no view as to the advisability of any of these 
three options.\2\
---------------------------------------------------------------------------
    \2\ Commissioner Walters issued a separate statement in which she 
supported the second option--authorizing an SRO to oversee investment 
advisers. See http://www.sec.gov/news/speech/2011/spch011911ebw.pdf.
---------------------------------------------------------------------------
 SEC DEG.CIRCUIT BREAKER RULES IN RESPONSE TO MAY 2010 FLASH 
                                 CRASH

    Question. One year ago this week, the now notorious May 6 ``flash 
crash'' sent the Dow Jones industrial average plunging some 700 points 
in minutes, exposing flaws in the electronic marketplace dominated by 
high-speed trading.
    In response, the SEC instituted new trading curbs last June as a 
pilot program. These single-stock circuit breakers apply to securities 
in the S&P 500 Index and Russell 1000 Index as well as certain 
exchange-traded funds.
    Under the existing circuit breaker pilot, trading in a stock pauses 
across the U.S. equity markets for a 5-minute period if the stock 
experiences a 10 percent change in price over the preceding 5 minutes. 
The pause gives the markets the opportunity to attract new trading 
interest in an affected stock, establish a reasonable market price, and 
resume trading in a fair and orderly fashion. I understand that the 
circuit breaker pilot is currently set to expire on August 11, 2011.
    A month ago (April 5, 2011), the SEC announced that national 
securities exchanges and the FINRA filed a proposal to establish a new 
``limit up-limit down'' mechanism to address extraordinary market 
volatility in U.S. equity markets. If approved by the SEC, the new 
limit up-limit down mechanism would replace the existing single-stock 
circuit breakers
    This proposed ``limit up-limit down'' mechanism would prevent 
trades in listed equity securities from occurring outside of a 
specified price band, which would be set at a percentage level above 
and below the average price of the security over the immediately 
preceding 5-minute period. For stocks currently subject to the circuit 
breaker pilot, the percentage would be 5 percent, and for those not 
subject to the pilot, the percentage would be 10 percent.
    The percentage bands would be doubled during the opening and 
closing periods, and broader price bands would apply to stocks priced 
below $1. To accommodate more fundamental price moves, there would be a 
5-minute trading pause--similar to the pause triggered by the current 
circuit breakers--if trading is unable to occur within the price band 
for more than 15 seconds.
    Have the circuit breakers performed as intended? If not, why not?
    Answer. One of the key purposes of the trading pauses imposed under 
the circuit breaker pilot was to provide an opportunity for trading 
interest to normalize after a stock has been subject to substantial 
price moves in a short period of time. In a number of instances when 
the circuit breakers have been triggered, the ensuing trading pause has 
had this intended effect. However, there may be room for improvement in 
terms of the actual mechanism that is used to guard against excessive 
volatility. In particular, because the circuit breakers are triggered 
only after a trade occurs outside of the applicable percentage 
threshold, there has been a propensity for the circuit breakers to be 
triggered by erroneous trades.
    Question. What advantages or improvements do you expect to gain by 
replacing the circuit breakers with the limit up/limit down mechanism?
    Answer. In contrast to the single-stock circuit breaker, which may 
be triggered by an erroneous trade, a limit up-limit down mechanism, 
which would prevent trades in individual securities from occurring 
outside of a specified price band, would help to prevent erroneous 
trades from occurring in the first place.
    In addition, unlike the single-stock circuit breaker, the limit up-
limit down mechanism will feature a 15-second ``limit state'' that is 
triggered before a trading pause may be initiated. Once triggered, the 
market for that security may exit the limit state in 1 of 2 ways. If 
the quotation that triggered the limit state (i.e., an offer at the 
lower price band, or a bid at the upper price band) is either cancelled 
or executed against in its entirety, the market for that security will 
exit the limit state and return to regular trading. If the quote is not 
cancelled or executed against in its entirety, then a trading pause is 
initiated for that stock once the 15-second period has run. In 
instances where the limit state was triggered by an erroneous quote or 
a momentary gap in liquidity, as opposed to a more fundamental price 
move, the ``limit state'' feature thus allows the market to quickly 
correct itself by cancelling or executing against the quotation that 
triggered the limit state, allowing regular trading to resume instead 
of automatically initiating a trading pause.
    Question. What's the timetable for action on the limit up/limit 
down proposal?
    Answer. The proposed limit up-limit down National Market System 
(NMS) Plan was published in the Federal Register on June 1, 2011, and 
the 120-day period for SEC approval ends on September 29, 2011 
(although the period for approval or disapproval may be extended to 180 
days). If the SEC approves the plan, the plan participants have 
proposed that the initial date of plan operations be 120 days following 
publication of the approval order in the Federal Register. In 
particular, plan participants proposed that once the plan is 
operational, it will be implemented in two phases. Phase I will be 
launched on the initial date of plan operations, and will cover stocks 
in the S&P 500, the Russell 1000, and a list of select exchange-traded 
products. Phase II of the plan, which will apply to all remaining NMS 
securities, will be implemented 6 months thereafter.

           SEC DEG.MARKET MAKER QUOTING OBLIGATIONS

    Question. What other initiatives or market structure measures has 
the SEC pursued in response to the flash crash?
    Answer. One of the phenomena that occurred on May 6, 2010 was that 
trades were executed at irrational prices as low as one penny or as 
high as $100,000. These trades occurred as a result of so-called ``stub 
quotes'', which are quotes generated by market makers (or the exchanges 
on their behalf) at levels far away from the current market in order to 
fulfill continuous two-sided quoting obligations even when a market 
maker has withdrawn from active trading. In the following months, the 
SROs filed, and the SEC approved, proposals establishing minimum 
quoting obligations for market makers. Specifically, for stocks that 
are in the S&P 500, Russell 1000, and a select list of exchange-traded 
products, market makers must submit a quote for one round lot of shares 
at 8 percent away from the National Best Bid or Offer (NBBO) between 
the hours of 9:45 a.m. and 3:35 a.m. For quotes in these securities 
that are submitted between 9:30 and 9:45 a.m., and between 3:35 and 4 
p.m., this quoting obligation changes to 20 percent away from the NBBO. 
For securities that are not included in the S&P 500, Russell 1000, or 
the select list of exchange-traded products, market makers must submit 
a quote at 30 percent away from the NBBO.
    In connection with the recently filed proposals to extend the 
single-stock circuit breaker pilot to all remaining NMS securities, 
using either a 30 percent threshold (for securities in that group that 
are trading at or above $1) or a 50 percent threshold (for securities 
in that group that are trading below $1), the SROs proposed 
corresponding changes to the market maker quoting obligations. If those 
proposals are approved, market makers would be obligated to quote one 
round lot at 28 percent away from the NBBO for those securities trading 
at or above $1 (and thus subject to the 30 percent circuit breaker 
threshold), and 30 percent away from the NBBO for those securities 
trading below $1 (and thus subject to the 50 percent circuit breaker 
threshold).
    In each of these cases, a market maker's quote may ``drift'' an 
additional 1.5 percent away from the NBBO before a new quote within the 
applicable band must be entered.

            SEC DEG.CLEARLY ERRONEOUS PILOT PROGRAM

    Another initiative following May 6 was the approval of a pilot 
program establishing uniform clearly erroneous standards. To provide 
market participants more certainty as to which trades will be broken 
and allow them to better manage their risks, the national securities 
exchanges and FINRA proposed new trade break procedures, which were 
approved by the SEC on a pilot basis in September 2010.
    These rules clarified the process for breaking erroneous trades. 
The rules will make it clearer when, and at what prices, trades will be 
broken by the exchanges and FINRA. Specifically, for stocks that are 
subject to the circuit breaker program, trades are broken at specified 
levels depending on the stock price:
  --For stocks priced $25 or less, trades are broken if the trades are 
        at least 10 percent away from the circuit breaker trigger 
        price.
  --For stocks priced more than $25 to $50, trades are broken if they 
        are 5 percent away from the circuit breaker trigger price.
  --For stocks priced more than $50, trades are broken if they are 3 
        percent away from the circuit breaker trigger price.
    Where circuit breakers are not applicable, the exchanges and FINRA 
will break trades at specified levels for events involving multiple 
stocks depending on how many stocks are involved:
  --For events involving between 5 and 20 stocks, trades are broken 
        that are at least 10 percent away from the ``reference price,'' 
        typically the last sale before pricing was disrupted.
  --For events involving more than 20 stocks, trades are broken that 
        are at least 30 percent away from the reference price.
    On May 6, the markets only broke trades that were more than 60 
percent away from the reference price in a process that was not 
transparent to market participants. By establishing clear and 
transparent standards for breaking erroneous trades, the new rules help 
to provide clarity in advance as to which trades will be broken, and 
allow market participants to better manage their risks.

Other Initiatives
    Revision of the Market-wide Circuit Breakers.--The SEC is working 
with the Commodity Futures Trading Commission (CFTC), as well as with 
the securities and futures exchanges, to develop a framework for SRO 
rule proposals to implement changes to the current market-wide circuit 
breakers originally implemented in 1988 (and last revised in 1998). The 
goal is to modify these circuit breakers to better address the type of 
volatility experienced on May 6, 2010, and to better conform with 
today's market structures and trading dynamics.
    Expansion of the Circuit Breaker Pilot To Cover all NMS 
Securities.--On May 6, 2011, the SROs filed proposed rule changes to 
extend the single-stock circuit breaker pilot program to all remaining 
NMS securities. The triggering percentage would be 30 percent for 
securities in this group that are trading at or above $1, and 50 
percent for securities in this group that are trading below $1. Absent 
the SEC extending the timeframe, the deadline for approving or 
disapproving these filings is June 26, 2011.
    Market Access Rules.--The compliance date for Rule 15c3-5, which 
imposes restrictions on sponsored and direct market access, is July 14, 
2011, although some market participants have requested a short 
extension of the compliance date for some aspects of the rule. This 
rule contains regulatory risk management procedures that may assist in 
reducing erroneous trades.
    Other Initiatives.--The SEC continues to consider the 
recommendations made by the Joint CFTC-SEC Advisory Committee on 
Emerging Regulatory Issues in its Summary Report. The SEC also 
continues to work towards implementing a consolidated audit trail for 
the U.S. equity market.
    Question. What lessons were learned as a result of May 6, 2010?
    Answer. From the extreme price movements observed on May 6, a 
number of key lessons emerged. One key lesson is that under stressed 
market conditions, the automated execution of a large sell order can 
trigger extreme price movements, especially if the automated execution 
algorithm does not take prices into account. Moreover, the interaction 
between automated execution programs and algorithmic trading strategies 
can quickly erode liquidity and result in disorderly markets. As the 
events of May 6 demonstrate, especially in times of significant 
volatility, high-trading volume is not necessarily a reliable indicator 
of market liquidity.
    May 6 was also an important reminder of the inter-connectedness of 
our derivatives and securities markets, particularly with respect to 
index products. The nature of the cross-market trading activity was 
confirmed by extensive interviews with market participants, many of 
whom are active in both the futures and cash markets in the ordinary 
course, particularly with respect to ``price discovery'' products such 
as the E-Mini and SPY.
    Another key lesson from May 6 is that many market participants 
employ their own versions of a trading pause--either generally or in 
particular products--based on different combinations of market signals. 
While the withdrawal of a single participant may not significantly 
impact the entire market, a liquidity crisis can develop if many market 
participants withdraw at the same time. This, in turn, can lead to the 
breakdown of a fair and orderly price-discovery process, and in the 
extreme case trades can be executed at stub-quotes used by market 
makers to fulfill their continuous two-sided quoting obligations. As 
demonstrated by the CME's Stop Logic Functionality that triggered a 
halt in E-Mini trading, pausing a market can be an effective way of 
providing time for market participants to reassess their strategies, 
for algorithms to reset their parameters, and for an orderly market to 
be re-established.
    A further observation from May 6 is that market participants' 
uncertainty about when trades will be broken can affect their trading 
strategies and willingness to provide liquidity. In fact, in interviews 
with staff of the SEC, many participants expressed concern that, on May 
6, the exchanges and FINRA only broke trades that were more than 60 
percent away from the applicable reference price, and did so using a 
process that was not transparent.
    Finally, the events of May 6 clearly demonstrate the importance of 
data in today's world of fully-automated trading strategies and 
systems. This is further complicated by the many sources of data that 
must be aggregated in order to form a complete picture of the markets 
upon which decisions to trade can be based. Varied data conventions, 
differing methods of communication, the sheer volume of quotes, orders, 
and trades produced each second, and even inherent time lags based on 
the laws of physics add yet more complexity. Whether trading decisions 
are based on human judgment or a computer algorithm, and whether trades 
occur once a minute or thousands of times each second, fair and orderly 
markets require that the standard for robust, accessible, and timely 
market data be set quite high. Although the SEC and CFTC staff did not 
believe that significant market data delays were the primary factor in 
causing the events of May 6, the analyses of that day reveal the extent 
to which the actions of market participants can be influenced by 
uncertainty about, or delays in, market data.

                     SEC DEG.IT WEAKNESSES

    Question. Today, there is no standardized, automated system to 
collect data across the various trading venues, products, and market 
participants. Each market has its own individual and often incomplete 
data collection system, and as a result, regulators tracking suspicious 
activity or reconstructing an unusual event must obtain and merge an 
immense volume of disparate data from a number of different markets. 
And even then, the data does not always reveal who traded which 
security, and when.
    To obtain individual trader information, the SEC must make a series 
of manual requests that can take days or even weeks to fulfill. In 
brief, the SEC's tools for collecting data and surveilling our markets 
are wholly inadequate to the task of overseeing the largest equity 
markets in the world.
    How can we get a handle on this situation?
    What kind of system is needed?
    Have there been cost estimates of what it would take to create and 
deploy such a system?
    Answer. As you noted, there currently is no standardized, automated 
system to collect order and trading data across the various trading 
venues and market participants. To track suspicious activity or to 
reconstruct an unusual event in the marketplace such as last year's May 
6 market disruption, regulatory staff at the SEC , the exchanges and 
FINRA currently must merge an immense volume of disparate data from a 
number of different markets and often must make a series of manual 
requests, a process that can take days or even months to complete.
    In order to address this situation, in May 2010, the SEC proposed a 
rule to require the exchanges and FINRA to create and implement a 
consolidated audit trail that would electronically capture customer and 
order information for all orders for equities and options, across all 
markets, for the entire life of an order. Under the proposal, the SEC 
and the SROs would have access to consolidated audit trail data for 
surveillance and other regulatory purposes. I believe that this 
consolidated audit trail would enhance the ability of the SEC and the 
SROs to detect and assess potentially illegal activity.
    The estimated costs, as well as the estimated benefits, are 
discussed in the SEC release proposing the consolidated audit trail. 
Most of the costs for the creation and implementation of the 
consolidated audit trail would be borne by the industry. However, I 
anticipate that the SEC would need to incur costs in order to make full 
use of the consolidated audit trail. For example, SEC staff would need 
the technology infrastructure to access and run analyses on the 
consolidated audit trail data. If the SEC approves the consolidated 
audit trail proposal, I expect that a portion of our fiscal year 2012 
budget will be used to begin to develop the Commission's capacity to 
use the information to be collected by such an audit trail.
    Does your proposal to spend $78 million (about 5.5 percent) of the 
$1.407 billion budget you are seeking for fiscal year 2012 include 
initiatives to address these IT deficiencies?
    Answer. In addition to the Consolidated Audit Trail, the proposal 
to spend $78 million for fiscal year 2012 also includes some 
initiatives to address the SEC's IT deficiencies; however, most of the 
SEC's IT infrastructure and security deficiencies are planned to be 
addressed through initiatives from the fiscal year 2011 budget and 
process improvements.
    Question. I note that the CFTC is proposing to devote 21 percent of 
its proposed $307 million fiscal year 2012 budget to information 
technology enhancements? What is your view on whether devoting a mere 5 
percent to IT is sufficient given the circumstances?
    Answer. The budget request for the CFTC would dedicate 21 percent 
of its fiscal year 2012 budget to information technology, both for 
operations and maintenance and for enhancements. For the SEC, the 
equivalent figure for technology spending in fiscal year 2012 would be 
about 12 percent of its requested appropriation. When combined with 
expected technology spending out of the SEC's Reserve Fund, the total 
percentage is 14 percent. We believe this amount would be sufficient to 
continue modernizing the SEC's technology environment and advance key 
initiatives, such as the TCR system; the migration of our financial 
system to a Federal Shared Service Provider (SSP); the Consolidated 
Audit Trail system; EDGAR and SEC.gov modernization; and Dodd-Frank Act 
deployments.

   SEC DEG.TACKLING MATERIAL WEAKNESSES IN INTERNAL CONTROLS

    Question. A Government Accountability Office (GAO) audit of the 
SEC's November 2010 Performance and Accountability Report identified 
two material weaknesses in internal controls over financial reporting: 
one in information systems, and a second in financial reporting and 
accounting processes.
    These are not new findings, but have been identified by the GAO in 
several previous audits. Chairman Schapiro, I note that you fully and 
freely acknowledge these material weaknesses are unacceptable.
    I understand that the SEC has decided to invest the time and 
resources to implement a long-term, comprehensive solution. Instead of 
creating new technology and systems, the SEC is switching to a SSP 
approach, migrating the SEC's financial system to the Department of 
Transportation (DOT).
    Other agencies, including the GAO, have migrated to the DOT, and 
they have experienced very positive results, with clean audits free of 
material weaknesses. This will be a significant undertaking, which, 
assuming adequate funding, will culminate in the cutover to the new 
system in April 2012.
    What do you estimate it will cost to migrate to a SSP?
    Will the plan involve annual payments to the DOT for providing the 
service?
    What will it save in the long run?
    Are you planning to take steps immediately using fiscal year 2011 
resources to prepare for the transition?
    Answer. In its fiscal year 2010 financial audit of the SEC, the GAO 
found that the SEC's financial statements were presented fairly, in all 
material respects, and in conformity with U.S. generally accepted 
accounting principles. The GAO noted two material weaknesses: one in 
information systems and a second in financial reporting and accounting 
processes. You correctly note that I find these material weaknesses to 
be unacceptable.
    The SEC is working this fiscal year on a number of fronts to 
correct the deficiencies noted by the GAO. In order to make its 
internal controls strong and sustainable over the long term, the SEC 
has decided to move its financial system and transaction processing to 
a Federal SSP, the DOT's Enterprise Services Center. After a planning 
phase was completed in January 2011, the implementation phase of the 
project began in February 2011 and will culminate in the cutover to the 
new system in April 2012.
    The total budget for the initial deployment, including for the 
design and setup of the system and the conversion of the SEC's data, is 
$25 million, of which the SEC will need about $12 million in fiscal 
year 2011 and $13 million in fiscal year 2012. Once the SEC cuts over 
to the DOT's financial system, the SEC will make annual payments for 
operations and maintenance, equal to about $5.5 million per year. 
Although the SEC did not undertake this initiative primarily for cost 
savings, the SEC does expect that its ongoing, annual costs will be 
lowered by about $1.4 million per year after the migration.

  SEC DEG.BROKER DEALER AND INVESTMENT ADVISERS STANDARDS OF 
                                CONDUCT

    Question. Brokers and dealers and investment advisers have been 
held to different standards of conduct in their dealings with 
investors. In very general terms, a broker-dealer is held to a 
suitability standard, and an investment adviser is held to a fiduciary 
duty standard.
    The ``suitability'' standard requires that brokers and dealers 
assess their customers' knowledge of securities and their financial 
situations and recommend securities that are suitable for their 
customers. Courts have imposed on a fiduciary an affirmative duty of 
``utmost good faith, and full and fair disclosure of all material 
facts,'' as well as an affirmative obligation ``to employ reasonable 
care to avoid misleading'' one's clients.
    Section 913 of the Dodd-Frank Act entitled ``Study and Rulemaking 
regarding Obligations of Brokers, Dealers, and Investment Advisers,'' 
is the major provision setting out a new approach for defining 
standards of conduct for these financial industry professionals. It 
requires the SEC to conduct a study to evaluate the effectiveness of 
the current legal or regulatory standards of care for brokers, dealers, 
and investment advisers and whether there are legal gaps, shortcomings, 
or overlaps in the standards, and enumerates 14 areas of consideration 
for this study.
    Has this study been conducted? If not, when do you expect it to 
commence and conclude?
    Answer. Yes, the study required under section 913 (``Study on 
Investment Advisers and Broker-Dealers'') was completed and submitted 
to the Congress in January 2011.
    Question. Chairman Schapiro, do you believe that when investors 
receive similar services from similar financial service providers that 
those providers--irrespective of their particular title--should be held 
to the same standard of conduct?
    Answer. Yes, I believe that when investors receive similar services 
from similar financial service providers, they should receive similar 
protections--regardless of the label applied to that financial service 
provider. As the staff's Study on Investment Advisers and Broker-
Dealers notes, we know that the difference between an investment 
adviser and a broker-dealer is often lost on an investor. What remains 
difficult to justify is 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.
                                 ______
                                 
               Questions Submitted by Senator Ben Nelson

    Question. I understand the financial crisis raised a number of 
concerns about municipal securities markets. However, I believe the 
Securities and Exchange Commission's (SEC) proposed rule to require 
municipal advisors to register with the SEC goes too far.
    While I do think that professional financial advisors should be 
registered, appointed members of municipal entities, like the ones I 
appointed in Nebraska as Governor, should not have to register as 
``municipal advisors.''
    In Nebraska these citizens are appointed by elected officials and 
are held accountable by those officials. I don't believe the 
registration process is relevant to the activities of a public utility 
board or the members of a State educational finance authority's board.
    Do you anticipate modifications to the final rule that would 
clarify that appointed members of municipal entities, like elected 
members, are considered ``municipal employees'' and are therefore 
excluded from the definition of a municipal advisor?
    Answer. As you know, on December 20, 2010, the SEC proposed for 
public comment rules that would govern the registration of municipal 
advisors and, among other things, proposed guidance and solicited 
comments on the appropriate treatment of appointed members of a 
governing body. We have received approximately 1,000 comment letters on 
the proposal, including many that address this important issue, and we 
are reviewing them carefully.
    Section 15B(e)(4)(a) of the Securities Exchange Act, as added by 
the Dodd-Frank Act, provides that the term ``municipal advisor'' 
includes a person (who is not a municipal entity or an employee of a 
municipal entity) that ``provides advice to or on behalf of a municipal 
entity or obligated person with respect to a municipal financial 
product or the issuance of municipal securities.'' Accordingly, our 
proposal would only require nonemployee-appointed officials, such as 
board members of local public entities, to register if they provide 
advice with respect to a municipal financial product or an issuance of 
municipal securities to or on behalf of a municipal entity or obligated 
person, or if they undertake a solicitation of a municipal entity.
    Public input is critically important to us in crafting rules. We 
will certainly give the comments we have received on this issue careful 
consideration before adopting a final rule.
    Question. In the current fiscal climate we are faced with many 
difficult decisions when it comes to the budget.
    While we were able to increase SEC funding by $74 million more than 
the fiscal year 2010 enacted level of $1.111 billion in the continuing 
resolution, I anticipate that providing additional funding in fiscal 
year 2012 will be even more difficult.
    Can you speak to the impact on the SEC's ability to regulate 
markets and enforce securities laws if we are only able to maintain 
fiscal year 2011 levels in fiscal year 2012?
    What would the impact be if the SEC were funded at fiscal year 2008 
levels or the level the House recently passed in their fiscal year 2012 
budget proposal?
    Answer. We greatly appreciate the subcommittee's strong support in 
recent years. The additional $74 million provided in fiscal year 2011 
will allow the SEC to fill vacancies to meet key strategic needs, begin 
to perform some of the agency's new responsibilities, and continue to 
improve agency operations.
    For fiscal year 2012, it is first important to note that the SEC's 
budget will be fully offset by matching collections of fees on 
securities transactions. Thus, the SEC's fiscal year 2012 appropriation 
at any level would have no direct impact on the deficit.
    In addition, as I stated in my testimony, it is important to note 
that over the last 20 years, the SEC's budget and workforce have fallen 
far behind the growth in the size and complexity of the securities 
markets. During that time, the average value of securities transactions 
per day has risen by about 2,500 percent and the value of investment 
adviser assets has grown by about 3,070 percent. Although the SEC's 
workforce grew over this period, it did not nearly keep pace. This 
mismatch between the changes in the markets and in the SEC has been 
exacerbated since 2005. Between 2005 and 2007, the SEC's workforce and 
technology investments had to be cut back, and they are only now 
returning to 2005 levels. In 2005, the SEC's funding was sufficient to 
provide 19 examiners for each $1 trillion in investment adviser assets 
under management. Now that figure stands at 12 examiners per $1 
trillion.
    Today, the SEC has responsibility for approximately 35,000 
entities, including direct oversight of 11,800 investment advisers, 
7,500 mutual funds, and more than 5,000 broker-dealers with more than 
160,000 branch offices. We also review the disclosures and financial 
statements of approximately 10,000 reporting companies. The SEC also 
oversees approximately 500 transfer agents, 15 national securities 
exchanges, 9 clearing agencies, 10 Nationally Recognized Statistical 
Rating Organizations, as well as the Public Company Accounting 
Oversight Board, Financial Industry Regulatory Authority, Municipal 
Securities Rulemaking Board, and the Securities Investor Protection 
Corporation. In addition, last year the SEC received vast new or 
enhanced responsibilities to oversee derivatives, hedge fund advisers, 
municipal advisors, and credit rating agencies.
    The Boston Consulting Group's (BCG) study, mandated by section 967 
of the act, concluded that although there are opportunities for 
redirecting resources to the agency's top priorities, the SEC still 
faces a ``capacity gap'' and needs significantly more staffing 
resources to effectively carry out its responsibilities. The BCG study 
estimated that this gap in fiscal year 2012 is equal to 400-450 
additional staff in the agency's five divisions and Office of 
Compliance Inspections and Examinations, in line with the President's 
fiscal year 2012 request.
    Keeping the SEC's fiscal year 2012 funding at the fiscal year 2011 
appropriated level of $1.185 billion would have serious consequences 
for the SEC. The agency would be unable to hire expertise in new areas 
such as derivatives, hedge fund advisers, credit rating agencies, and 
others. The agency also would be unable to fulfill strategic staffing 
needs in our long-standing core programs, such as for enforcement 
investigations, investment adviser examinations, and enhanced reviews 
of disclosure filings of large companies. In addition, the SEC would 
face reductions in the technology investments needed to strengthen 
operations and effectively oversee the markets, at a time when 
technology is more important to the markets than ever before, and when 
the firms the SEC regulates annually spend many times more on 
technology than the entire SEC budget.
    Cutting the agency's fiscal year 2012 funding to the levels of 
fiscal year 2008 would be devastating. If the SEC were to receive an 
fiscal year 2012 appropriation reflecting its fiscal year 2008 level, 
reflecting the overall approach taken in the House's fiscal year 2012 
budget proposal, the agency's funding would be $906 million, or $279 
million less than our fiscal year 2011 appropriation--a 24 percent 
reduction. A reduction of this magnitude would make significant cuts in 
staff and IT unavoidable and would undoubtedly dismantle most of the 
important achievements of the past 2 years to make the SEC more 
vigilant, agile, and responsive.
    Under this scenario, the SEC would need to take dramatic action to 
cut its workforce. Even after factoring in projected attrition, a 24 
percent cut in the Commission's budget would require a personnel 
reduction of approximately 1,120 additional FTE--nearly one-third of 
our workforce. To achieve this reduction through a RIF alone would 
require eliminating 1,760 positions outright. A furlough to achieve 
this reduction would have to cover the entire SEC workforce for 
approximately 85 workdays. The most dramatic impact would inevitably be 
on the largest programs--enforcement, examinations, and disclosure 
review.
    If the SEC were to cut IT investments to achieve a 24 percent 
reduction in the overall agency budget, the impact would be immediate 
and damaging. For example, the SEC would have to eliminate all new IT 
investments and suspend all ongoing development work on IT systems. 
Major technology initiatives would have to be halted, such as those to 
track tips, complaints, and referrals; strengthen the agency's 
financial controls; enhance enforcement and examination management 
systems; and bolster data analytics capabilities.
                                 ______
                                 
              Questions Submitted by Senator Thad Cochran

    Question. You mention recent challenges the Securities and Exchange 
Commission (SEC) faced in maintaining staffing levels and budgets 
sufficient to carry out its core mission. Following its investigation 
of Stanford Financial, the Office of the Inspector General (OIG) 
identified several problems at the SEC. However, none of these problems 
involved inadequate funding or inadequate staffing. This year the 
agency reorganized its national examination program in part as a 
response to lessons learned from the Stanford fraud. What changes did 
you make in this reorganization to ensure the problems identified by 
the OIG are being corrected?
    Answer. While the Stanford IG Report did not include 
recommendations directed to the Office of Compliance Inspections and 
Examinations (OCIE), its findings show a clear need for improved 
coordination between enforcement and the OCIE on investigations of 
potential violations of the Federal securities laws, particularly those 
investigations initiated by a referral from the OCIE to the Enforcement 
Division. The OCIE has undertaken specific policy changes in its 
National Examination Program and instituted procedures to improve 
coordination and communication between the Enforcement Division and the 
OCIE.
    Through a number of structural and process reforms, the OCIE and 
the Enforcement Division are working to identify misconduct earlier and 
to move to shut it down more rapidly. The OCIE and enforcement staff 
and leadership have been directed to evaluate potential referrals from 
the OCIE exam staff against enforcement's programmatic priorities 
regularly and determine the disposition of referrals. If there is 
disagreement on a case at the regional level, exam staff has been 
instructed to escalate the matter to the attention of senior leadership 
in Washington. These processes ensure that concerns can be escalated in 
a timely manner to senior leadership of both the exam and enforcement 
programs for appropriate review and resolution.
    Exam and enforcement coordination with respect to particular 
matters is also the subject of periodic reviews. The OCIE policy now 
requires that the OCIE exam staff in each office hold quarterly Exam 
Reviews, in which the progress and status of every exam in the office 
is discussed and evaluated for several factors, including evaluating 
any significant issues with the firm that is the subject of the exam, 
determining whether more staff resources are needed on the exam and 
deciding if the exam is a potential referral to the Enforcement 
Division. These reviews are an opportunity to summarize and preview 
findings that appear likely to trigger possible Enforcement referrals, 
as well as to flag any potential differences in the assessment of 
urgency, potential harm to investors, or other issues that can then be 
raised at the joint regional meetings or to the OCIE senior management.
    Finally, the OCIE exam staff is working closely with Enforcement's 
specialized units to identify key risks presented by entities 
registered with the SEC and key risks to the markets. As previously 
described, this partnership with the specialized units has already 
resulted in new approaches to joint efforts to identify risky firms 
that may warrant examination or an enforcement investigation. In 
addition, the OCIE recently announced the creation of several 
specialized working groups that will focus on areas where the OCIE 
plans to increase its specialization and market knowledge.
    We have recently received encouraging news about these reforms. On 
March 30, 2011, the OIG issued the OCIE Regional Offices' Referrals to 
Enforcement, Report No. 493 (Referral IG Report). This audit report 
suggests that our efforts at improved coordination are meeting with 
success. The report notes that a survey of all the OCIE examiners 
throughout the SEC's regional offices concerning their view of 
Enforcement responses to examination-related referrals found that 
``when combining the responses for `completely satisfied' and `somewhat 
satisfied' for respondents, the majority of SEC regional offices had a 
combined level of satisfaction ranging from 70 to 87 per cent.'' The IG 
Report further found that where there was dissatisfaction with the 
referral process, the level of concern dramatically dropped over time 
and particularly in fiscal year 2010, with some respondents identifying 
enforcement's newly created Asset Management Unit as having 
significantly assisted with the acceptance rate of the OCIE referrals.
    An additional issue raised by the OIG's Stanford report, albeit one 
for which there were no specific recommendations, was a relative lack 
of coordination between the investment adviser exam team and the 
broker-dealer exam team in the Fort Worth Regional Office's 
examinations of Stanford. Senior leadership of the National Examination 
Program recognizes that the past structure within the examination 
program has resulted in certain silo effects in the examination 
process. After giving this issue careful consideration, changes have 
been made to the structure of several regional offices. For example, 
some of the regional offices have restructured their examination 
program so that each subgroup contains both adviser examiners and 
broker-dealer examiners. These examiners report to the same immediate 
supervisor, which has strengthened collaboration in examining entities 
that are dually registered with the SEC as both an investment adviser 
and a broker-dealer such as Stanford.
    Question. I am very troubled by the OIG's report, released last 
year, on Stanford Financial. Many Mississippians and other Americans 
lost their life savings by investing in what were freely marketed as 
safe, Certificate-of-Deposit investments. Dating back to 1997, the 
SEC's Fort Worth Examination Group repeatedly requested that an 
enforcement action be brought against Stanford Financial. That was more 
than 12 years before the SEC actually brought an enforcement action. 
The OIG found serious managerial, cultural, and performance-based 
problems at the SEC, which led to this terrible failure. What are you 
doing to help compensate the victims of the Stanford Financial fraud?
    Answer. We are proceeding on several fronts. Most recently, on June 
15, 2011, the SEC asked the Securities Investor Protection Corporation 
(SIPC) to initiate a court proceeding under the Securities Investors 
Protection Act (SIPA) to liquidate the broker-dealer. This decision was 
based on the totality of facts and circumstances in the case. A SIPA 
liquidation proceeding would allow investors with accounts at Stanford 
Group Company to file claims with a trustee selected by the SIPC.
    On the litigation front, the SEC's focus is to hold wrongdoers 
accountable while providing maximum recovery available under the law to 
investors harmed by this egregious fraud. First, after filing its civil 
action in February 2009, the SEC filed a motion requesting that the 
district court appoint a receiver over the defendants' assets to 
prevent waste and dissipation of those assets to the detriment of 
investors. Second, to complement the receiver's efforts, the SEC, in 
coordination with the Department of Justice (DOJ), moved to freeze 
Securities and Investment Board assets held in international financial 
institutions. Freezing assets in international jurisdictions poses 
complex litigation challenges, but this step was crucial to ensure the 
protection of investor funds. Third, the SEC is working with the 
receiver, DOJ, and securities regulators and law enforcement agencies 
in the United Kingdom, Switzerland, Canada, Mexico, and in several 
countries throughout Central and South America, to identify, secure, 
and repatriate for the benefit of investors more than $300 million in 
cash and securities held in non-U.S. bank accounts.
    In a status report filed February 11, 2011, the receiver identified 
several categories of major assets for possible distribution to harmed 
investors:
  --$94.7 million in cash on hand;
  --$30.4 million in private equity investments already recovered and 
        liquidated;
  --$1 million in coins and bullion inventory;
  --$6 million in real estate sale proceeds, with an additional $11.7 
        million expected from sales of other identified properties; and
  --$594.9 million in pending fraudulent transfer and unjust enrichment 
        claims.\1\
---------------------------------------------------------------------------
    \1\ This figure includes amounts claimed in lawsuits filed or 
intended to be filed by the receiver; actual recovery may vary 
depending on litigation outcome.
---------------------------------------------------------------------------
    In conjunction with the SEC, the receiver is focused on identifying 
and liquidating the largest possible pool of obtainable assets for 
distribution to harmed investors.
    The SEC is closely monitoring the receiver's costs to ensure 
optimal recovery for the victims of this massive fraud. We have 
strongly urged the receiver to stringently apply a cost-benefit 
analysis and pursue only those legal claims that could generate maximum 
proceeds for the benefit of investors while minimizing the receiver's 
legal fees and expenses. We also have cautioned the receiver that we 
are carefully scrutinizing all bills requesting payment for fees and 
expenses. In fact, on at least three occasions, the SEC has formally 
challenged the receiver's bills. We will continue to do so where 
appropriate.
                                 ______
                                 
          Questions Submitted by Senator Kay Bailey Hutchison

    Question. The Madoff and Stanford Ponzi schemes represent what many 
view as two of the largest failures of the Securities and Exchange 
Commission (SEC). Investigative reports published by your own Inspector 
General (OIG) highlighted several areas where the SEC failed in its 
mandate to protect investors. Can you please explain how the additional 
funds you are requesting for fiscal year 2012 would have helped the SEC 
to prevent or respond better to shut down the Madoff or Stanford Ponzi 
schemes before thousands of American investors saw their finances so 
devastated?
    Answer. The SEC commends the work of the OIG investigating this 
matter and drafting the reports, Investigation of the SEC's Response to 
Concerns Regarding Robert Allen Stanford's Alleged Ponzi Scheme, OIG-
526 (Stanford IG Report) and Investigation of the SEC's Failure to 
Uncover Bernie Madoff's Ponzi Scheme, OIG-509 (Madoff IG Report). In 
the Stanford IG Report, the OIG conducted an extensive investigation 
that clearly identifies missed opportunities for protecting investors, 
and no one should evade responsibility for the SEC's handling of the 
Stanford matter. We deeply regret that the SEC failed to act more 
quickly to limit the tragic investor losses suffered by Stanford's 
victims. In the Madoff IG Report, the OIG identified numerous red flags 
that the SEC missed in its examinations and investigation of Bernie 
Madoff's hedge fund and trading practices.
    In particular, the Stanford IG Report, which was released last 
year, made important recommendations identifying areas for improvement 
throughout the SEC and both the Division of Enforcement and the Office 
of Compliance Inspections and Examinations (OCIE) have since instituted 
various measures to implement all of those recommendations.
    In addition to the OIG's recommendations in the Stanford IG Report, 
under their new leadership both the Division of Enforcement and the 
OCIE have engaged in a top to bottom review within the last 2 years and 
have implemented measures to reform organizational processes and 
improve our effectiveness. We have streamlined management; put seasoned 
investigative attorneys back on the front lines; improved our 
examiners' risk-assessment techniques; revised our enforcement and 
examination procedures to improve coordination and information-sharing; 
leveraged the knowledge of third parties; instituted new initiatives to 
identify fraud; expanded our training programs; hired staff with new 
skill sets; and revamped the way that we handle the tremendous volume 
of tips, complaints, and referrals that we receive annually.
    Although our reform efforts are ongoing, the OIG's recent report, 
the OCIE Regional Offices' Referrals to Enforcement, Report No. 493 
(Referral IG Report), issued on March 30, 2011, indicates that enhanced 
coordination between Enforcement and the OCIE is proving effective, 
particularly in the area of handling referrals from the OCIE to 
Enforcement. In addition, strengthened collaboration between the OCIE 
and Enforcement has resulted in a number of notable enforcement actions 
in the past 2 years.
    Despite the many changes, more work remains. This will require 
commitment and creativity. While we must always efficiently use 
existing resources, additional resources will help us continue to 
implement organizational reforms underway in the Division of 
Enforcement and the OCIE. For example, additional resources will allow 
us to enhance our IT capabilities to allow enhanced data analytics and 
data mining in our Enforcement investigations, enabling us to identify 
patterns across suspicious conduct and generate meaningful 
investigative leads. Although we deeply regret the losses suffered by 
Stanford and Madoff investors, we embrace the challenges that lie ahead 
and are confident that our ongoing efforts will enhance investor 
protection and the integrity of our financial markets.
    Question. The Securities Investors Protection Act (SIPA) Trustee 
appointed to the Madoff case has reportedly recovered almost all the 
investors' original principal to be distributed among the victims, 
while the SEC-appointed receiver in the Stanford case has so far 
recovered an estimated 2 cents per $1. Unlike the Securities Investor 
Protection Corporation (SIPC) appointed trustee who draws his fees from 
the SIPC, the SEC-appointed receiver draws his fees from the funds he 
has been able to recover. Ultimately, this lessens funds able to be 
distributed to Stanford investors. Does the SEC still maintain that 
receivership was the appropriate course of action for the Stanford 
case? If so, why?
    Answer. Upon filing its civil action in February 2009, the SEC 
filed a motion requesting that the district court appoint a receiver 
over the defendants' assets (including more than 100 Stanford-related 
entities operating around the world) to prevent waste and dissipation 
of those assets to the detriment of investors. While a receiver was a 
necessary tool in this case, the SEC has closely monitored the 
receivership to help maximize investor recovery. To complement the 
receiver's efforts, the SEC, in coordination with the Justice 
Department, moved to secure assets held in international financial 
institutions.
    Securing assets in international jurisdictions poses complex 
litigation challenges, and those challenges have been magnified in this 
case by, among other issues, the appointment in Antigua of a competing 
receiver that has not cooperated with the SEC and that, in fact, has 
challenged various steps taken by the receiver, the SEC and the Justice 
Department. But securing international assets was crucial to ensure the 
protection of investor funds and we continue to work closely with the 
receiver, Justice Department, and securities regulators and law 
enforcement agencies in the United Kingdom, Switzerland, Canada, 
Mexico, and in several countries throughout Central and South America, 
to identify, secure, and repatriate for the benefit of investors more 
than $300 million in cash and securities held in non-U.S. bank 
accounts.
    In conjunction with the SEC, the receiver is focused on identifying 
and liquidating the largest possible pools of assets to prepare for a 
future distribution to harmed investors. In addition, the SEC has 
recently worked with other involved parties in the creation of an 
investor committee to provide an additional mechanism for investor 
input as to the receivership operations.
    Throughout this case, the SEC has worked closely with a court-
appointed examiner to monitor the receiver's costs and ensure maximum 
recovery to the victims of this massive fraud. These efforts have had 
tangible benefits. For example, the receiver and the professionals 
assisting him have reduced their customary fees by at least 20 percent 
and have capped the rates charged by senior lawyers. In addition, we 
carefully scrutinize the receiver's bills for fees and expenses. In 
fact, in response to our objections, the district court has held back, 
on an ongoing basis, an additional 20 percent from the receiver's fees 
and expenses. We have strongly urged the receiver to stringently apply 
a cost-benefit analysis and pursue only those legal claims that could 
generate maximum proceeds for the benefit of investors while minimizing 
the receiver's legal fees and expenses.
    As with our monitoring of the receiver's fees and expenses, the SEC 
has intervened when it believed the receiver was pursuing inappropriate 
claims. For example, the SEC challenged the receiver's lawsuits seeking 
net profits from innocent investors. Conversely, when the receiver 
properly pursues assets, we intervene in support of that effort where 
appropriate. For example, the SEC recently submitted an amicus brief in 
the Fifth Circuit supporting the receiver's efforts to maintain a 
freeze more than approximately $24 million in accounts held by former 
Stanford financial advisers. We will continue to be closely involved 
with the receiver's activities.
    Question. Currently, the Supreme Court forbids investors from going 
to court to compel SIPC to order a brokerage liquidation as it believes 
there are adequate safeguards in place to prevent a miscarriage of 
justice for investors. What options do investors have when they do not 
agree with the SEC's or the SIPC's interpretation of the SIPA?
    Answer. The SEC staff monitor situations in which SIPC member 
broker-dealers are in (or may be approaching) financial distress to 
determine whether a SIPA liquidation proceeding is appropriate for the 
protection of the firm's customers. In addition, customers of SIPC 
member firms and their representatives can and do communicate with SEC 
staff and Commissioners when they believe that a member firm should be 
liquidated under the SIPA. In the Stanford case, for example, investors 
asked the SEC to direct SIPC to begin a liquidation under the SIPA of 
Stanford Group Company, a registered broker-dealer and member of SIPC. 
On June 15, 2011, the SEC asked SIPC to initiate a court proceeding 
under the SIPA to liquidate Stanford Group Company. In every case in 
which the SEC has concluded that a SIPC member firm should be 
liquidated under the SIPA, SIPC has agreed to do so. If SIPC were not 
to agree, section 11(b) of SIPA gives the SEC the right to file an 
action to compel SIPC to begin a liquidation proceeding to ensure that 
the protections provided by SIPA are available to the customers of the 
SIPC member firm. The SEC has authorized its Division of Enforcement to 
bring an action to compel SIPC to begin a SIPA liquidation of Stanford 
Group Company if SIPC refuses to do so.
    In Securities Investor Protection Corporation v. Barbour, 421 U.S. 
412 (1975), the Supreme Court held that customers of a SIPC member firm 
do not have an implied private right under SIPA to ask a court to 
require SIPC to begin a liquidation proceeding. Without deciding 
whether customers may challenge the SEC's decision not to seek an order 
(under SIPA section 11(b)) compelling SIPC to begin a liquidation 
proceeding, the Court in Barbour noted that the SEC's brief in that 
case indicated that such a decision ``might be reviewable under the 
Administrative Procedure Act for an abuse of discretion.'' Id. at 425 
n.7. No customer has sought judicial review of an SEC decision not to 
request a court to order SIPC to begin a SIPA liquidation.
                                 ______
                                 
                Question Submitted by Senator Mark Kirk

    Question. Last year, the Congress passed significant new sanctions 
on Iran and others, including the United Nations and the European 
Union, also imposed sanctions. The result is that companies continuing 
to do business in Iran now face significantly more risk--the risk of 
direct sanctions; the risk that sanctions will make any business in 
Iran more difficult and more expensive; and the representational risk 
that comes with doing business with a regime that brutally suppresses 
its own people. Why has the Securities and Exchange Commission (SEC) 
failed to issue a specific regulation requiring companies, which face 
potential sanction under U.S. law for their activity in Iran, to 
disclose that information?
    Answer. Currently, our rules do not include a line-item requirement 
to disclose a company's business activities in Iran. Instead, with 
regard to whether companies will be required to disclose information 
relating to activities in Iran, the general materiality analysis that 
governs disclosure obligations applies. Under our rules, a company 
would be required to provide some disclosure of its business activities 
in Iran if the company faces material risks, including material risks 
from possible sanctions violations, as a result of those activities. 
Generally speaking, information is considered material if there is a 
substantial likelihood that a reasonable investor would consider it 
important in deciding how to vote or make an investment decision, or, 
put another way, if the information would alter the total mix of 
available information. I recognize that this is a difficult judgment 
call, and may not result in disclosure in every case that some may 
think is appropriate.
    I note, however, that I have asked the Division of Corporation 
Finance to prepare a rule proposal for the SEC's consideration on 
disclosure of activities that may subject a company to sanctions under 
the Iran Sanctions Act. In addition, based on a study of divestment 
activities, the Government Accountability Office has recommended that 
the SEC consider issuing a rule requiring companies that trade on U.S. 
exchanges to disclose their business operations tied to Sudan, as well 
as possibly other state sponsors of terrorism. The division has 
outlined the terms for a possible rule proposal for specific disclosure 
requirements regarding business and investment activities in Iran and 
Sudan, and has circulated this outline for the SEC's consideration.

                          SUBCOMMITTEE RECESS

    Senator Lautenberg. The subcommittee hearing is hereby 
recessed.
    [Whereupon, at 11:22 a.m., Wednesday, May 4, the 
subcommittee was recessed, to reconvene subject to the call of 
the Chair.]
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