[Senate Hearing 113-3]
[From the U.S. Government Publishing Office]



                                                          S. Hrg. 113-3

 
 WALL STREET REFORM: OVERSIGHT OF FINANCIAL STABILITY AND CONSUMER AND 
                          INVESTOR PROTECTIONS

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

                                HEARING

                               before the

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

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE AGENCIES' OVERALL IMPLEMENTATION OF THE DODD-FRANK WALL 
               STREET REFORM AND CONSUMER PROTECTION ACT

                               __________

                           FEBRUARY 14, 2013

                               __________

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


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

                      Jeanette Quick, OCC Detailee

                  Greg Dean, Republican Chief Counsel

              Jelena McWilliams, Republican Senior Counsel

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                      THURSDAY, FEBRUARY 14, 2013

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2
    Senator Heitkamp
        Prepared statement.......................................    37

                               WITNESSES

Mary J. Miller, Under Secretary for Domestic Finance, Department 
  of the Treasury................................................     4
    Prepared statement...........................................    37
    Responses to written questions of:
        Senator Crapo............................................    89
        Senator Schumer..........................................    90
        Senator Warner...........................................    93
        Senator Warren...........................................    94
        Senator Johanns..........................................    97
        Senator Toomey...........................................    99
Daniel K. Tarullo, Governor, Board of Governors of the Federal 
  Reserve System.................................................     6
    Prepared statement...........................................    41
    Responses to written questions of:
        Senator Crapo............................................   102
        Senator Warner...........................................   107
        Senator Warren...........................................   111
        Senator Toomey...........................................   116
Martin J. Gruenberg, Chairman, Federal Deposit Insurance 
  Corporation....................................................     7
    Prepared statement...........................................    45
    Responses to written questions of:
        Senator Crapo............................................   118
        Senator Warner...........................................   126
        Senator Heitkamp.........................................   130
        Senator Toomey...........................................   132
Thomas J. Curry, Comptroller, Office of the Comptroller of the 
  Currency.......................................................     9
    Prepared statement...........................................    51
    Responses to written questions of:
        Senator Crapo............................................   133
        Senator Warren...........................................   137
        Senator Heitkamp.........................................   141
        Senator Toomey...........................................   142
Richard Cordray, Director, Consumer Financial Protection Bureau..    10
    Prepared statement...........................................    58
    Responses to written questions of:
        Senator Warner...........................................   142
        Senator Heitkamp.........................................   143
Elisse B. Walter, Chairman, Securities and Exchange Commission...    12
    Prepared statement...........................................    63
    Responses to written questions of:
        Senator Crapo............................................   145
        Senator Warner...........................................   147
        Senator Warren...........................................   148
        Senator Toomey...........................................   154

                                 (iii)

Gary Gensler, Chairman, Commodity Futures Trading Commission.....    14
    Prepared statement...........................................    82
    Responses to written questions of:
        Senator Crapo............................................   156

              Additional Material Supplied for the Record

Highlights of GAO-13-180: Financial Crisis Losses and Potential 
  Impacts of the Dodd-Frank Act, January 2013....................   158
Submitted written testimony of Christy Romero, Special Inspector 
  General for the Troubled Asset Relief Program (SIGTARP)........   159


 WALL STREET REFORM: OVERSIGHT OF FINANCIAL STABILITY AND CONSUMER AND 
                          INVESTOR PROTECTIONS

                              ----------                              


                      THURSDAY, FEBRUARY 14, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:33 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. This Committee is called to order.
    Before we begin, I would like to extend a warm welcome to 
Senator Crapo as Ranking Member and to Senator Manchin, Senator 
Warren, Senator Heitkamp, Senator Coburn, and Senator Heller 
who are joining us this Congress. I would also like to welcome 
back my friend Senator Kirk.
    Earlier this week I released my agenda for this Congress, 
and I look forward to this Committee's continued productivity. 
I am optimistic that we can work together on a bipartisan 
basis. To that end, Ranking Member Crapo and I sent a letter 
yesterday to the banking regulators on the importance of 
carefully implementing Basel III, and I look forward to hearing 
from each of you, and working with the Ranking Member, on this 
issue.
    Today, this Committee continues a top priority--oversight 
of Wall Street Reform implementation. Wall Street reform was 
enacted to make the financial system more resilient, minimize 
risk of another financial crisis, better protect consumers from 
abusive financial practices, and ensure American taxpayers will 
never again be called upon to bail out a failing financial 
firm. This morning, we will hear from the regulators on how 
their agencies are carrying out these mandates of Wall Street 
reform.
    Many of the law's remaining rulemakings, like QRM and the 
Volcker Rule, require careful consideration of complex issues 
as well as interagency and international coordination. I 
appreciate your efforts to finalize these rules. To date, the 
regulators have proposed or finalized over three-fourths of the 
rules required by Wall Street reform. These include rules that 
have recently gone ``live'' in the market, such as the data 
reporting and registration rules for derivatives that mark new 
oversight of a previously unregulated market. But there is 
still more work to do.
    That is why I have asked each of our witnesses to provide a 
progress report to the Committee, both on rulemakings that your 
agency has completed and those that your agency has yet to 
finalize. I ask that you craft these rules in a manner that is 
effective for smaller firms, like community banks, so that they 
can continue to meet the needs of their customers and 
communities.
    The work does not end when the final rules go out the door. 
Regulators must enforce the rules, and I ask that each agency 
inform us how they intend to better supervise the financial 
system. While concerns have been raised about whether a few 
firms remain ``too big to fail,'' Wall Street reform provides 
regulators with new tools to address the issue head on. This is 
one of the many reasons why full implementation of the law 
remains important, not just for our constituents but for future 
generations.
    As we approach the 5-year anniversary of the failure of 
Bear Stearns, we must not lose sight of why we passed Wall 
Street reform. Congress enacted the law in the wake of the most 
severe financial crisis in the lifetime of most Americans. How 
costly was it? I asked the GAO to study this question to better 
understand the impact the crisis had on our Nation. In a report 
released today, which I am entering in the record, the GAO 
concluded that while the precise cost of the crisis is 
difficult to calculate, the total damage to the economy may be 
as high as $13 trillion. I say again, 13 trillion--with a 
``T''--dollars. Thus, I urge you to consider the benefits of 
avoiding another costly, devastating crisis as you continue 
implementing Wall Street reform.
    I would like to make one final comment on Director Cordray 
and the CFPB. Since he was appointed as the head of the CFPB 
last year, Director Cordray and the CFPB have worked tirelessly 
to finalize many rules and policies to protect consumers in 
areas such as mortgages, student lending, servicemembers' 
rights, and credit cards. He has done good work, and I urge my 
colleagues to confirm Director Cordray to a full term without 
delay and allow the CFPB to continue its important work 
protecting consumers.
    I now turn to Ranking Member Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman. You and I 
have a very good personal friendship and have had a good 
working relationship over the years, and I look forward to 
building on that and working with you as the Ranking Member of 
the Committee this year, this Congress.
    One of my objectives and hopes would be to work together on 
the kind of commonsense bipartisan solutions that we can 
achieve before this Committee in a number of areas that I think 
various Members of the Committee have already identified and 
discussed among ourselves.
    We, you and I, as you indicated, have already sent a joint 
letter to inform the regulators of our concerns about the 
impact of the proposed Basel III requirements on community 
banks, insurance companies, and the mortgage market, and so we 
are off to a good start. I look forward to building on that.
    I also want to join with you in welcoming the new Members 
of our Committee: on our side, Senators Coburn and Heller; and 
on your side, also Senators Manchin, Warren, and Heitkamp. We 
welcome you to the Committee.
    Today, the Committee will hear about the ongoing 
implementation of Dodd-Frank. Academic researchers estimate 
that when Dodd-Frank is fully implemented, there will be more 
than 13,000 new regulatory restrictions in the Code of Federal 
Regulations. Over 10,000 pages of regulations have already been 
proposed, requiring, as is estimated, over 24 million 
compliance hours each year, and that is just the tip of the 
iceberg. Of some 400 rules required by Dodd-Frank, roughly one-
third have been finalized, about one-third have been proposed 
but not finalized, and roughly one-third have not even yet been 
proposed. Together, the hundreds of Dodd-Frank proposed rules 
are far too complex, offering confusing and often contradictory 
standards and regulatory requirements.
    I am concerned that the regulators do not understand and 
are not focusing aggressively enough on the cumulative effect 
of the hundreds of proposed rules and that there is a lack of 
coordination among the agencies, both domestically and 
internationally. That is why it is important for the regulators 
to perform meaningful cost/benefit analysis so that we can 
understand how these rules will affect the economy as a whole, 
interact with one another, and impact our global 
competitiveness.
    An enormous number of new rules are slated to be finalized 
this year as a result of Dodd-Frank, Basel III, and other 
regulatory initiatives. And at this important juncture, we need 
answers to critical questions.
    First, what are the anticipated cumulative effects of these 
new rules to credit, liquidity, borrowing costs, and the 
overall economy? Ultimately, we need rules that are strong 
enough to make our financial system safer and sounder, but that 
can adapt to changing market conditions and promote credit 
availability and spur job growth for millions of Americans.
    Second, what have the agencies done to assess how these 
complicated rules will interact with each other and the 
existing regulatory framework? I am hearing a lot of concern 
about how the interaction of some rules will reduce mortgage 
credit through the qualified mortgage rule, the proposed 
qualified residential mortgage rule, and the proposed 
international Basel III risk weights for mortgages, as an 
example.
    And, third, what steps are being taken to fix the lack of 
coordination and harmonization of rules among the United States 
and international regulators on cross-border issues? For 
example, the CFTC has issued a number of so-called guidance 
letters and related orders on cross-border issues. The CFTC's 
initial proposal received widespread criticism from foreign 
regulators that the guidance is confusing, expansive, and 
harmful. Meanwhile, the SEC has not yet issued its cross-border 
proposal.
    There is bipartisan concern that some of the Dodd-Frank 
rules go too far and need to be fixed. A good starting point 
would be to fulfill congressional intent by providing an 
explicit exemption from the margin requirements for 
nonfinancial end users that qualify for the clearing exemption. 
Similar language to this passed the House last year by a vote 
of 370-24. Federal Reserve Chairman Bernanke has confirmed 
that, regardless of congressional intent, the banking 
regulators view the plain language of the statute as requiring 
them to impose some kind of margin requirement on nonfinancial 
end users unless Congress changes the statute.
    Unless Congress acts, new regulations will make it more 
expensive for farmers, manufacturers, energy producers, and 
many small business owners across the country to manage their 
unique business risks associated with their day-to-day 
operations. An end user fix is just one example of the kind of 
bipartisan actions that we can take to improve the safety and 
soundness of our financial system without unnecessarily 
inhibiting economic growth.
    It is my hope that today's hearing is going to provide us a 
starting point to address these critical issues and identify 
the needed reforms that we must undertake.
    Thank you, Mr. Chairman, again for holding this hearing.
    Chairman Johnson. Thank you, Senator Crapo.
    This morning, opening statements will be limited to the 
Chairman and Ranking Member to allow more time for questions 
from the Committee Members. I want to remind my colleagues that 
the record will be open for the next 7 days for opening 
statements and any other materials you would like to submit.
    Now I would like to introduce our witnesses.
    Mary Miller is the Under Secretary for Domestic Finance of 
the U.S. Department of the Treasury.
    Dan Tarullo is a member of the Board of Governors of the 
Federal Reserve System.
    Martin Gruenberg is the Chairman of the Federal Deposit 
Insurance Corporation.
    Tom Curry is the Comptroller of the Currency.
    Richard Cordray is the Director of the Consumer Financial 
Protection Bureau.
    Elisse Walter is the Chairman of the Securities and 
Exchange Commission.
    And Gary Gensler is the Chairman of the Commodity Futures 
Trading Commission.
    I thank all of you again for being here today.
    I would like to ask the witnesses to please keep your 
remarks to 5 minutes. Your full written statements will be 
included in the hearing record.
    Under Secretary Miller, you may begin your testimony.

   STATEMENT OF MARY J. MILLER, UNDER SECRETARY FOR DOMESTIC 
              FINANCE, DEPARTMENT OF THE TREASURY

    Ms. Miller. Chairman Johnson, Ranking Member Crapo, and 
Members of the Committee, thank you so much for the opportunity 
to be here today.
    The Dodd-Frank Wall Street Reform and Consumer Protection 
Act represents the most comprehensive set of reforms to the 
financial system since the Great Depression. Americans are 
already beginning to see benefits from these reforms reflected 
in a safer and stronger financial system.
    Although the financial markets have recovered more 
vigorously than the overall economy, the economic recovery is 
also gaining traction. The financial regulators represented 
here today have been making significant progress implementing 
Dodd-Frank Act reforms.
    Treasury's specific responsibilities under the Dodd-Frank 
Act include standing up new organizations to strengthen 
coordination of financial regulation both domestically and 
internationally, improve information sharing, and better 
address potential risks to the financial system.
    Over the past 30 months, we have focused considerable 
effort on creating the Financial Stability Oversight Council, 
the Office of Financial Research, and the Federal Insurance 
Office.
    The Financial Stability Oversight Council, known as FSOC, 
has become a valuable forum for collaboration among financial 
regulators. Through frank discussion and early identification 
of areas of common interests, the financial regulatory 
community is now better able to identify issues that would 
benefit from enhanced coordination. Although FSOC members are 
required to meet only quarterly, the FSOC met 12 times last 
year to conduct its regular business and respond to specific 
market developments. Much additional work takes place at the 
staff level with regular and substantive engagement to inform 
FSOC leaders.
    While Treasury is not a rule-writing agency, the Treasury 
Secretary has a statutory coordination role for the Volcker 
Rule and risk retention rule by virtue of his chairmanship of 
the FSOC. We take that role very seriously and will continue to 
work with the respective rulemaking agencies as they finalize 
these rules.
    In addition to the FSOC's coordination role, it has certain 
authority to make recommendations to the responsible regulatory 
agencies where a financial stability concern calls for further 
action. An example along these lines is a concern about risks 
in the short-term funding markets. The FSOC's focus on this 
ultimately led the Council to issue proposed recommendations on 
money market fund reforms for public comment.
    The FSOC has also taken significant steps to designate and 
increase oversight of financial companies whose failure or 
distress could negatively impact financial markets or the 
financial stability of the United States. Treasury has made 
significant progress in establishing the Office of Financial 
Research and the Federal Insurance Office. The OFR provides 
important data and analytical support for the FSOC and is 
developing new financial stability metrics and indicators. It 
also plays a leadership role in the international initiative to 
establish a Legal Entity Identifier, a code that uniquely 
identifies parties to financial transactions. The planned 
launch of the LEI next month will provide financial companies 
and regulators worldwide a better view of companies' exposures 
and counterparty risks.
    With the establishment of the Federal Insurance Office, the 
United States has gained a Federal voice on insurance issues, 
domestically and internationally. For example, in 2012, FIO was 
elected to serve on the Executive Committee of the 
International Association of Insurance Supervisors and is now 
providing important leadership in developing international 
insurance policy.
    We are also working internationally to support efforts to 
make financial regulations more consistent worldwide. By moving 
early with the passage and implementation of the Dodd-Frank 
Act, we are leading from a position of strength in setting the 
international reform agenda. This comprehensive agenda spans 
global bank capital and liquidity requirements, resolution 
plans for large multinational financial institutions, and 
derivatives markets. We will continue to work with our partners 
around the world to achieve global regulatory convergence.
    As we move forward, it is critical to strike the 
appropriate balance of measures to protect the strength and 
stability of the U.S. financial system while preserving liquid 
and efficient markets that promote access to capital and 
economic growth. Completion of these reforms provides the best 
path to achieving continued economic growth and prosperity 
grounded in financial stability.
    Thank you for the opportunity to testify today. I would 
welcome any questions the Committee may have.
    Chairman Johnson. Thank you.
    Governor Tarullo, please proceed.

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

    Mr. Tarullo. Thank you, Mr. Chairman, Senator Crapo, and 
other Members of the Committee. It is a pleasure to be with all 
of you here on this Valentine's Day. I just wanted to make two 
points in these oral remarks.
    First, I hope that 2013 will be the beginning of the end of 
the major portion of rulemakings implementing Dodd-Frank and 
strengthening capital rules. The rulemaking process has been 
very time-consuming. In some cases, it has run beyond the 
deadline set by Congress, though there have been some good 
reasons for that. Joint rulemaking just takes a lot of time, 
and for many of the rules, that process involves three to five 
independent agencies, representing between 12 and 22 
individuals who have votes at those agencies. Also, some of the 
rules involve subjects that are complicated, controversial, or 
both.
    I think there was wide agreement that it was incumbent on 
the regulators to take the time to understand the issues and to 
give full consideration to the many thousands of comments that 
were submitted on some of the proposals.
    But it is also important to get to the point where we can 
provide clarity to financial firms as to what regulatory 
environment they can expect in some of these important areas so 
that they can get on with planning their businesses 
accordingly.
    So it is my hope and my expectation that, with respect to 
the Volcker Rule, the capital rules, Section 716, and many of 
the special prudential requirements for systemically important 
firms, we will publish final rules this year.
    On Volcker, and on the standardized capital rules in 
particular, I think the agencies have learned a good deal from 
the formal comments and public commentaries addressed to these 
proposals. Both required a difficult balance between the aims 
of comprehensiveness on the one hand and administrability at 
firms and at regulators on the other. I think it is pretty 
clear that both proposals lean too far in the direction of 
complexity, and I would expect a good bit of change in the 
final rulemakings on these subjects.
    Indeed, these examples prove the wisdom of those who 
drafted the Administrative Procedures Act many years ago 
whereby they set up a process that agencies issue proposals for 
notice and comment, receive comments, consider the comments, 
modify the regulations, and then finally put those regulations 
into place.
    We should also get out proposals this year to implement two 
arrangements agreed internationally: the capital surcharge for 
systemically important banks and the liquidity coverage ratio.
    One exception where we will be slowing down a little--and 
here ``we'' as in the Federal Reserve, not our fellow 
agencies--is the Section 165 requirement for counterparty 
credit risk limits. Based on the comments received and ongoing 
internal staff analysis, we concluded that a quantitative 
impact study was needed to help us assess better the optimal 
structure of a rule that is breaking new ground in an area for 
which there is a lot of hard, but heretofore uncollected, data. 
So we are going to need some more time on this one.
    The second point I want to make is that the feature of the 
financial system that is in most need of further attention and 
regulatory action is that of nondeposit short-term financing. 
My greatest concern is with those parts of the so-called shadow 
banking system that are susceptible to destabilizing funding 
runs, something that is more likely where the recipients of the 
short-term funding are highly leveraged, engaged in substantial 
maturity transformation, or both. It was just these kinds of 
runs that precipitated the most acute phase of the financial 
crisis that the Chairman referred to a few moments ago.
    We need to continue to assess the vulnerabilities posed by 
this kind of funding while recognizing that many forms of 
short-term funding play important roles in credit 
intermediation and productive capital market activities.
    But we should not wait for the emergence of a consensus on 
comprehensive measures to address these kinds of funding 
channels. That is why I suggest in my written testimony more 
immediate action in three areas: the transparency of securities 
financing, money market mutual funds, and triparty repo 
markets.
    Thank you all for your attention.
    Chairman Johnson. Thank you.
    Chairman Gruenberg, please proceed.

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

    Mr. Gruenberg. Thank you, Mr. Chairman. Chairman Johnson, 
Ranking Member Crapo, and Members of the Committee, thank you 
for the opportunity to testify today on the FDIC's efforts to 
implement the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. While my prepared testimony addresses a range 
of issues, I will focus my oral remarks on three areas of 
responsibility specific to the FDIC: deposit insurance, 
systemic resolution, and community banks.
    With regard to the deposit insurance program, the Dodd-
Frank Act raised the minimum reserve ratio for the Deposit 
Insurance Fund to 1.35 percent and required that the reserve 
ratio reach this level by September 30, 2020. The FDIC is 
currently operating under a DIF Restoration Plan that is 
designed to meet this deadline, and the DIF reserve ratio is 
recovering at a pace that remains on track to achieve the plan. 
As of September 30, 2012, the reserve ratio stood at 0.35 
percent of estimated insured deposits. That is up from 0.12 
percent a year earlier. The fund balance has now grown for 11 
consecutive quarters, increasing to $25.2 billion at the end of 
the third quarter of 2012.
    The FDIC has also made significant progress on the 
rulemaking and planning for the resolution of systemically 
important financial institutions, so-called SIFIs. The FDIC and 
the Federal Reserve Board have jointly issued the basic 
rulemaking regarding resolution plans that SIFIs are required 
to prepare. These are the so-called living wills. The rule 
requires bank holding companies with total consolidated assets 
of $50 billion or more to develop, maintain, and periodically 
submit resolution plans that are credible and that would enable 
these entities to be resolved under the Bankruptcy Code. On 
July 1, 2012, the first group of living will filings by the 
nine largest institutions with nonbank assets over $250 billion 
was received, with the second group to follow by July 1st of 
this year, and the rest by December 31st. The Federal Reserve 
and the FDIC are currently in the process of reviewing the 
first group of plan submissions.
    The FDIC has also largely completed the rulemaking 
necessary to carry out its systemic resolution responsibilities 
under Title II of the Dodd-Frank Act. The final rule approved 
by the FDIC board addressed, among other things, the priority 
of claims and the treatment of similarly situated creditors.
    Section 210 of the Dodd-Frank Act expressly requires the 
FDIC to coordinate, to the maximum extent possible, with 
appropriate foreign regulatory authorities in the event of the 
resolution of a systemic financial company with cross-border 
operations.
    In this regard, the FDIC and the Bank of England, in 
conjunction with the prudential regulators in our respective 
jurisdictions, have been working to develop contingency plans 
for the failure of SIFIs that have operations in both the U.S. 
and the U.K. In December, the FDIC and the Bank of England 
released a joint paper, providing an overview of the work we 
have been doing together.
    In addition, the FDIC and the European Commission have 
agreed to establish a joint working group to discuss resolution 
and deposit insurance issues common to our respective 
jurisdictions. The first meeting of the working group will take 
place here in Washington next week.
    Finally, in light of concerns raised about the future of 
community banking in the aftermath of the financial crisis, as 
well as the potential impact of the various rulemakings under 
the Dodd-Frank Act, the FDIC engaged in a series of initiatives 
during 2012 focusing on the challenges and opportunities facing 
community banks in the United States. In December of last year, 
the FDIC released the FDIC Community Banking Study, a 
comprehensive review of the U.S. community banking sector 
covering the past 27 years of data.
    Our research confirms the important role that community 
banks play in the U.S. financial system. Although these 
institutions account for just 14 percent of the banking assets 
in the United States, they hold 46 percent of all the small 
loans to businesses and farms made by FDIC-insured 
institutions. The study found that for over 20 percent of the 
counties in the United States, community banks are the only 
FDIC-insured institutions with an actual physical presence.
    Importantly, the study also found that community banks that 
stayed with their basic business model--careful relationship 
lending funded by stable core deposits--exhibited relatively 
strong and stable performance over this period and during the 
recent financial crisis, and should remain an important part of 
the U.S. financial system going forward.
    Mr. Chairman, that concludes my oral remarks. I would be 
glad to respond to your questions.
    Chairman Johnson. Thank you.
    Comptroller Curry, please proceed.

   STATEMENT OF THOMAS J. CURRY, COMPTROLLER, OFFICE OF THE 
                  COMPTROLLER OF THE CURRENCY

    Mr. Curry. Chairman Johnson, Ranking Member Crapo, and 
Members of the Committee, it is a pleasure to appear before you 
today for this panel's first hearing of the new Congress. I 
want to thank Chairman Johnson for his leadership in holding 
this hearing, and I would also like to congratulate Senator 
Crapo on his new role as the Ranking Member of this Committee. 
I look forward to working with both of you on many issues 
facing the banking system. There are also a number of new 
Members on the Committee, and I look forward to getting to know 
each of you better this session.
    It has been nearly 3 years since the Dodd-Frank Act was 
enacted, and both the financial condition of the banking 
industry and the Federal regulatory framework have changed 
significantly. The OCC supervises more than 1,800 national 
banks and Federal savings associations, which together hold 
more than 69 percent of all commercial bank and thrift assets. 
They range in size from very small community banks with less 
than $100 million in assets to the Nation's largest financial 
institutions with assets exceeding $1 trillion. More than 1,600 
of the banks and thrifts we supervise are small institutions 
with less than $1 billion in assets, and they play a vital role 
in meeting the financial needs of communities across the 
Nation.
    I am pleased to report that Federal banks and thrifts have 
made significant strides since the financial crisis in 
repairing their balance sheets through stronger capital, 
improved liquidity, and timely recognition and resolution of 
problem loans.
    While these are encouraging developments, banks and thrifts 
continue to face significant challenges, and our examiners 
continue to stress the need for these institutions to remain 
vigilant in monitoring the risks they take on in this 
environment.
    We are also mindful that we cannot let the progress that 
has been made in repairing the economy and in strengthening the 
banking system lessen our sense of urgency in addressing the 
weaknesses and flaws that were revealed by the financial 
crisis. The Dodd-Frank Act addresses major gaps in the 
regulatory landscape, tackles systemic issues that contributed 
to and amplified the effects of the financial crisis, and lays 
the groundwork for a stronger financial system.
    Like my colleagues at the table, we at the OCC are 
currently engaged in numerous rulemakings, from appraisals to 
Volcker and from risk retention to swaps. My written statement 
provides details on each of these efforts and provides a flavor 
of some of the public comments that have been submitted.
    The OCC is committed to implementing fully those provisions 
where we have sole rule-writing authority as quickly as 
possible. We are equally committed to working cooperatively 
with our colleagues on those rules that require coordinated or 
joint action. I remain very hopeful that we will soon have in 
place final regulations in several areas to provide the clarity 
the industry needs.
    Throughout this process, I have been keenly aware of the 
critical role that community banks play in providing consumers 
and small businesses in communities across the Nation with 
essential financial services and access to credit. As the OCC 
undertakes every one of these critical rulemakings, we are very 
focused on ensuring that we put standards in place that promote 
safety and soundness without adding unnecessary burden to 
community banks.
    I would like to highlight one of the most significant 
milestones of the Dodd-Frank Act for the OCC, which is the 
successful integration of the mission and most of the employees 
from the Office of Thrift Supervision into the OCC. The 
integration was accomplished smoothly and professionally, 
reflecting the merger of experience with a strong vision for 
the future. The final stage of this process is underway with 
the integration of rules of applicable to Federal thrifts with 
those that apply to national banks consistent with the 
statutory differences between the two charter types. An 
integrated set of rules will benefit both banks and thrifts.
    In the vast majority of the rulemaking activities, the OCC 
is one of several participants. The success of those 
rulemakings depends on interagency cooperation, and I want to 
acknowledge the work of my colleagues at this table and their 
staff for approaching these efforts thoughtfully and 
productively, giving careful consideration to all issues. 
Working together, I believe we will be able to develop rules 
that will be good for the financial system, the entities we 
regulate, and the communities they serve going forward.
    Thank you for your attention, and I look forward to 
answering any questions you may have.
    Chairman Johnson. Thank you.
    Director Cordray, please proceed.

  STATEMENT OF RICHARD CORDRAY, DIRECTOR, CONSUMER FINANCIAL 
                       PROTECTION BUREAU

    Mr. Cordray. Thank you, Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee, for inviting me back 
today. My colleagues and I at the Consumer Financial Protection 
Bureau are always happy to testify before the Congress, 
something we have done now 30 times.
    Today we are here to talk about the implementation of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, the 
signature legislation that created this new consumer agency.
    Since the Bureau opened for business in 2011, our team has 
been hard at work. We are examining both banks and nonbank 
financial institutions for compliance with the law, and we have 
addressed and resolved many issues through these efforts to 
date. In addition, for consumers who have been mistreated by 
credit card companies, we are, in coordinated enforcement 
actions with our fellow regulators, returning roughly $425 
million to their pockets. For those consumers who need 
information or want help in understanding financial products 
and services, we have developed AskCFPB, a data base of 
hundreds of answers to questions frequently asked of us by 
consumers. And our Consumer Response center has helped more 
than 100,000 consumers with their individual problems related 
to their credit cards, mortgages, student loans, and bank 
accounts.
    In addition, we have been working hard to understand, 
address, and resolve some of the special consumer financial 
issues affecting specific populations: students, 
servicemembers, older Americans, and those are unbanked or 
under-banked. And we are planning a strong push in the future 
for broader and more effective financial literacy in this 
country. We need to change the fact that we send many thousands 
of our young people out into the world every year to manage 
their own affairs with little or no grounding in personal 
finance education. We want to work with each of you on these 
issues on behalf of your constituents.
    We have also faithfully carried out the law that Congress 
enacted by writing rules designed to help consumers throughout 
their mortgage experience--from signing up for a loan to paying 
it back. We have written rules dealing with loan originator 
compensation, giving consumers better access to their appraisal 
reports, and addressing escrow and appraisal requirements for 
higher-priced mortgage loans.
    Just last month, we released our Ability-to-Repay rule, 
which protects consumers shopping for a loan by requiring 
lenders to make a good faith, reasonable determination that 
consumers can actually afford to pay back their mortgages. The 
rule outlaws so-called and very irresponsible ``NINJA'' loans--
even with no income, no job, and no assets, you could still get 
a loan--that were all too common in the lead-up to the 
financial crisis. Our rule also strikes a careful balance on 
access-to-credit issues that are so prevalent in the market 
today by enabling safer lending and providing greater certainty 
to the mortgage market.
    Finally, the Bureau also recently adopted mortgage 
servicing rules to protect borrowers from practices that have 
plagued the industry like failing to answer phone calls, 
routinely losing paperwork, and mishandling accounts. I am sure 
that each of you has heard from constituents in your States who 
have these kinds of stories to tell.
    We know the new protections afforded by the Dodd-Frank Act 
and our rules will no doubt bring great changes to the mortgage 
market. We are committed to doing what we can to achieve 
effective, efficient, complete implementation by engaging with 
all stakeholders, especially industry, in the coming year. We 
know that it is in the best interests of the consumer for the 
industry to understand these rules--because if they cannot 
understand, they cannot properly implement.
    To this end, we have announced an implementation plan. We 
will publish plain-English summaries. We will publish readiness 
guides to give industry a broad checklist of things to do to 
prepare for the rules taking effect next January--like updating 
their policies and procedures and providing training for staff. 
We are working with our fellow regulators to ensure consistency 
and examinations of mortgage lenders under the new rules and to 
clarify issues as needed. We also are working to finalize 
further proposals in these rules to recognize that, as my 
colleagues have said, the traditional lending practices of 
smaller community banks and credit unions are worthy of respect 
and protection.
    So thank you again for the opportunity to appear before you 
today and speak about the progress we are making at the 
Consumer Financial Protection Bureau. We always welcome your 
thoughts about our work, and I look forward to your questions.
    Thank you.
    Chairman Johnson. Thank you.
    Chairman Walter, please proceed.

    STATEMENT OF ELISSE B. WALTER, CHAIRMAN, SECURITIES AND 
                      EXCHANGE COMMISSION

    Ms. Walter. Chairman Johnson, Ranking Member Crapo, and 
Members of the Committee, Thank you for inviting me to testify 
on behalf of the Securities and Exchange Commission regarding 
our ongoing implementation of the Dodd-Frank Act.
    As you know, the act required the SEC to undertake the 
largest and most complex rulemaking agenda in the history of 
the agency. We have made substantial progress writing the huge 
volume of new rules mandated by the act. We have proposed or 
adopted over 80 percent of the more than 90 required rules, and 
we have finalized almost all of the studies and reports 
Congress directed us to write.
    Since the law's enactment, our staff has worked closely 
with other regulatory agencies and has carefully reviewed the 
thousands of comments we received to ensure that we not only 
get the rules done but that we get them done right. And I am 
committed to doing both. Indeed, as long as I serve a Chairman, 
I will continue to push the agency forward to implement Dodd-
Frank.
    While my written testimony describes in greater detail what 
we have achieved, I wanted to touch briefly on just a few of 
the items.
    Today, as a result of new rules jointly adopted with the 
CFTC, systemic risk information is now being periodically 
reported by registered investment advisers who manage at least 
$150 million in private fund assets. This information is 
providing FSOC and the Commission with a broader view of the 
industry than we had in the past. Additionally, because of our 
registration rules, we now have a much more comprehensive view 
of the hedge fund and private fund industry.
    We also adopted rules creating a new whistleblower program, 
and last year our program produced its first award. We expect 
future payments to further increase the visibility of the 
program and lead to even more valuable tips. The program is 
pulling in the type of high-quality information that reduces 
the length of investigations and saves resources.
    With respect to the new oversight regime Dodd-Frank 
mandated for over-the-counter derivatives, we have proposed 
substantially all of the core rules to regulate security-based 
swaps. Last year in particular, we finalized rules regarding 
product and party definitions, adopted rules relating to 
clearing and reporting, and issued a road map outlining how we 
plan to implement the new regime. Soon we plan to propose how 
this regime will be applied in the cross-border context. The 
Commission has chosen to address cross-border issues in a 
single proposing release rather than through individual 
rulemakings. We believe this approach will provide all 
interested parties with the opportunity to consider as an 
integrated whole the Commission's proposed approach to cross-
border security-based swap oversight.
    Last year, the Commission, working with the CFTC and the 
Fed, adopted rules requiring registered clearing agencies to 
maintain certain risk management standards and also established 
record keeping and financial disclosure requirements. These 
rules will strengthen oversight of securities clearing agencies 
and help to ensure that clearing agency regulation reduces 
systemic risk in the financial markets.
    Although tremendous progress has been made, work remains in 
areas such as credit rating agencies, asset-backed securities, 
executive compensation, and the Volcker Rule. With respect to 
the Volcker Rule, the issues raised are complex, and the nearly 
19,000 comment letters received in response to the proposal 
speak to the multitude of viewpoints that exist. We are 
actively working with the Federal banking agencies, the CFTC, 
and the Treasury in an effort to expeditiously finalize this 
important rule.
    With respect to all of our rules, economic analysis is 
critical. While certain costs or benefits may be difficult to 
quantify or value with precision, we continue to be committed 
to meeting these challenges and to ensuring that the Commission 
engages in sound, robust economic analysis in its rulemaking.
    It also has been clear to me from the outset that the act's 
significant expansion of the SEC's responsibilities cannot be 
handled appropriately with the agency's current resource 
levels. With Congress' support, the SEC's fiscal year 2012 
appropriation permitted us to begin hiring some of the new 
positions needed to fulfill these responsibilities.
    Despite this, the SEC does not yet have all the resources 
necessary to fully implement the law. Enactment of the 
President's fiscal year 2013 budget would help us to fill the 
remaining gaps by hiring needed employees for frontline 
positions and also would permit us, importantly, to continue 
investing in technology initiatives that substantially and 
cost-effectively allow us to improve our ability to police the 
markets.
    As you know, regardless of the amount appropriated, our 
budget will be fully offset by fees we collect and will not 
impact the Nation's budget deficit.
    As the Commission strives to complete our remaining tasks, 
we look forward to working with this Committee and others to 
adopt rules that fulfill our mission of protecting investors, 
maintaining fair, orderly, and efficient markets, and 
facilitating capital formation.
    Thank you again for inviting me to share with you our 
progress to date and our plans going forward. I look forward to 
answering your questions.
    Chairman Johnson. Thank you.
    Chairman Gensler, please proceed.

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING 
                           COMMISSION

    Mr. Gensler. Thank you, Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee. I want to first just 
associate myself with Governor Tarullo's comments about wishing 
you well on this Valentine's Day, but also his comments about 
the Administrative Procedures Act. I think we have all 
benefited at the CFTC by the 39,000 comments that we have 
gotten on our various rules.
    This hearing is occurring at a very historic time in the 
markets because, with your direction, the CFTC now oversees the 
derivatives marketplace--not only the futures marketplace that 
we had overseen for decades, but also this thing called the 
swaps marketplace that, through Dodd-Frank, you asked us to 
oversee.
    Our agency has actually completed 80 percent, not just 
proposed but completed 80 percent of the rules you asked us to 
do. And the marketplace is increasingly shifting to 
implementation of these commonsense rules of the road.
    So what does it mean? Three key things:
    For the first time, the public is benefiting from seeing 
the price and volume of each swap transaction. This is free of 
charge on a Web site. It is like a modern-day ticker tape.
    Second, for the first time, the public will benefit from 
greater access to the market that comes from centralized 
clearing and the risk reduction that comes from that 
centralized clearing. This will be phased throughout 2013, but 
we are not needed to do any new rules. It is all in place.
    And, third, for the first time, the public is benefiting 
from the oversight of swap dealers--we have 71 of them that 
registered--for sales practices and business conduct to help 
lower risk to the overall economy.
    Now, these swaps market reforms ultimately benefit end 
users. The end users in our economy, the nonfinancial side, 
employs 94 percent of private sector jobs, and these benefit 
those end users through greater transparency. Greater 
transparency starts to shift some information advantage from 
Wall Street to Main Street, but also lowering risk. And we have 
completed our rules ensuring, as Congress directed, that the 
nonfinancial end users are not required to participate in 
central clearing. And as Ranking Member Crapo said, at the CFTC 
we have proposed margin rules that provide that end users will 
not have to post margin for those uncleared swaps.
    To smooth the market's transition to the reform, the 
Commission has consistently been committed to phasing in 
compliance based upon the input from the market participants. I 
would like to highlight two areas in 2013 that we still need to 
finish up the rules.
    One is completing the pretrade transparency reforms. This 
is so buyers and sellers meet, compete in the marketplace, just 
as in the securities and futures marketplace. We have yet to 
complete those rules on the swap execution facilities and block 
rules.
    Second, ensuring that cross-border application of swaps 
market reform appropriately covers the risk of U.S. affiliates 
operating offshore. We have been coordinating greatly with our 
international colleagues and the SEC and the regulators at this 
table, but I think in enacting financial reform, Congress 
recognized a basic lesson of modern finance and the crisis. 
That basic lesson is that during a crisis, during a default, 
risk knows no geographic border. If a run starts in one part of 
a modern financial institution, whether it is here or offshore, 
it comes back to hurt us. That was true in AIG, which ran most 
of its swaps business out of Mayfair--that is a part of 
London--but it was also true at Lehman Brothers, Citigroup, 
Bear Stearns, and Long-Term Capital Management. I think failing 
to incorporate this basic lesson of modern finance into our 
oversight of the swaps market would not only fall short of your 
direction to the CFTC and Dodd-Frank, but I also think it would 
leave the public at risk. I believe Dodd-Frank reform does 
apply, and we have to complete the rules to apply to 
transactions entered into branches of U.S. institutions 
offshore, or their guaranteed affiliates offshore transacting 
with each other, or even if it is a hedge fund that happens to 
be incorporated in an island or offshore but it is really 
operated here.
    I would like just to turn with the remaining minute to 
these cases the CFTC brought on LIBOR because it is so much of 
our 2013 agenda.
    Now, the U.S. Treasury collected $2 billion from the 
Justice Department and CFTC fines, but that is not the key part 
of this. What is really important is ensuring financial market 
integrity. And when a reference rate such as LIBOR, central to 
borrowing, lending, and hedging in our economy, has so readily 
and pervasively been rigged, I think the public is just 
shortchanged. I do not know any other way to put it. We must 
ensure that reference rates are honest and reliable reflections 
of observable transactions in real markets and that they cannot 
be so vulnerable to misconduct.
    I will close by mentioning, the same way as Chairman Walter 
did, the need for resources. I would say the CFTC has been 
asked to take on a market that is vast in size and much larger 
than the futures market we once oversaw, and that without 
sufficient funding, I think the Nation cannot be assured that 
we can effectively oversee these markets.
    I thank you and look forward to your questions.
    Chairman Johnson. Thank you, and thank you all for your 
testimony.
    As we begin questions, I will ask the clerk to put 5 
minutes on the clock for each Member.
    Ms. Miller, what steps is the U.S. taking both at home and 
abroad to complete reforms in a way that makes the financial 
system safer, ends too-big-to-fail bailouts, and promotes 
stable economic growth? And what are the challenges to 
accomplish this?
    Ms. Miller. Thank you for the question. I think the most 
important thing that we can do is to restore confidence in our 
financial markets and our financial system, and I think the 
work that has gone on, post the Dodd-Frank reforms, has been 
incredibly important in strengthening our financial 
institutions, making sure that they are better capitalized, 
that they are more liquid, and that they have a good plan for 
failure should they not succeed.
    I do not think that our reforms are intended to prevent 
failure, but I think they are intended to make us much better 
prepared and to make sure that our financial institutions and 
the activities that they engage in are much safer and sounder.
    So we have been working very hard, I think, in the U.S. and 
abroad with our international counterparts to make sure that we 
have put in place the necessary rules of the road to make sure 
these things can happen.
    So it is happening at many levels in the U.S. You have 
heard of all of the activities that these financial regulators 
are engaged in. But it is also happening in international 
forums where we are working with our counterparts to make sure 
that we have a level playing field.
    As far as the challenges, this is a very comprehensive law. 
It is one that addresses many parts of our financial system. I 
think the number of rulemaking activities, definitions, 
studies, and work that were laid out by Dodd-Frank is quite a 
big workload. When I work with these regulators here, I see the 
same people in many instances working on a wide range of rules. 
They are working very hard. But they have a pretty big agenda 
to accomplish. But I think that the spirit of cooperation is 
good. I think entities like the Financial Stability Oversight 
Council provide a good forum for working on these things.
    Chairman Johnson. Mr. Cordray, congratulations on issuing a 
final QM rule that was well received by both consumer advocates 
and the industry. What approach did you take to design a final 
rule to strike the right balance?
    Mr. Cordray. Thank you, Mr. Chairman, and I appreciate 
those observations. I think we tried to do three things.
    The first is that we were very accessible to all parties 
with all ranges of viewpoints on the issues. The issues were 
difficult. It is not easy to write rules for the mortgage 
market right now because we are in an unnaturally tight period, 
and the data from a few years before was from an unnaturally 
loose period, and we have some significant issues unresolved in 
terms of public policy. We listened very carefully and 
attentively to what people had to say to us and the great deal 
of comments that we received.
    Secondly we did go back and try to develop additional data 
so that we could work through the numbers on our own and 
understand what kind of effects different potential approaches 
would have.
    Third and this was quite meaningful--we consulted very 
closely with our fellow agencies. They have a lot of expertise 
and a lot of insight on the kinds of problems we were 
addressing, and we will ultimately be examining these 
institutions in parallel to one another. And the rules need to 
work for everyone.
    We will continue to work with the other agencies on 
implementation, and I do think that that helped us 
tremendously. I could point to any number of provisions in the 
rules that were made better by that process.
    Chairman Johnson. This question is for Mr. Gruenberg, Mr. 
Curry, and Mr. Tarullo. First, I want to thank Senator Hagan 
for all her hard work on QRM. Is there anything in the law that 
would prohibit QRM from being defined the same as QM? And is 
that something you are considering now that the QM rule is 
finalized, as Mr. Cordray just described? Mr. Gruenberg, let us 
begin with you.
    Mr. Gruenberg. Thank you, Mr. Chairman. I do not believe 
there is any prohibition in the law with regard to conforming 
QRM with QM. We actually delayed consideration of the 
rulemaking on QRM pending the completion of the QM rules, and I 
think we will now have the ability to consider the final 
rulemaking on QRM in light of that QM rulemaking.
    Chairman Johnson. Mr. Tarullo and Mr. Curry, do you agree?
    Mr. Tarullo. Certainly, Mr. Chairman, I agree with Chairman 
Gruenberg that there is no legal bar. And I would just say 
further that, as you know, the two provisions had somewhat 
different motivations. The QM rule was motivated toward 
protecting the individual who buys the house, and the QRM rule 
was motivated toward the risk retention associated with that 
mortgage and, thus, presumably trying to protect the investment 
for the intermediary.
    Having said that, I think given the state of the mortgage 
market right now--and both you and Senator Crapo have alluded 
to it--we want to be careful here about the incremental 
rulemaking that we are doing not beginning to constrict credit 
to middle- and lower-middle-class people who might be priced 
out of the housing market if there is too much in the way of 
duplicate or multiple kinds of requirements at the less than 
highly creditworthy end.
    So I think it is definitely the case that on the table 
should be consideration of making QRM more or less congruent 
with QM.
    Chairman Johnson. Mr. Curry.
    Mr. Curry. I share the views of both Governor Tarullo and 
Chairman Gruenberg with respect to the definition. I also would 
concur with Governor Tarullo that it is important to look at 
the cumulative effect, the issue that Senator Crapo mentioned, 
when we are talking about the mortgage market and issues of 
competition, and the ability to have the widest number of 
financial institutions, regardless of size, participating in it 
is something that we are very concerned about and paying close 
attention to.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman. Senator Corker has 
a need to get to another meeting, and I am going to yield to 
him.
    Senator Corker. Thank you. Thank you very much. I will do 
this rarely, and I will be very brief, just three questions.
    Mr. Gruenberg, we talked extensively, I think, about 
orderly liquidation in Title II, and I know most people thought 
orderly liquidation meant that these institutions would be out 
of business and gone. I think as you have gotten into it, you 
have decided that you are only going to eliminate the holding 
company level. And what that means is that creditors, candidly, 
could issue debt to all the subsidiaries and know that they are 
never going to be at a loss. And I am just wondering if you 
have figured out a way to solve that, because obviously that 
was not what was intended.
    Mr. Gruenberg. I agree with you, Senator, and as you know, 
the approach we have been looking at would impose losses--
actually wiping out shareholders, imposing losses on creditors, 
and replacing culpable management. In regard to creditors, it 
would be important to have a sufficient amount of unsecured 
debt at the holding company level in order to make this 
approach work. We have been working closely with the Federal 
Reserve on this issue. Actually, Governor Tarullo in his 
testimony makes reference to it, and I am hopeful we can 
achieve an outcome that will allow us to impose that kind of 
accountability on creditors.
    Senator Corker. It seems like you would want all of your 
long-term debt at the holding company level, so I just hope 
that you all will work something out that is very different 
than the way it is right now, because creditors could easily be 
held harmless by just making those loans at the sub-level, and 
that is not what anybody intended.
    Second, with the FSOC, Ms. Miller and Mr. Tarullo, I know 
that you are to identify and to respond to threats in the 
financial system, any kind of systemic threat, and I would just 
ask the two of you: Is there any institution in America today 
that, if it failed, would pose a systemic risk? Any 
institution.
    Ms. Miller. Well, I think we learned from the financial 
crisis that the failure of a large institution can create some 
systemic risk, so I----
    Senator Corker. But you all are to eliminate that, so I am 
just wondering if any institution in America failed, would that 
create systemic risk? Because your job is to ensure that that 
is not the case.
    Ms. Miller. I believe that all the work that we have done 
and continue to do is designed to prevent that effect and to 
make sure that we have in place rules and regulations that keep 
firms from engaging in activities or building their business 
models in ways that are going to transmit that type of 
financial distress.
    Senator Corker. Mr. Tarullo.
    Mr. Tarullo. I think, Senator, that it is a journey and not 
a single point where you can say we have addressed the too-big-
to-fail issue. I do think a lot of progress has been made. But 
I would also distinguish between, if I can put it this way, 
resolvability without a disorderly, major disruption to the 
financial system on the one hand, and on the other the failure 
of a firm that entails substantial negative externalities. So 
it is the difference between bringing the whole system into 
crisis on the one hand, not doing so on the other, but still 
imposing lots of costs.
    And I do think that there is complementarity between the 
capital rules, the FDIC resolution process, and the other rules 
in trying to make sure that we are dealing both with 
resolvability and negative externality.
    Senator Corker. I hear what you are both saying. I would 
assume, though, that a big part of your role is to ensure that 
there is no institution--I know that you guys have regulatory 
regimes that try to keep them healthy. But I assume--and if I 
am wrong--that you want to ensure that there is no institution 
in America that is operating, that operates that can fail and 
create systemic risk. I assume that is part of your role, and 
if not, I would like a follow-up after the meeting, and maybe 
we will ask that again in written testimony. I know my time is 
short.
    Let me just close with this. I know the Basel III rules are 
really complicated as it relates to capital, and some people, 
Mr. Tarullo, have come out and said that we would be much 
better off with a much stronger capital ratio--some people have 
said 8 percent--and do away with all the complexities that 
exist, because many of the schemes, if you will, that lay out 
risk really do not work so well. I am just wondering if that 
would not be a better solution to Basel III, and that is, just 
have much better ratios, much stronger ratios, and much less 
complexity with all of these rules that so many people are 
having difficulty understanding.
    Mr. Tarullo. Well, Senator, I guess I would say--and I know 
you are not making the observation I am about to respond to, 
but it has been heard as well--the idea that if you somehow do 
not completely like Basel III or think maybe more should have 
been done, that we should not be for Basel III. Basel III is an 
enormous advancement in improving the quantity and the quality 
of capital, and those pieces of it are actually not all that 
complicated. You know, making sure that the equity that is held 
is real equity that can be loss absorbing and getting it up to 
a 7-percent level, effectively, rather than as low as 2 
percent, which that level was precrisis. I think those are 
pretty straightforward.
    Whether more should be done, whether as Chairman Gruenberg 
was just saying, for some of the largest institutions we need 
some complementary measures, we certainly think with systemic 
risk you do. I agree with that. But I actually think it is 
pretty straightforward, and I would also say that in the U.S., 
at least, with the Collins amendment, we are now in a position 
to have a standardized floor with standardized risk weights, 
not model-driven risk weights but standardized risk weights, 
which applies to everybody, and my hope would be that other 
countries actually see there is substantial merit in this, in 
having a much simpler floor and then above that for the biggest 
institutions, that is where you have the model-driven 
supplemental capital requirement, not displacing the simple 
one, just supplemental.
    Senator Corker. Thank you. Thank you very much.
    Chairman Johnson. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Chairman Gensler, I understand that you recently had a 
roundtable on the futurization of swaps, and one of the 
participants indicated that because the rulemaking process has 
not been fully completed, many people are moving away to avoid 
uncertainty in the futures markets. Can you tell us what risks 
might be posed by that and also how you are going to respond to 
finalizing these rules? And I know you indicated your budget 
issue is probably a critical factor in that. You might even 
comment on that again.
    Mr. Gensler. Thank you, Senator. I think what we are seeing 
in the derivatives marketplace is somewhat natural. The futures 
marketplace has been regulated for seven or eight decades and 
for transparency and risk reduction through clearing. The swaps 
marketplace developed about 30 years ago and, in fact, is 
between 80 and 90 percent of the market share in a sense of the 
outstanding derivatives.
    So as Congress dictated, as we bring transparency and 
central clearing to the unregulated market, there has been some 
relabeling, some reshifting. As you say, some people call this 
futurization.
    The good news is whether it is a future or a swap, we have 
transparency after the transaction and in futures before the 
transaction occurs. We have central clearing to lower the risk 
and ensure access.
    We do need to finish the rules in the swaps marketplace 
around these things called swap execution facilities and the 
block rule. We also in the futures world have to ensure that we 
do not lose something, that what was once swaps moves over and 
calls itself futures and somehow the exchanges lower the 
transparency. We would not want to see that happen.
    But I think whether it is called a future or a swap, we are 
in better shape than we were before 2008. I thank you for 
asking about resources. We desperately need more resources. It 
is a hard ask when Congress is grappling with the budget 
deficits, I know.
    Senator Reed. Commissioner Walter, this is a related 
question because it is an international market, and both you 
and Chairman Gensler are working on the issue of cross-border 
swaps. And in order to coordinate with international regulators 
so that there is a consistent rule--and it sort of harkens back 
to what Governor Tarullo said about it would be great if there 
was a Collins rule across the board. Uniformity, simple 
uniformity helps sometimes.
    Can you comment upon what both you and Chairman Gensler are 
doing with respect to these coordination efforts with respect 
to the cross-border swaps?
    Ms. Walter. Absolutely. Thank you, Senator Reed. It is a 
tremendously important issue, perhaps more important in this 
market than any other, because this market is truly a global 
marketplace. Unlike other markets that we regulate which only 
have certain cross-border aspects, the majority of what goes on 
in this marketplace really does cross national lines.
    We have worked very closely not only with the standard 
multinational bodies such as IOSCO, the International 
Organization of Securities Commissions, but both the CFTC and 
the SEC are working very actively with the regulators around 
the globe who are in the process of writing the same rules. 
They are at somewhat different stages than we are. Some are 
still at the legislative stage. Some are just entering the 
rule-writing stage. But we all acknowledge the importance of 
making sure that the business can take place across national 
boundaries and that we remove unnecessary barricades.
    First of all, we want no incompatibility or conflict, but 
then we also want to look at ways that we can make our rules 
more consonant. And we are both looking at techniques such as 
what we call substituted compliance, where you could have an 
entity that is registered in the United States but complies 
with its U.S. obligations by complying with its home-country 
laws. We think this will really ease the burdens, and we are 
looking at all of it very carefully.
    Senator Reed. Chairman Gensler, any comments?
    Mr. Gensler. I think we are in far better shape than we 
were 2 years ago if we had this hearing, or even 1 year ago, 
because Europe, the European Union, now has a law called AMIR. 
Canada and Japan and we, so four very significant jurisdictions 
between which we probably have 85 or 90 percent of this 
worldwide swaps marketplace.
    We are ahead of them in the rule-writing stage, but with 
some developments last week, even Europe now got their rules 
through a very important process through the European 
Parliament. So I think that we are starting to align better.
    Senator Reed. Let me just make a final comment because my 
time is expiring. One of the Dodd-Frank initiatives was to take 
bilateral derivative trades and make them--put them on clearing 
platforms so that they are multilateral. That helps, but it 
also engenders the possibility of systemic risk from the large 
concentration. That means that the collateral rules, all the 
rules have to be. I just want to leave that thought with you, 
that you have--you know, that is something that should be of 
concern to both CFTC and SEC, that these central clearing 
platforms are so grounded with capital, collateral, however you 
want to describe it, lack of leverage, that they do not pose 
systemic risk. I think you understand that.
    Mr. Gensler. We do, and we take that very seriously, and we 
consult actively with the Federal Reserve and international 
regulators as well on that.
    Senator Reed. Thank you very much.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman. I first 
want to get into the issue of economic analysis. As I know you 
are all aware, the President has issued two Executive orders 
requiring the agencies to conduct economic analysis, and the 
Office of Management and Budget has issued directives and 
guidance on how to implement that. But, ironically, independent 
agencies such as yours are not subject to those requirements or 
to those Executive orders. And I know that each of your 
agencies has said that you are going to follow the spirit of 
those orders, but in December of 2011, the GAO found that, in 
fact, in the rulemaking under Dodd-Frank the agencies were not 
following the guidances put out by OMB. And in its December 
report of this year, it found that the OCC and the SEC were 
getting there, but that the remaining agencies still a year 
later were not following the key guidances that the OMB has put 
out for economic analysis.
    The GAO, frankly, I think was quite critical about that, as 
well as the fact that it found some coordination among the 
agencies, but that the coordination was very informal in 
nature, and almost none of the coordination looks at the 
cumulative burden of all the new rules, regulations, and 
requirements.
    So my first question, or really ask, is of all of you: Can 
I have your commitment that each of your agencies will act on 
GAO's recommendation to incorporate OMB's guidance on cost/
benefit analysis into your proposed and final rules as well as 
your interpretive guidance? I guess I would not necessarily go 
through and ask each one of you for an answer, but if there is 
any agency here who will not commit to comply with the GAO's 
recommendation, could you speak up?
    Mr. Tarullo. I am sorry. I will confess not being familiar 
with the December 2012 recommendations, Senator. Certainly we 
do economic analysis both on a rule-by-rule basis and more 
generally, and to that we are committed. I do not know that we 
are committed to everything that might be in there, and I just 
would not want to leave you with that impression. So I would 
prefer to be able to get back to you after the hearing.
    Senator Crapo. OK. Well, I have got the report here. I am 
sure you can get a copy of it. And what the GAO is saying is 
that it is the OMB guidances implementing the President's 
Executive orders on this issue, and each of the agencies tells 
the GAO that they are doing what you just said to me, that you 
are doing economic analysis. The GAO is saying that you are not 
doing economic analysis the way that the OMB has directed that 
it be done, according to the guidance.
    So the request is that you commit that you will follow the 
GAO recommendation that you simply comply with the OMB 
guidances.
    All right. I am going to take that as an agreement that you 
will do that.
    Mr. Gensler. Could I just, because I do not want to leave 
it----
    Senator Crapo. I guess maybe not.
    Mr. Gensler. Well, no. I just want to make sure, just as 
Governor Tarullo, that we did not leave you with anything but 
the best impressions.
    Our general counsel and our chief economist issued guidance 
to the staff on all our rulemakings to ensure that our final 
rules do what you are saying. I think the GAO report also is 
looking at some proposals that came before, so we had to sort 
of, you know, address what the recommendations were, and there 
were proposals before that.
    We are also in a circumstance where our statute has 
explicit language about cost/benefit considerations, and that 
language we have is a little different than other agencies. So 
we look to Section 15(a), I think, of the Commodity Exchange 
Act for our guidance on cost/benefit. But I believe and I 
understand that our guidance to the staff is consistent with 
the OMB, but recognizing we have to comply with the statute 
that we have.
    Senator Crapo. I do not think that the statute you have, 
though, stops you from honoring and meeting the OMB guidances. 
GAO, as I understand it, looked at 66 rulemakings altogether 
that happened among the agencies law year, and that is a pretty 
significant amount of the rulemakings that were there.
    Let me get at this in another way. Can each of you commit 
that you will provide the Committee with a description of the 
specific steps your agency is taking to understand and quantify 
the anticipated cumulative effect of the Dodd-Frank rules? Any 
problem with that one?
    Mr. Tarullo. We are using data that is available, and where 
the quantification possibility exists, absolutely.
    Senator Crapo. All right. I see my time is up. I have some 
other issues to get into with you, but I appreciate this. And I 
just want to conclude by a statement. I think GAO's report was 
very clear that the kind of economic analysis that we need is 
not happening, and that is why I am raising this. So although 
you explained that you have other regimes or statutory 
mandates, the issue here is getting at proper economic analysis 
as we implement these rules. And I think GAO's report is pretty 
damning in terms of the results they found on the 66 rules that 
they identified.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Thank you to all 
for your testimony.
    Mr. Curry, I wanted to discuss the botched foreclosure 
review process that I held a hearing on more than a year ago in 
the Housing Subcommittee, and in fairness, let me start off by 
saying that I realize that you were not the Comptroller when 
the foreclosure review program was designed. But as the follow-
on to that period of time, you are, nevertheless, tasked with 
cleaning up what I consider to be a mess.
    Basically what was done here is that we replaced the 
process with an $8.5 billion settlement that will not really 
determine which borrowers were wronged or not, and despite 
keeping their legal rights to sue the banks, most borrowers do 
not have the financial means to litigate their cases if they 
feel that the compensation was inadequate.
    So considering this point, isn't it unfair to not review 
the files of those turning in packages if they still want a 
review? And would you consider mailing each borrower a check 
but giving them the option to return that check in favor of a 
full review of their file? And as part of the answer--I will 
just give you the third part of it--how is it fair to tell a 
borrower who had, for example, $10,000 in improper fees charged 
to them that they are going to get $1,000 because that is the 
amount that all borrowers in the improper fee category will 
get?
    I have been at this for over a year, and I am concerned 
about how we are coming to the conclusion here. So give me some 
insight.
    Mr. Curry. Thank you, Senator Menendez. I share your 
concerns about the entire process and its ability to meet its 
original stated objectives.
    What happened here is that the complexity of the review 
process was much larger than was anticipated in the beginning. 
It consumed a considerable amount of time with very little in 
terms of results. And our concern was that having over almost 
$2 billion being spent as of November of this year without 
being able to even issue the first checks, that the process was 
flawed and that the best equitable result was to estimate an 
appropriate amount of settlement and to make as equitable a 
decision as possible, taking into account the level of harm and 
the borrower characteristics. The settlement is not perfect, 
but we believe it is the best possible outcome under the 
circumstances.
    Senator Menendez. On the specific questions that I asked 
you, though, is it possible for those who want a review of 
their files to get a review if they are willing to forgo or at 
least the check?
    Mr. Curry. That is not an element of the settlement that we 
reached.
    Senator Menendez. So the bottom line is that they will be 
foreclosed from a review?
    Mr. Curry. No. Part of the settlement is--and this was the 
impetus for having the $5.7 billion worth of assistance for 
foreclosure relief as part of the settlement. We have made it 
clear that those funds should be prioritized and that they 
should be directed toward the in-scope population and toward 
those individuals with the greatest risk of foreclosure. We 
want people to stay in their homes.
    Senator Menendez. Well, we want people to stay in their 
homes, too. The question is: What recourse do they have here 
other than pursuing their own litigation? They have none 
through your process. That is what I want to get to.
    Mr. Curry. The way the settlement is structured, we will 
try to allocate the payments to the most grievous situations. 
We have made----
    Senator Menendez. But you will not know that without a 
review of their files.
    Mr. Curry. We have done an analysis, a preliminary analysis 
of the level of harm in the total in-scope population. We think 
we have a fair estimate of overall who would be harmed. But we 
do recognize, as you stated, that certain individuals may not 
get fully compensated for financial harm.
    Senator Menendez. Well, we look forward to reviewing that 
with you further.
    Last, Secretary Miller, the President called for something 
that both Senator Boxer and I have promoted and offered, the 
Responsibility Homeowners Refinancing Act and said it is past 
time to do it. Could you tell the Committee the value to 
individuals as well as to the economy of permitting refinancing 
at this time?
    Ms. Miller. Thank you for that question. The population of 
homeowners who today are underwater on their mortgages--we know 
that is about 20 percent of all homeowners--who have not been 
able to refinance in a low- interest-rate environment is a 
missed opportunity, we think, to reach homeowners who should be 
able to benefit from the spread of a high- interest-rate loan 
that they may hold versus where rates are today. So we would 
very much support any assistance that you can provide to help 
reach that population.
    We do have a program that is reaching homeowners whose 
mortgages happen to be held or guaranteed by the GSEs. It is 
called HARP. And we have seen very good take-up in the 
refinancing assistance we are providing to underwater loan 
holders in that population. But it is the other group of 
homeowners who do not have a mortgage held at the GSEs that 
have not been able to take advantage of this. So we think that 
it is a priority. It would be good for homeowners. It would be 
good for the mortgage market. It would be good for the economy.
    Senator Menendez. Thank you.
    Chairman Johnson. Senator Coburn.
    Senator Coburn. Mr. Chairman, thank you. I am glad to be on 
this Committee. I just one question. I will submit the rest of 
my questions for the record.
    This is to Mr. Cordray. You mentioned in your testimony 
financial literacy and that needs to be approved. I wonder if 
you are aware of how many financial literacy programs the 
Congress has running right now.
    Mr. Cordray. I could not tell you exactly, but I can tell 
you that, by law, I am the Vice Chair of the Financial Literacy 
Education Commission, and we are coordinating with other 
agencies. There are 15 or 20 other agencies, and it does feel 
to me that one of the issues has been a sort of piecemeal 
approach to this problem. We have been given substantial 
responsibilities as a new consumer agency in this area, and I 
would like to work both with the Congress and with our fellow 
agencies as we are doing through what is called the FLEC that I 
mentioned, and also with State and local officials.
    When I was a county treasurer and then State treasurer in 
Ohio, we were able to get the legislature to change the law 
such that every high school student in Ohio now has to have 
personal finance education before they can graduate. That is 
something we used to do years ago through the home economics 
curriculum and like. I have seen mathematics textbooks from the 
teens and twenties where a lot of the questions asked were put 
in terms of household budgeting and the types of financial 
issues that were around particularly farming and other 
communities. I think that is something that we have lost. It is 
something that has weakened our society, and it is something 
that we need to focus on.
    But I would agree with you. There is a very scattered and 
disparate approach right now, and it has not been optimal.
    Senator Coburn. It is pretty ironic the Federal Government 
is teaching Americans about financial literacy given the state 
of our economic situation.
    There are 56 different Federal Government programs for 
financial literacy, and so what I would hope you would do in 
your position is really analyze this and make a recommendation 
to Congress after looking at the GAO report on this and tell us 
to get rid of them or get one, but not 56 sets of 
administrators, offices, rules, and complications and 
requirements that have to be fulfilled by people to actually 
implement financial literacy.
    Mr. Cordray. I appreciate the comment. I would be glad to 
follow up with you and work and think about this. As we 
coordinate with one another, that helps minimize some of the 
problem. We have worked with the FDIC, particularly on their 
Money Smart curriculum, which is a terrific curriculum. We do 
not need to be reinventing the wheel. We are working with them 
now on creating a new module for older Americans and seniors 
who face some specific issues. I am sure your office hears 
about them quite a bit, and I would be happy to work with you 
on that. And I agree with the thrust of your question.
    Senator Coburn. My only point is that with 56, if we start 
another one or another two or three and do not change those, we 
are throwing money out the door.
    Mr. Cordray. I would agree with that.
    Senator Coburn. Thank you.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you, Chairman Johnson.
    Governor Tarullo, I would like to talk to you for a moment. 
Three or four years ago, in 2009, you said, and I quote, 
``Limiting the size or interconnectedness of financial 
institutions was more a provocative idea than a proposal.'' And 
you said that in the context that there were not particularly 
any well-developed ideas out there. And since then, as we have 
talked, I have introduced legislation to limit the nondeposit 
liabilities of any single institution relative to domestic GDP. 
I have worked with Senator Vitter on that proposal, and we are 
considering to see, I think, more bipartisan support.
    Tell me how your thinking has evolved--your more recent 
statement seems like it has. Tell me how your thinking has 
evolved from 2009 and why that is.
    Mr. Tarullo. You are absolutely right, Senator Brown. My 
observation back in 2009 was that people would say something 
like, ``Break up the banks.'' But there was not a plan behind 
it that allowed people to make a judgment as to whether it 
would address the kind of problems in too big to fail and 
others we saw in the crisis, and what the costs associated with 
it would be.
    As you say, since then a lot of people have generated a lot 
of plans, and I think they probably fall into three categories. 
The first category is really a variant on things we already do: 
strengthen the barriers between insured depository institutions 
and other parts of bank holding companies; make sure that some 
activities are not taking place in the banks; make sure that 
there is enough capital in the rest of the holding company, 
even if they get into trouble independently, do not just think 
in terms of protecting the IDI itself.
    Interestingly, those are a big part of some of the European 
proposals like the Liikanen and Vickers proposals. As I say, to 
a considerable extent, the U.S. has already gone down that 
road, and indeed Dodd-Frank strengthened some of those 
provisions.
    The second set of proposals is what I would characterize as 
a functional split, so saying that there are certain kinds of 
functions that cannot be done within a bank holding company. 
Obviously Glass-Steagall was exactly that kind of approach. It 
separated investment banking from commercial banking. And there 
are some proposals out like this now. They sort of vary. Some 
of them would allow underwriting but not market making. Others 
might say nothing at all other than commercial banking.
    There are issues on both sides. On the one hand, we have to 
ask ourselves, if we did that, would it actually address the 
problem that led to the crisis. As Senator Johnson was 
indicating in his introductory remarks, it was the failure of 
Bear Stearns, a broker-dealer, not a bunch of IDIs or 
relationships with IDIs, that precipitated the acute phase of 
the crisis.
    The second issue, obviously, is what would be lost. Are 
there valuable roles played when, for example, an underwriter 
also makes market in the securities which it underwrites? I 
think most people would conclude that there are.
    The third kind of example is embodied in your legislation, 
and I think in some other proposals, which focuses on the point 
that I tried to make at the close of my introductory oral 
remarks--what I would think of as the unaddressed set of 
issues, the unaddressed set of issues of large amounts of 
short-term, nondeposit, runnable funding. And I think here--and 
speaking personally now--my view is that is the problem we need 
to address. I think your legislation takes one approach to 
addressing it, which is to try to cap the amount that any 
individual firm can have and thereby try to contain the risk of 
the amplification of a run.
    There are other complementary ideas such as restricting the 
amounts based on different kinds of duration risk or having 
higher requirements if you have more than a certain amount.
    There are even broader ideas such as placing uniform 
margins on any kind of securities lending, no matter who 
participates in them.
    From my point of view, the importance of what you have done 
is to draw attention to that issue of short-term, nondeposit, 
runnable funding, and that is the one I think we should be 
debating in the context of too big to fail and in the context 
of our financial system more generally.
    Senator Brown. Thank you.
    Mr. Chairman, if I could just make a couple of quick 
comments. One, we have seen since--and thank you for that 
evolution in your thinking and the way you explained it.
    When Senator Kaufman and I first introduced that amendment 
on the floor in 2010, it had bipartisan support, but it 
obviously fell short. We have seen from columnists like George 
Will and a Wall Street Journal op-ed columnist and a number of 
others sort of across the political spectrum, including 
colleagues that are, you know, way more conservative than I am 
on this in this body come around to looking at this pretty 
favorably. So we have seen a lot of momentum, and I appreciate 
your thinking.
    Second, I wanted to bring up really quickly, Mr. Chairman--
and I will not end with a question. But last week, Governor, I 
received the Fed's response to a letter regarding the 
imposition of Basel III on insurance companies. Senator Johanns 
and I sent, with 22 of our colleagues last years, Senators 
Johnson and Crapo sent a letter yesterday to the Fed on the 
insurance issue. And you and other Fed officials have stated 
several times you believe the proposed rule adequately 
accommodates the business of insurance. We respectfully 
disagree. I will not ask for a response now, but we will work 
with you on that, if we could. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Heller. And welcome to the 
Committee.
    Senator Heller. Thank you very much, Mr. Chairman, and to 
the Ranking Member, it will be a pleasure to serve with you, 
and thanks for making me part of this team. And I want to thank 
those who have testified today. I have a lot to learn. I guess 
there are two messages. This takes a team to solve these 
problems that we have today. And, two, I do have a lot to 
learn.
    I want to concentrate my comments today more on 
consolidation. We have had massive consolidation in the banking 
industry in Nevada. I come from the State with the highest 
unemployment, highest foreclosures, highest bankruptcies, and I 
think the health of the banking industry reflects the health of 
the State in its current position.
    From about a 30,000-feet level looking down at this, we 
only have 14 community banks left in Nevada. We only have 23 
credit unions left in Nevada. Eighty-five percent of all 
deposits are now concentrated in large banks, and 31 percent of 
Nevadans are unbanked or under-banked, which is the highest 
percentage in the country. Our housing, as, Ms. Miller, you 
mentioned, underwater mortgages are about 20 percent 
nationwide; it is about 60 percent in Nevada. So we are in a 
tough situation here, and I am concerned about consolidation.
    My question--I see a lot of you writing notes, and I 
appreciate that, but what does this consolidation do? How does 
it help Nevadans get these loans? If the small banks--one of 
you testified--I cannot remember which one it was--that 50 
percent of the small loans to businesses, to home mortgages, to 
car loans come from these community banks. With the loss of 
community banks--and let me make one more point before I raise 
the question, and that is, the Banking Association feels in 
Nevada that if you have deposits of less than $1 billion, you 
are probably going away. Less than $1 billion. Do you agree 
with that statement? And, two, how does it help Nevada to have 
this lack of financial opportunities and to consolidate in this 
manner? Mr. Gruenberg.
    Mr. Gruenberg. Yes, thank you, Senator. Just on the final 
point you made in terms of needing a certain level of deposits 
or assets to be viable in the banking system, this is actually 
one of the issues we did look at in the study we did looking at 
the experience of community banks over the past 27 years. And 
we tried to look closely at that particular issue because there 
is a lot of talk about that issue. And for what it is worth, 
based on the data that we analyzed, we could not find any 
significant economies of scale once you get over $300 million 
in assets. So the notion that a community bank has to be at 
least $1 billion in assets, for example, in order to be viable 
in the banking market was not proved out by the analysis we 
did.
    You raise important points in regard to Nevada's particular 
situation. Nationally, Nevada had rapid expansion in commercial 
real estate, and that is what really, I think, drove a lot of 
the developments there. Hopefully Nevada has worked through the 
worst of that. That was not typical of the rest of the country, 
so I think it is fair to say Nevada was particularly impacted 
there.
    I think for the surviving banks, one, it is a tribute to 
the work they did to manage their way through this, and I think 
it is fair to say they are deserving of particular attention 
and support going forward, given the role that community banks 
play in terms of credit availability. That was the point I made 
earlier. That is important because the particular niche for 
small banks, as you know, is small business lending, which 
tends to be labor intensive and highly customized. It is the 
sort of lending that the large institutions--who are interested 
in standardized products that they can offer in volume--are not 
necessarily interested in providing. So the community banks 
really have a critical role in filling that niche in the 
financial system.
    Senator Heller. Do you have a comment, Mr. Curry?
    Mr. Curry. Yes. I have been a community bank supervisor at 
the State and Federal level for 25 years, over 25 years, and I 
saw firsthand in New England the importance of community banks 
and their ability to help dig out of a severe recession. So I 
share your concerns and also your commitment to community 
banks.
    I think as supervisors we can play a role in whether it is 
rulemaking or in the manner in which we actually supervise and 
examine these banks to eliminate unnecessary burden. It is 
something that we are committed to doing at the OCC where we 
have over 1,600 institutions. And the supervisory process I 
think for smaller banks, when the examiners talk to CEOs and 
lending officers, there is an actually an ability to share best 
practices and help improve the performance of community banks.
    Senator Heller. Thank you.
    Mr. Chairman, thank you very much.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you very much, Mr. Chairman. Thank 
you, Ranking Member. It is good to be here. And thank you all 
for appearing. I have sat where you sit. It is harder than it 
looks. I appreciate your being here.
    I want to ask a question about supervising big banks when 
they break the law, including the mortgage foreclosures but 
others as well. You know, we all understand why settlements are 
important, that trials are expensive and we cannot dedicate 
huge resources to them. But we also understand that if a party 
is unwilling to go to trial, either because they are too timid 
or because they lack resources, the consequence is they have a 
lot less leverage in all the settlements that occur.
    Now, I know there have been some landmark settlements, but 
we face some very special issues with big financial 
institutions. If they can break the law and drag in billions in 
profits and then turn around and settle, paying out of those 
profits, they do not have much incentive to follow the law.
    It is also the case that every time there is a settlement 
and not a trial, it means that we did not have those days and 
days and days of testimony about what those financial 
institutions had been up to.
    So the question I really want to ask is about how tough you 
are about how much leverage you really have in these 
settlements. And what I would like to know is tell me a little 
bit about the last few times you have taken the biggest 
financial institutions on Wall Street all the way to a trial.
    [Applause.]
    Senator Warren. Anybody? Chairman Curry?
    Mr. Curry. I would like to offer my perspective as a bank 
supervisor.
    Senator Warren. Sure.
    Mr. Curry. We primarily view the tools that we have as 
mechanisms for correcting deficiencies, so the primary motive 
for our enforcement actions is really to identify the problem 
and then demand a solution to it on an ongoing basis.
    Senator Warren. That is right. And then you set a price for 
that. I am sorry to interrupt, but I just want to move this 
along. It is effectively a settlement. And what I am asking is: 
When did you last take--and I know you have not been there 
forever, so I am really asking about the OCC--a large financial 
institution, a Wall Street bank to trial?
    Mr. Curry. Well, the institutions I supervise, national 
banks and Federal thrifts, we have actually had a fair number 
of consent orders. We do not have to bring people to trial or--
--
    Senator Warren. Well, I appreciate that you say you do not 
have to bring them to trial. My question is: When did you bring 
them to trial?
    Mr. Curry. We have not had to do it as a practical matter 
to achieve our supervisory goals.
    Senator Warren. Ms. Walter.
    Ms. Walter. Thank you, Senator. As you know, among our 
remedies are penalties, but the penalties we can get are 
limited, and my predecessor actually asked for additional 
authority to raise penalties. When we look at these issues--and 
we truly believe that we have a very vigorous enforcement 
program--we look at the distinction between what we could get 
if we go to trial and what we could get if we do not.
    Senator Warren. I appreciate that. That is what everybody 
does. And so the question I am really asking is: Can you 
identify when you last took the Wall Street banks to trial?
    Ms. Walter. I will have to get back to you with the 
specific information, but we do litigate, and we do have 
settlements that are either rejected by the Commission or not 
put forward for approval.
    Senator Warren. OK. We have got multiple people here. 
Anyone else want to tell me about the last time you took a Wall 
Street bank to trial?
    You know, I just want to note on this, there are district 
attorneys and U.S. Attorneys who are out there every day 
squeezing ordinary citizens on sometimes very thin grounds and 
taking them to trial in order to ``make an example,'' as they 
put it. I am really concerned that ``too big to fail'' has 
become ``too big for trial.'' That just seems wrong to me.
    [Applause.]
    Senator Warren. If I can--and I will go quickly, Chairman 
Johnson--I have one more question I would like to ask, and that 
is a question about why the large banks are trading at below 
book value. We all understand that book value is just what the 
assets are listed for, what the liabilities are and that most 
big corporations trade well above book value. But many of the 
Wall Street banks right now are trading below book value, and I 
can only think of two reasons why that would be so.
    One would be because nobody believes that the banks' books 
are honest, or the second would be that nobody believes that 
the banks are really manageable--that is, that they are too 
complex either for their own institutions to manage them or for 
the regulators to manage them.
    And so the question I have is: What reassurance can you 
give that these large Wall Street banks that are trading for 
below book value, in fact, are adequately transparent and 
adequately managed? Governor Tarullo or Ms. Miller.
    Mr. Tarullo. There is certainly another reason we might add 
to your list, Senator Warren, which is investor skepticism as 
to whether a firm is going to make a return on equity that is 
in excess of what the investor regards as the value of the 
individual parts. And so I think what you would hear analysts 
say is that in the wake of the crisis, there have been issues 
on just that point surrounding, first, what the regulatory 
environment is going to be, how much capital is going to be 
required, what activities are going to be restricted, what are 
not going to be restricted.
    Two, for some time there have been questions about the 
franchise value of some of these institutions. You know, the 
crisis showed that some of the so-called synergies were not 
very synergistic at all and, in fact, there really was not the 
potential, at least on a sustainable basis, to make a lot of 
money.
    Part of it is probably just the environment of economic 
uncertainty.
    In some cases, we have seen some effort to get rid of large 
amounts of assets at some of the large institutions. It is 
indirectly in response to just this point that some of them 
have concluded that they are not in a position to have a 
viable, manageable, profitable franchise if they have got all 
of the entities that they had before. And so a couple of them, 
as I say, have actually reduced or are in the process of 
reducing their balance sheets.
    The other thing I would note is you are absolutely right 
about the difference there. The difference actually is that the 
economy has been improving and some of the firms have built up 
their capital. You have seen that difference actually narrowing 
in a number of cases as they seem to have a better position in 
the view of the market from which to proceed in a more feasible 
fashion.
    Senator Warren. Good. Well, I appreciate it, and I 
apologize for going over, Mr. Chairman. Thank you.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman. Chairman Johnson, I 
appreciate your comments on QRM earlier.
    For the U.S. housing market to continue on its path to 
recovery, consumers, lenders, and investors need clarity 
regarding the boundaries of mortgage lending. The recent action 
by the Consumer Financial Protection Bureau to finalize rules 
implementing the ability to repay provisions of Dodd-Frank was, 
I think, an important step toward certainty and access. Now 
that the CFPB has successfully finalized its work on the 
qualified mortgage definition, I urge you to work quickly to 
finalize the QRM definition in a way that ensures responsible 
borrowers have ongoing access to prudent, sustainable mortgages 
that for decades have been the cornerstone of a stable and 
strong U.S. housing market.
    Earlier this week, we saw data showing that home loans that 
would be exempt from the ability-to-repay requirements and the 
proposed risk retention standard, even with a 10-percent 
downpayment requirement, made up less than half the market in 
2010. Importantly, it should be noted that these loans rarely 
went into default.
    Now that QM is finalized, can you assure me that your 
agencies will work diligently to complete a QRM rule in a 
manner consistent with that legislative intent? I would love 
your thoughts.
    Mr. Curry. Senator Hagan, we view the QRM rulemaking, the 
risk retention rulemaking process as an important one. With QM 
in place, we are looking forward to adopt an appropriate 
regulation as quickly as possible.
    Senator Hagan. ``As quickly as possible'' is defined as 
when?
    Mr. Curry. I think Governor Tarullo mentioned earlier we 
expect to wrap up most of the Dodd-Frank rulemaking this year.
    Mr. Tarullo. Oh, I would hope on that one it would be 
sooner than the end of the year.
    Senator Hagan. The sooner the better.
    Mr. Tarullo. Because the QM coming out, Senator, really now 
does allow us to go and finish it. Most of the other issues--
the way these processes work is at a staff level people go 
through all the various issues and they try to either work them 
through or present them to their commissioners or Governors for 
resolution. There, most of that process has already proceeded, 
so there are a couple of things that are going to have to be 
considered by the people at this table and our colleagues in 
our various agencies. But it really was having QM final which 
lets us now go to completion.
    Senator Hagan. Under Secretary Miller, at the request of 
the Financial Stability Oversight Council (FSOC), the Office of 
Financial Research has been studying the asset management 
industry. This study is intended to help the FSOC to determine 
what risks, if any, this industry might pose to the U.S. 
financial system and whether any such risks are best addressed 
through designation of asset managers as nonbank systemically 
important financial institutions.
    My question is: Can you talk about the transparency of the 
process? Will the results of the analysis be made public? And, 
will interested parties be provided the opportunity to comment 
formally on the results?
    Ms. Miller. Thank you. As you are aware, the FSOC has some 
responsibilities to designate nonbank financial institutions. 
In the course of doing that, in April of 2012 we published some 
criteria for exactly how that activity would proceed. At the 
time, we said that asset managers are large financial 
institutions, but they appeared different than some of the 
other financial institutions we were looking at, and we took 
that off the table to go off and do some additional work.
    So the OFR has been doing that work, has been working with 
the market participants as well as members of the FSOC to 
complete that. I expect that if there is a plan to go forward 
with designation on an asset manager or an activity of an asset 
manager, there would have to be further publication of the 
criteria for doing that and the terms on which that would be 
considered. So we have been clear that we would be transparent 
and public about that.
    Senator Hagan. When you said you ``took it off the table,'' 
what did you mean by that?
    Ms. Miller. We meant that we set it aside from the criteria 
that were established at the time for nonbank financial 
institutions to say that we wanted to study the asset 
management industry further to learn more about the activities 
and risks that they might present.
    Senator Hagan. Will the FSOC provide the public with an 
opportunity to comment on any metrics and thresholds relating 
to the potential designation of asset management companies as 
nonbank systemically important financial institutions--if you 
went to the point--prior to any designation of such a company?
    Ms. Miller. Well, I cannot speak for all the members of the 
FSOC and what they would want to do, but I think that that 
would be a reasonable course if we move forward in that 
direction.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman. First, I want to 
start by saying how excited I am about being a new Member of 
the Senate Banking Committee with all my colleagues, and I look 
forward to working with you all. And I want to thank both you, 
Chairman Johnson, and Ranking Member Crapo, my good friend, for 
allowing me to be part of this.
    I would like to start out by saying that in West Virginia 
we have a lot of community banks that have been basically 
really stable and done a good job, but they are caught up in 
this, if you will, the whole banking changes and regulations. 
And with that being said, I know there have been some things 
that have helped by the Dodd-Frank, but I think most of the 
community banks believe that it has been very onerous on them.
    Federal Reserve Board Governor Elizabeth Duke recently gave 
a speech in favor of the community banks where she said that a 
one-size-fits-all regulatory environment makes it difficult for 
community banks and that hiring compliance experts can put an 
enormous burden on small banks. She also went on to say that 
hiring one additional employee would reduce the return on 
assets by 23 basis points for many small banks. In other words, 
13 percent of the banks with assets less than $50 million, 
these are the banks that did not cause this problem that we got 
into in 2008. But they have been lumped in with all the bad 
actors, if you will, and all the bad practices.
    What we are saying on that--how are you all, because you 
all--if I look across this and me being brand new to the 
Committee, you pretty much have every aspect of regulations. 
How are you dealing with that? Anybody can start. Mr. Gensler.
    Mr. Gensler. Well, I would just say Congress gave us the 
authority to exempt what Congress said was small financial 
institutions, anything less than $10 billion in size, from the 
central clearing requirement. We went through a rulemaking, and 
we did just that. We exempted about 15,000 institutions from--
we do not oversee the banks, but we did our share on the 
community banks.
    Senator Manchin. The only thing I could say on that is that 
you could, but they are just saying to comply with the massive 
amount of paperwork regulations and the people they would have 
to hire to do that when they were not at fault. And I think 
every--they are saying this across the board.
    Mr. Gensler. Yes. I was just saying what the CFTC did. We 
just exempted them from the one provision that, you know, 
Congress gave us authority.
    Senator Manchin. Anybody else? Anybody feel like exempting 
them?
    Mr. Cordray. Senator, I would be happy to mention--so on 
the mortgage rules that we just completed, the qualified 
mortgage rule and our mortgage servicing rules are the most 
significant and substantive rules. We were convinced--as you 
say, and I have said it many times--that the smaller community 
banks and credit unions did not do the kinds of things that 
caused the crisis and, therefore, we should take account of 
that and protect their lending model as we now regulate to 
prevent the crisis from happening again.
    On the servicing rules, we exempted smaller servicers from 
having to comply with big chunks of that rule in consultation 
with people. And on the qualified mortgage rule, we have done a 
reproposal that would allow smaller banks that keep loans in 
portfolios--many of them do--to be deemed qualified mortgages, 
and I think that that is quite important. It has been well 
received, and we are looking to finalize that proposal----
    Senator Manchin. Thank you. Since my time is short, I would 
like to ask this question, and maybe the people who have not--
Glass-Steagall was put in place in 1933 to prevent exactly what 
happened to us. It was in place, I think, for approximately 66 
years until it was repealed. Up until the 1970s, it worked 
pretty well. We started seeing some changes and chipping away 
with new rules that took some powers away from Glass-Steagall. 
And then we finally repealed it in 1999, and the collapse in 
2008.
    How do you all--I mean, the Volcker Rule--and I know it 
does not do what the Glass-Steagall does, but why would we have 
those protections? And if it worked so well for so many years, 
why do you all not believe it is something we should return to 
or look at very--Governor.
    Mr. Tarullo. Let me take a shot at that, Senator. I think 
you have put your finger on the time frame at which what had 
been a quite safe, pretty stable, not particularly innovative 
financial system began to change. One of the big reasons, 
though, it began to change was that commercial banks were 
facing increasing competition on both the asset and liability 
sides of their demand sheet--their balance sheet.
    You had, on the one hand--and this is essentially a good 
development--the growth of capital markets----
    Senator Manchin. Where was the competition coming from?
    Mr. Tarullo. I was about to say the growth of public 
capital markets that were allowing more and more corporations 
to issue public debt, to issue bonds, so they did not rely as 
much on bank lending, borrowing from banks as they used to. 
And, on the other side, you saw the growth of savings vehicles 
like money market funds which provided higher returns than an 
insured deposit in one of those institutions. So the banks felt 
themselves squeezed on both sides by what in some respects were 
very benign, very good developments, which is to say more 
options for people. Where I think----
    Senator Manchin. So we changed the rule basically to allow 
them to get into risky ventures.
    Mr. Tarullo. Well, in some cases it was risky ventures, 
that is right. There definitely was a deregulatory movement in 
bank regulation beginning in about the mid-1970s for an 
extended period of time. And I guess what I would say is that 
it would--if I had to identify a collective mistake by the 
country as a whole, it was not in trying to preserve a set of 
rules and structures which were just being eroded by everything 
that was going on in the unregulated sector. I would say the 
mistake lay in not substituting a new, more robust set of 
structures and measures that could take account of the 
intertwining of conventional lending with capital markets. And 
that process of pulling away old regulation but not putting in 
place new modernized responsive regulation, I think that is 
what left us vulnerable.
    Senator Manchin. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman. I want to thank 
the Ranking Member and you for your service on this Committee, 
and I look forward to working with you both on issues of 
consequence here. And I want to thank everybody that is on the 
Committee.
    I am going to start out with some questions to Chairman 
Walter, if I might. Investor protection was clearly one of the 
most significant issues contemplated by Dodd-Frank, including 
direction to the SEC to examine the standards of care for 
broker-dealers and investor advisers in providing investor 
advice. The SEC released a study on the subject that 
recommended that the Commission exercise its rulemaking 
authority to implement uniform fiduciary standards while 
preserving investor choice.
    It has been 2 years since that study was released. In your 
testimony, you mentioned that the SEC is drafting a public 
request for information to gather more data regarding this 
provision.
    I guess, first of all, do you anticipate the SEC will move 
forward on this issue? And when?
    Ms. Walter. I expect that the request for comment that is 
referenced in my testimony will go out in the near future, in 
the next month or two.
    Senator Tester. OK.
    Ms. Walter. With respect to the substance of the issue, 
speaking only for myself, I would love to move forward on this 
issue as soon as possible. Opinions at the Commission vary a 
great deal in terms of the potential costs it imposes. My own 
personal view is that it is the right thing to do and we should 
proceed, and that we should then go on or perhaps at the same 
time take a very hard look--and there is, I think, more support 
for this at the Commission--at the different rules that are 
applicable to the two different professions, the investment 
adviser and the broker-dealer professions, to see where they 
should be harmonized and where, in fact, the differences in the 
regulatory structures are justified.
    Senator Tester. Well, first of all, I appreciate your 
position on this issue. I would encourage the Commissioners to 
make this a priority because I think there is absolute benefit 
to investors. And if you can help push it. I do not speak for 
the Chairman of Ranking Member, but if we find it as a 
priority, maybe we can help push it. But I think it is very, 
very important.
    Ms. Walter. I appreciate that, and I agree with you 
completely.
    Senator Tester. Thank you.
    Another question deals with the JOBS Act that was signed 
about 10 months ago, and a few of those provisions were 
effective immediately. The SEC has really blown by most of the 
statutory deadlines for rulemaking and rules have yet to be 
proposed. The SEC I think put out one proposed rule on general 
solicitation in August with the comment period that closed in 
October. Since then, there has not been much talk about 
finalizing the rule or the rest of the rulemaking requested by 
that act.
    I am troubled by rumblings that I have heard suggesting 
that implementation of the portion of the bill that the 
Commission has dubbed as ``Regulation A Plus'' may not be a 
priority for the SEC. And I appreciate you do have a lot on 
your plate--I understand that--in the way of rulemaking. But we 
need the SEC to make progress so that small businesses that 
this law was intended to benefit can better access capital 
markets.
    Can you outline the Commission's timeline for JOBS Act 
implementation including Regulation A Plus, including when you 
anticipate the SEC staff will present draft rules to the 
Commissioners?
    Ms. Walter. Our rulemaking priorities start with Dodd-Frank 
and the JOBS Act, and then beyond that we see what else we can 
accomplish at the same time. So we are looking very closely 
now, particularly in how to proceed with the general 
solicitation provisions of the law, which received rather 
interesting and divided comment. We have to make a decision as 
to whether to proceed with lifting the ban on general 
solicitation in a stark way or whether to accompany it with a 
number of protections that were offered by various commenters, 
including unanimously by our Investor Advisory Committee with 
respect to suggestions as to how to implement with additional 
investor protections. That is actively at the top of our plate 
right now.
    Following closely behind that, we are working in the next 
few months on putting together a crowdfunding proposal. I will 
say, although we very much regret not meeting the statutory 
deadlines, we have learned a lot by meeting with people both 
from this country and from abroad who have engaged actively in 
crowdfunding in the securities sphere, and I think that will 
help to illuminate our proposal and to make it the best 
proposal that it can be.
    Senator Tester. Well, I just have to say, the JOBS Act was 
said by some to be the most important jobs bill that we have 
done in a while as far as actually creating jobs. I can tell 
you, in my State of Montana, which is incredibly rural, folks 
are hungry to get going. And I think we are holding the process 
up. And like I said, I know you are pushed in a lot of 
different directions and you are very, very busy, but I would 
certainly hope that, once again, we can get some things out 
very, very quickly, because I do not think we get the full 
benefit of the act until we do.
    And I assume since I am the last questioner I can just keep 
going, right, Mr. Chairman?
    [Laughter.]
    Chairman Johnson. No.
    Senator Tester. I have more questions, but I just want to 
say thank you all for what you do, and just because I did not 
ask you a question does not mean I do not still love you.
    [Laughter.]
    Senator Tester. Thank you.
    Chairman Johnson. Thank you all for your testimony and for 
being here with us today. I appreciate your hard work in 
implementing those implement reforms.
    Also, Senator Crapo has additional questions he would like 
to submit.
    This hearing is adjourned.
    [Whereupon, at 12:33 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

              PREPARED STATEMENT OF SENATOR HEIDI HEITKAMP

    Chairman Johnson and Ranking Member Crapo, thank you for holding 
this important hearing, and thank you to our many witnesses for 
appearing today. I look forward to working with all of you as a Member 
of this Committee.
    After spending the last year traveling across North Dakota and 
talking with community banks and credit unions across my great State, 
it is clear that small financial institutions are struggling. As active 
members in their communities, they provide crucial services in rural 
communities and underserved areas. Yet, burdensome and complicated 
regulation is contributing to an environment where the cost of business 
is overwhelming and consolidation is too often the answer.
    I applaud the efforts of some regulators to work with the community 
banking industry to ensure the industry is strong and their regulation 
is efficient and effective. We must encourage this trend to continue 
and facilitate a dialogue to ensure smaller institutions are not 
adversely affected by regulations targeted at large, complex ones. We 
must create a banking system that supports community banks and credit 
unions rather than stymies their ability to thrive.
    As more rules are finalized to work toward financial stability and 
increase investor and consumer protections, I look forward to working 
with the appropriate regulators to make sure our smaller financial 
institutions receive the consideration they deserve and can continue to 
serve the many communities in North Dakota that rely on their services.
                                 ______
                                 
                  PREPARED STATEMENT OF MARY J. MILLER
    Under Secretary for Domestic Finance, Department of the Treasury
                           February 14, 2013

    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to appear here today to 
discuss progress implementing the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.
    The Dodd-Frank Act represents the most comprehensive set of reforms 
to the financial system since the Great Depression. The package of 
reforms President Obama signed into law 2\1/2\ years ago was a needed 
antidote for regulations that were too antiquated and weak to prevent 
or respond effectively to a financial crisis that inflicted devastating 
damage on the U.S. economy and American families. The inadequacy of our 
previous financial regulatory system was a major reason the crisis was 
so severe and why the recovery has taken so long.
    Americans are already beginning to see benefits of the reforms 
implemented in the wake of the crisis reflected in a safer and stronger 
financial system and a broader economic recovery. Although the 
financial markets have recovered more vigorously than the overall 
economy, with the stock market near its October 2007 all-time high, the 
economic recovery is gaining traction. Private-sector payrolls have 
increased by more than 6 million jobs from the low point in February 
2010, marking the 35th consecutive month of private-sector job growth. 
The unemployment rate, while still too high at 7.9 percent, has fallen 
more than two percentage points since its October 2009 peak of 10.0 
percent. The recovery in the housing market also still has further to 
go, but it appears to be taking firmer hold as measured by rising home 
prices, stronger sales, and declining numbers of delinquencies and 
defaults.
    The financial regulators represented here today have been making 
significant progress implementing Dodd-Frank Act reforms. Consumers 
have access to better information about financial products and are 
benefiting from new protections. Financial markets and companies have 
become more transparent. Regulators have become better equipped to 
monitor, mitigate, and respond to threats to the financial system.
    Our financial system has also become smaller as a share of the 
economy and significantly less leveraged, reducing our vulnerability to 
a future crisis. Capital requirements for the largest banks have 
increased substantially, and U.S. banks have raised their capital 
levels to approximately $1 trillion, up 75 percent from 3 years ago. We 
have a new framework in place for protecting the financial system, the 
economy, and taxpayers from the consequences of the failure of a large 
financial company.
    Eleven of the largest bank holding companies have already submitted 
their living wills to the Federal Reserve and Federal Deposit Insurance 
Corporation, and the other firms required to submit living wills will 
follow suit by the end of this year, providing their regulators with a 
roadmap to wind them down should they fail. The costs of resolving a 
failed financial company will not be borne by taxpayers, but by the 
company's stockholders, creditors, and culpable management--and if 
necessary by the financial services industry.
    The newly created Consumer Financial Protection Bureau (CFPB) has 
taken important steps to provide clarity on consumer financial products 
for ordinary Americans. The CFPB is cracking down on abusive practices 
and helping to level the playing field between banks and nonbanks, so 
that they play by the same rules when dealing with customers.
    Expanded enforcement authorities at the Securities and Exchange 
Commission (SEC) and the Commodity Futures Trading Commission (CFTC), 
along with their new whistleblower rules, are providing investors with 
increased protections, and the agencies' vigorous enforcement efforts 
should serve as a greater deterrent to misconduct. Investors in 
thousands of publicly traded companies have exercised new rights to 
vote on executive compensation packages as a result of Dodd-Frank's 
say-on-pay provisions.
    A new framework for regulatory oversight of the over-the-counter 
(OTC) derivatives market is largely in place. It will significantly 
reduce the risks associated with these products and will provide much-
needed transparency for both market participants and regulators. As a 
result of trade-reporting requirements, the price and volume of certain 
swap transactions are now available to regulators and the public, at no 
charge, and reporting for additional asset classes will begin at the 
end of this month. Swap dealers now have to register with the CFTC and 
adhere to new standards for business conduct and record keeping. 
Beginning next month, certain types of financial institutions 
transacting in clearable interest-rate or credit-index swaps must move 
those transactions to central clearinghouses, reducing overall risk to 
the financial system.
    Treasury's responsibilities under the Dodd-Frank Act include 
standing up new organizations to strengthen coordination of financial 
regulation both domestically and internationally, improve information 
sharing, and better identify and respond to potential risks to the 
financial system. Over the past 30 months, we have focused considerable 
effort on creating the Financial Stability Oversight Council, the 
Office of Financial Research, and the Federal Insurance Office and 
making them effective and efficient organizations that fulfill the 
objectives established in the Dodd-Frank Act.
The Financial Stability Oversight Council
    The Financial Stability Oversight Council (FSOC) has become a 
valuable forum for collaboration among financial regulators and, 
despite its relative youth, has become a central figure in the 
implementation of financial regulatory reform and in addressing risks 
to the financial system.
    Although FSOC members by law are required to meet only quarterly, 
the FSOC has been far more active than that. In 2012, FSOC principals 
met 12 times to conduct their regular business and respond to specific 
market developments. Additionally, the FSOC facilitates significant 
collaboration and information-sharing at the staff level through 
regular meetings of its Deputies Committee, which meets on a bi-weekly 
basis, and its Systemic Risk Committee, which meets monthly.
    These are key forums for coordination among regulators. There is 
steady and understandable demand from the financial industry for 
enhanced regulatory coordination. Given the different statutory 
mandates and supervisory responsibilities of the various independent 
financial regulators, they are not always able to achieve as much 
alignment as regulated entities and market participants might desire. 
However, by having a regular forum available for frank discussion and 
early identification of areas of mutual or potentially overlapping 
interests, the financial regulatory community has been able to better 
identify issues that would benefit from enhanced coordination. On the 
international front, for example, the U.S. representatives to groups 
such as the Financial Stability Board and the International Association 
of Insurance Supervisors are able to use the FSOC as a means of sharing 
information and collaborating with a broader group of domestic 
colleagues on international efforts.
    The benefits of strengthened coordination go beyond regulatory 
implementation. One of the strongest attributes of the FSOC has been 
its ability to quickly bring the key regulators together to respond to 
events such as the failure of MF Global and the disruption to financial 
markets caused by Superstorm Sandy.
    In addition to the FSOC's coordination role, it has certain 
authority to provide for more stringent regulation of a financial 
activity by issuing recommendations to the responsible regulatory 
agencies. An example along these lines is vulnerability in the short-
term funding markets, which the FSOC first addressed in its 2011 annual 
report and then again in 2012. The focus on this exposure ultimately 
led to the FSOC's issuance for public comment of proposed 
recommendations on money market mutual fund reforms. The comment period 
on those proposed recommendations closes tomorrow, February 15.
    The FSOC has also taken significant steps to designate and increase 
oversight of financial companies whose failure or distress could 
negatively impact financial markets or the financial stability of the 
United States. In July 2012, the FSOC designated eight financial market 
utilities, companies that play important roles in our clearing, 
payment, and settlement systems, as systemically important. These 
companies are now subject to higher risk-management standards and 
coordinated oversight by the Federal Reserve, the SEC, and the CFTC. 
The FSOC is also in the final stages of evaluating an initial set of 
nonbank financial companies for potential designation, and completing 
that work is an important priority for 2013. Designated nonbank 
financial companies will be subject to enhanced prudential standards 
and supervision by the Federal Reserve, closing an important regulatory 
gap.

The Office of Financial Research
    Treasury has made significant progress in establishing the Office 
of Financial Research (OFR), which has been further strengthened with 
the confirmation of Richard Berner early this year as its first 
Director.
    The OFR provides important support for the FSOC, including data for 
the FSOC annual report as well as data and analysis relating to the 
designation of nonbank financial companies. In collaboration with FSOC 
members, the OFR is also developing new dashboards of financial 
stability metrics and indicators for use by the FSOC's Systemic Risk 
Committee.
    A key part of the OFR mission is to fill the gaps in existing data 
and analysis. The OFR has accordingly completed an initial inventory of 
purchased and collected data among FSOC member agencies and an 
inventory of internally developed data is underway. To improve the 
quality and scope of data available to policy makers, the OFR has 
established data-sharing agreements with a number of FSOC member 
agencies and continues to work on new ones as needed.
    The OFR plays a leadership role in the international initiative to 
establish a global Legal Entity Identifier (LEI), a code that uniquely 
identifies parties to financial transactions. The OFR's chief counsel 
was recently named Chair of the LEI Regulatory Oversight Committee. 
With the planned launch of the global system next month, the goal of 
standardizing the identification of these entities will become a 
reality. Financial companies and financial regulators worldwide will 
gain a better view of true exposures and counterparty risks across the 
global financial system.
    In July 2012, the OFR issued its first annual report assessing the 
state of the U.S. financial system, the status of the efforts by the 
OFR to meet its mission, and key findings of the OFR's research and 
analysis. We have also established the Financial Research Advisory 
Committee, composed of 30 distinguished professionals in economics, 
finance, financial services, data management, risk management, and 
information technology to provide advice and recommendations to the 
OFR.

Federal Insurance Office
    Treasury has also worked to establish the Federal Insurance Office 
(FIO) and develop its ability to serve as the Federal voice on 
insurance issues, both domestically and internationally.
    FIO is responsible for monitoring all aspects of the insurance 
industry, including identifying issues or gaps in regulation that could 
contribute to a systemic crisis in the insurance industry or financial 
system. FIO coordinates and develops Federal policy on prudential 
aspects of international insurance matters; represents the United 
States at the International Association of Insurance Supervisors 
(IAIS); and, along with the independent insurance expert and a State 
insurance commissioner, the FIO Director contributes insurance 
expertise to the FSOC as a nonvoting member. FIO also monitors the 
accessibility and affordability of nonhealth insurance products to 
traditionally underserved communities.
    Until the establishment of FIO, the United States was not 
represented by a single, unified Federal voice in the development of 
international insurance supervisory standards. FIO now provides 
important leadership in developing international insurance policy. In 
2012, FIO was elected to serve on the IAIS Executive Committee and as 
Chair of its Technical Committee. FIO is involved with the IAIS's 
development of the methodology to identify global systemically 
important insurers and the policy measures to be applied to any 
designated firm. Apart from its work with the IAIS, FIO established and 
has provided leadership in the European Union-United States insurance 
project regarding matters such as group supervision, capital 
requirements, reinsurance, and financial reporting. FIO has worked and 
will continue to work closely and consult with State insurance 
regulators and other Federal agencies in this work.
    FIO will soon release its first annual report on the insurance 
industry and its report on how to modernize and improve the system of 
insurance regulation in the United States. FIO is working diligently to 
release these and several other reports in the coming months.

Coordination
    In the year ahead, Treasury will continue to build on the FSOC's 
existing strengths as a key forum for information-sharing and 
collaboration among regulators and continue to develop the expertise 
and capacity of the OFR and FIO.
    Although we are not a rulemaking agency for either the Dodd-Frank 
Act's Volcker Rule or risk-retention rule, the Treasury Secretary, in 
his capacity as Chairperson of the FSOC, has an explicit statutory 
coordination role with respect to both of those rulemakings. We take 
that role very seriously and will continue to work with the respective 
rulemaking agencies as they finalize those rules.
    Another area where we continue to engage in significant 
coordination with other agencies is with respect to the Dodd-Frank 
Act's new orderly liquidation authority. We have participated in 
extensive planning exercises and preparations with the Federal Reserve 
and FDIC to be fully prepared to wind down a company whose failure 
could have serious adverse effects on U.S. financial stability.

International
    Our progress on domestic implementation is mirrored by our work 
internationally to support efforts to make financial regulations more 
consistent worldwide through the G20 and the Financial Stability Board 
(FSB). By moving early with the passage and implementation of the Dodd-
Frank Act, we have been able to lead from a position of strength in 
setting the international reform agenda and elevating the world's 
standards to our own. We remain attentive to the inevitable 
inconsistencies and lags on implementation and continue to emphasize 
that successful implementation of global financial regulatory reforms 
is essential for promoting U.S. financial sector competitiveness; 
building a stable, secure, and more resilient financial system; and 
avoiding regulatory arbitrage and a race to the bottom.
    We are pursuing a comprehensive reform agenda internationally 
spanning bank capital and liquidity, resolution, and OTC derivatives 
markets.
    On capital and liquidity, the Basel III standards raise the quality 
and quantity of capital and strengthen liquidity requirements so that 
banks can better protect themselves against losses of the magnitude 
seen in the crisis. These form the bulwark of core reforms that will 
enhance the stability of the international banking system. In June 
2012, the Federal banking agencies issued proposed rules and currently 
are working to adopt final rules to implement the Basel III standards 
in 2013. It is critical that our international partners implement Basel 
III faithfully as soon as possible. In fact, the majority of the 
largest U.S. banks already meet Basel III capital targets--well ahead 
of schedule.
    On resolution, we have reached an important agreement that key 
financial jurisdictions should have the tools to resolve large cross-
border financial firms without the risk of severe disruption or 
taxpayer exposure to loss. The FSB is working actively to see that this 
international commitment by regulators will drive major global banks to 
develop cross-border recovery and resolution plans; develop criteria to 
improve the ``resolvability'' of systemically important institutions; 
and negotiate institution-specific cross-border resolution cooperation 
arrangements.
    On derivatives, U.S. regulators have led with implementation of 
reforms to centrally clear derivatives and require transaction 
reporting. We have also led the call for the development of a global 
margin standard for OTC derivatives that are not centrally cleared, and 
the G20 and the FSB are making steady progress in their efforts to 
develop such a standard.
    We have made real progress internationally on all of these fronts 
and must continue to do so. As the global economy heals from the 
devastation of the crisis, the urgency for reform may wane. Progress 
remains uneven internationally and significant work remains. We must 
redouble efforts domestically and urge our partners internationally to 
continue this essential work. In particular, we must be careful to 
avoid a fragmentation in financial regulation internationally, which 
can lead to uneven regulation, unequal treatment, constrained capital 
flows, and increased uncertainty. Treasury will continue to work with 
our partners around the world to achieve global regulatory convergence.

Conclusion
    Financial regulatory reform implementation has presented one of the 
most challenging sets of responsibilities for regulators in nearly 80 
years. We have a highly complex, international financial system with 
many intricately linked parts. While the demand for simple rules has a 
superficial appeal, simple rules do not suffice to address the nuances 
of a complex financial system. Also, as the work of regulatory reform 
implementation proceeds, issues inevitably arise such as MF Global's 
failure, the so-called ``London Whale'' trading losses, and LIBOR 
manipulation that inform the work of regulators in important ways but 
that also require significant attention in and of themselves.
    As we move forward, it is critical to strike the appropriate 
balance of measures to protect the strength and stability of the U.S. 
financial system while preserving liquid and efficient markets that 
promote access to capital and economic growth. Rules must also be 
properly calibrated to risks, taking into account, for example, the 
reduced risks that community banks pose compared to large, complex 
financial institutions.
    Finally, we cannot afford to succumb to complacency now as the 
financial markets and economy slowly continue to recover. Efforts to 
repeal the Dodd-Frank Act in whole or piecemeal or to starve regulators 
by underfunding them will hamper growth, allow uncertainty to fester, 
and be corrosive to the strength and stability of our financial system. 
The progress we have made so far is because of the reforms that we are 
putting in place, not in spite of them. Completion of these reforms 
provides the best path to building a sounder foundation for continued 
economic growth and prosperity.
                                 ______
                                 
                PREPARED STATEMENT OF DANIEL K. TARULLO
       Governor, Board of Governors of the Federal Reserve System
                           February 14, 2013

    Chairman Johnson, Ranking Member Crapo, and other Members of the 
Committee, thank you for the opportunity to testify on implementation 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 (Dodd-Frank Act). In today's testimony, I will provide an update 
on the Federal Reserve's recent activities pertinent to the Dodd-Frank 
Act and describe our regulatory and supervisory priorities for 2013.
    The Federal Reserve, in many cases jointly with other regulatory 
agencies, has made steady and considerable progress in implementing the 
Congressional mandates in the Dodd-Frank Act, though obviously some 
work remains. Throughout this effort, the Federal Reserve has 
maintained a focus on financial stability. In the process of rule 
development, we have placed particular emphasis on mitigating systemic 
risks. Thus, among other things, we have proposed varying the 
application of the Dodd-Frank Act's special prudential rules based on 
the relative size and complexity of regulated financial firms. This 
focus on systemic risk is also reflected in our increasingly systematic 
supervision of the largest banking firms.

Recent Regulatory Reform Milestones
    Strong bank capital requirements, while not alone sufficient to 
guarantee the safety and soundness of our banking system, are central 
to promoting the resiliency of banking firms and the financial sector 
as a whole. Capital provides a cushion to absorb a firm's expected and 
unexpected losses, helping to ensure that those losses are borne by 
shareholders rather than taxpayers. The financial crisis revealed, 
however, that the regulatory capital requirements for banking firms 
were not sufficiently robust. It also confirmed that no single capital 
measure adequately captures a banking firm's risks of credit and 
trading losses. A good bit of progress has now been made in 
strengthening and updating traditional capital requirements, as well as 
devising some complementary measures for larger firms.
    As you know, in December 2010 the Basel Committee on Banking 
Supervision (Basel Committee) issued the Basel III package of reforms 
to its framework for minimum capital requirements, supplementing an 
earlier set of changes that increased requirements for important 
classes of traded assets. Last summer, the Federal Reserve, the Office 
of the Comptroller of the Currency (OCC), and the Federal Deposit 
Insurance Corporation (FDIC) issued for comment a set of proposals to 
implement the Basel III capital standards for all large, 
internationally active U.S. banking firms. In addition, the proposals 
would apply risk-based and leverage capital requirements to savings and 
loan holding companies for the first time. The proposals also would 
modernize and harmonize the existing regulatory capital standards for 
all U.S. banking firms, which have not been comprehensively updated 
since their introduction 25 years ago, and incorporate certain new 
legislative provisions, including elements of sections 171 and 939A of 
the Dodd-Frank Act.
    To help ensure that all U.S. banking firms maintain strong capital 
positions, the Basel III proposals would introduce a new common equity 
capital requirement, raise the existing tier 1 capital minimum 
requirement, implement a capital conservation buffer on top of the 
regulatory minimums, and introduce a more risk-sensitive standardized 
approach for calculating risk-weighted assets. Large, internationally 
active banking firms also would be subject to a supplementary leverage 
ratio and a countercyclical capital buffer and would face higher 
capital requirements for derivatives and certain other capital markets 
exposures they hold. Taken together, these proposals should materially 
reduce the probability of failure of U.S. banking firms--particularly 
the probability of failure of the largest, most complex U.S. banking 
firms.
    In October 2012, the Federal Reserve finalized rules implementing 
stress testing requirements under section 165 of the Dodd-Frank Act. 
Consistent with the statute, the rules require annual supervisory 
stress tests for bank holding companies with $50 billion or more in 
assets and any nonbank financial companies designated by the Financial 
Stability Oversight Council (Council). The rules also require company-
run stress tests for a broader set of regulated financial firms that 
have $10 billion or more in assets. The new Dodd-Frank Act supervisory 
stress test requirements are generally consistent with the stress tests 
that the Federal Reserve has been conducting on the largest U.S. bank 
holding companies since the Supervisory Capital Assessment Program in 
the spring of 2009. The stress tests allow supervisors to assess 
whether firms have enough capital to weather a severe economic downturn 
and contribute to the Federal Reserve's ability to make assessments of 
the resilience of the U.S. banking system under adverse economic 
scenarios. The stress tests are an integral part of our capital plan 
requirement, which provides a structured way to make horizontal 
evaluations of the capital planning abilities of large banking firms.
    The Federal Reserve also issued in December of last year a proposal 
to implement enhanced prudential standards and early remediation 
requirements for foreign banks under sections 165 and 166 of the Dodd-
Frank Act. The proposal is generally consistent with the set of 
standards previously proposed for large U.S. bank holding companies. 
The proposal generally would require foreign banks with a large U.S. 
presence to organize their U.S. subsidiaries under a single 
intermediate holding company that would serve as a platform for 
consistent supervision and regulation. The U.S. intermediate holding 
companies of foreign banks would be subject to the same risk-based 
capital and leverage requirements as U.S. bank holding companies. In 
addition, U.S. intermediate holding companies and the U.S. branches and 
agencies of foreign banks with a large U.S. presence would be required 
to meet liquidity requirements similar to those applicable to large 
U.S. bank holding companies. The proposals respond to fundamental 
changes in the scope and scale of foreign bank activities in the United 
States in the last 15 years. They would increase the resiliency and 
resolvability of the U.S. operations of foreign banks, help protect 
U.S. financial stability, and promote competitive equity for all large 
banking firms operating in the United States. The comment period for 
this proposal closes at the end of March.

Priorities for 2013
    The Federal Reserve's supervisory and regulatory program in 2013 
will concentrate on four tasks: (1) continuing key Dodd-Frank Act and 
Basel III regulatory implementation work; (2) further developing 
systematic supervision of large banking firms; (3) improving the 
resolvability of large banking firms; and (4) reducing systemic risk in 
the shadow banking system.

Carrying Forward the Key Dodd-Frank Act and Basel III Regulatory 
        Implementation Work
    Capital, Liquidity, and Other Prudential Requirements for Large 
Banking Firms. Given the centrality of strong capital standards, a top 
priority this year will be to update the bank regulatory capital 
framework with a final rule implementing Basel III and the updated 
rules for standardized risk-weighted capital requirements. The banking 
agencies have received more than 2,000 comments on the Basel III 
capital proposal. Many of the comments have been directed at certain 
features of the proposed rule considered especially troubling by 
community and smaller regional banks, such as the new standardized risk 
weights for mortgages and the treatment of unrealized gains and losses 
on certain debt securities. These criticisms underscore the difficulty 
in fashioning standardized requirements applicable to all banks that 
balance risk sensitivity with the need to avoid excessive complexity. 
Here, though, I think there is a widespread view that the proposed rule 
erred on the side of too much complexity. The three banking agencies 
are carefully considering these and all comments received on the 
proposal and hope to finalize the rulemaking this spring.
    The Federal Reserve also intends to work this year toward 
finalization of its proposals to implement the enhanced prudential 
standards and early remediation requirements for large banking firms 
under sections 165 and 166 of the Dodd-Frank Act. As part of this 
process, we intend to conduct shortly a quantitative impact study of 
the single-counterparty credit limits element of the proposal. Once 
finalized, these comprehensive standards will represent a core part of 
the new regulatory framework that mitigates risks posed by systemically 
important financial firms and offsets any benefits that these firms may 
gain from being perceived as ``too big to fail.''
    We also anticipate issuing notices of some important proposed 
rulemakings this year. The Federal Reserve will be working to propose a 
risk-based capital surcharge applicable to systemically important 
banking firms. This rulemaking will implement for U.S. firms the 
approach to a systemic surcharge developed by the Basel Committee, 
which varies in magnitude based on the measure of each firm's systemic 
footprint. Following the passage of the Dodd-Frank Act, which called 
for enhanced capital standards for systemically important firms, the 
Federal Reserve joined with some other key regulators from around the 
world in successfully urging the Basel Committee to adopt a requirement 
of this sort for all firms of global systemic importance.
    Another proposed rulemaking will cover implementation by the three 
Federal banking agencies of the recently completed Basel III 
quantitative liquidity requirements for large global banks. The 
financial crisis exposed defects in the liquidity risk management of 
large financial firms, especially those which relied heavily on short-
term wholesale funding. These new requirements include the liquidity 
coverage ratio (LCR), which is designed to ensure that a firm has a 
sufficient amount of high quality liquid assets to withstand a severe 
standardized liquidity shock over a 30-day period. The Federal Reserve 
expects that the U.S. banking agencies will issue a proposal in 2013 to 
implement the LCR for large U.S. banking firms. The Basel III liquidity 
standards should materially improve the liquidity risk profiles of 
internationally active banks and will serve as a key element of the 
enhanced liquidity standards required under the Dodd-Frank Act.
    Volcker Rule, Swaps Push-out, and Risk Retention. Section 619 of 
the Dodd-Frank Act, known as the ``Volcker Rule,'' generally prohibits 
a banking entity from engaging in proprietary trading or acquiring an 
ownership interest in, sponsoring, or having certain relationships with 
a hedge fund or private equity fund. In October 2011, the Federal 
banking agencies and the Securities and Exchange Commission sought 
public comment on a proposal to implement the Volcker Rule. The 
Commodity Futures Trading Commission subsequently issued a 
substantially similar proposal. The rulemaking agencies have spent the 
past year carefully analyzing the nearly 19,000 public comments on the 
proposal and have made significant progress in crafting a final rule 
that is faithful to the language of the statute and maximizes bank 
safety and soundness and financial stability at the least cost to the 
liquidity of the financial markets, credit availability, and economic 
growth.
    Section 716 of the Dodd-Frank Act generally prohibits the provision 
of Federal assistance, such as FDIC deposit insurance or Federal 
Reserve discount window credit, to swap dealers and major swap 
participants. The Federal Reserve is currently working with the OCC and 
the FDIC to develop a proposed rule that would provide clarity on how 
and when the section 716 requirements would apply to U.S. insured 
depository institutions and their affiliates and to U.S. branches of 
foreign banks. We expect to issue guidance on the implementation of 
section 716 before the July 21, 2013, effective date of the provision.
    To implement the risk retention requirements in section 941 of the 
Dodd-Frank Act, the Federal Reserve, along with other Federal 
regulatory agencies, issued in March 2011 a proposal that generally 
would force securitization sponsors to retain at least 5 percent of the 
credit risk of the assets underlying a securitization. The agencies 
have reviewed the substantial volume of comments on the proposal and 
the definition of a qualified mortgage in the recent final ``ability-
to-pay'' rule of the Consumer Financial Protection Bureau (CFPB). As 
you know, the CFPB's definition of qualified mortgage serves as the 
floor for the definition of exempt qualified residential mortgages in 
the risk retention framework. The agencies are working closely together 
to determine next steps in the risk retention rulemaking process, with 
a view toward crafting a definition of a qualified residential mortgage 
that is consistent with the language and purposes of the statute and 
helps ensure a resilient market for private-label mortgage-backed 
securities.

Improving Systematic Supervision of Large Banking Firms
    Given the risks to financial stability exposed by the financial 
crisis, the Federal Reserve has reoriented its supervisory focus to 
look more broadly at systemic risks and has strengthened its 
microprudential supervision of large, complex banking firms. Within the 
Federal Reserve, the Large Institution Supervision Coordinating 
Committee (LISCC) was set up to centralize the supervision of large 
banking firms and to facilitate the execution of horizontal, cross-firm 
analysis of such firms on a consistent basis. The LISCC includes senior 
staff from various divisions of the Board and from the Reserve Banks. 
It fosters interdisciplinary coordination, using quantitative methods 
to evaluate each firm individually, relative to other large firms, and 
as part of the financial system as a whole.
    One major supervisory exercise conducted by the LISCC each year is 
a Comprehensive Capital Analysis and Review (CCAR) of the largest U.S. 
banking firms. \1\ Building on supervisory work coming out of the 
crisis, CCAR was established to ensure that each of the largest U.S. 
bank holding companies (1) has rigorous, forward-looking capital 
planning processes that effectively account for the unique risks of the 
firm and (2) maintains sufficient capital to continue operations 
throughout times of economic and financial stress. CCAR, which uses the 
annual stress test as a key input, enables the Federal Reserve to make 
a coordinated, horizontal assessment of the resilience and capital 
planning abilities of the largest banking firms and, in doing so, 
creates closer linkage between microprudential and macroprudential 
supervision. Large bank supervision at the Federal Reserve will include 
more of these systematic, horizontal exercises.
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     \1\ For more information, see, www.federalreserve.gov/bankinforeg/
ccar.htm.
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Improving the Resolvability of Large Banking Firms
    One important goal of postcrisis financial reform has been to 
counter too-big-to-fail perceptions by reducing the anticipated damage 
to the financial system and economy from the failure of a major 
financial firm. To this end, the Dodd-Frank Act created the Orderly 
Liquidation Authority (OLA), a mechanism designed to improve the 
prospects for an orderly resolution of a systemic financial firm, and 
required all large bank holding companies to develop, and submit to 
supervisors, resolution plans. Certain other countries that are home to 
large, globally active banking firms are working along roughly parallel 
lines. The Basel Committee and the Financial Stability Board have 
devoted considerable attention to the orderly resolution objective by 
developing new standards for statutory resolution frameworks, firm-
specific resolution planning, and cross-border cooperation. Although 
much work remains to be done by all countries, the Dodd-Frank Act 
reforms have generally put the United States ahead of its global peers 
on the resolution front.
    Since the passage of the Dodd-Frank Act, the FDIC has been 
developing a single-point-of-entry strategy for resolving systemic 
financial firms under the OLA. As explained by the FDIC, this strategy 
is intended to effect a creditor-funded holding company 
recapitalization of the failed financial firm, in which the critical 
operations of the firm continue, but shareholders and unsecured 
creditors absorb the losses, culpable management is removed, and 
taxpayers are protected. Key to the ability of the FDIC to execute this 
approach is the availability of sufficient amounts of unsecured long-
term debt to supplement equity in providing loss absorption in a failed 
firm. In consultation with the FDIC, the Federal Reserve is considering 
the merits of a regulatory requirement that the largest, most complex 
U.S. banking firms maintain a minimum amount of long-term unsecured 
debt. A minimum long-term debt requirement could lend greater 
confidence that the combination of equity owners and long-term debt 
holders would be sufficient to bear all losses at the consolidated 
firm, thereby counteracting the moral hazard associated with taxpayer 
bailouts while avoiding disorderly failures.

Reducing Systemic Risk in the Shadow Banking System
    Most of the reforms I have discussed are aimed at addressing 
systemic risk posed by regulated banking organizations, and all involve 
action the Federal Reserve can take under its current authorities. 
Important as these measures are, however, it is worth recalling that 
the trigger for the acute phase of the financial crisis was the rapid 
unwinding of large amounts of short-term funding that had been made 
available to firms not subject to consolidated prudential supervision. 
Today, although some of the most fragile investment vehicles and 
instruments that were involved in the precrisis shadow banking system 
have disappeared, nondeposit short-term funding remains significant. In 
some instances it involves prudentially regulated firms, directly or 
indirectly. In others it does not. The key condition of the so-called 
``shadow banking system'' that makes it of systemic concern is its 
susceptibility to destabilizing funding runs, something that is more 
likely when the recipients of the short-term funding are highly 
leveraged, engage in substantial maturity transformation, or both.
    Many of the key issues related to shadow banking and their 
potential solutions are still being debated domestically and 
internationally. U.S. and global regulators need to take a hard, 
comprehensive look at the systemic risks present in wholesale short-
term funding markets. Analysis of the appropriate ways to address these 
vulnerabilities continues as a priority this year for the Federal 
Reserve. In the short term, though, there are several key steps that 
should be taken with respect to shadow banking to improve the 
resilience of our financial system.
    First, the regulatory and public transparency of shadow banking 
markets, especially securities financing transactions, should be 
increased. Second, additional measures should be taken to reduce the 
risk of runs on money market mutual funds. The Council recently 
proposed a set of serious reform options to address the structural 
vulnerabilities in money market mutual funds.
    Third, we should continue to push the private sector to reduce the 
risks in the settlement process for triparty repurchase agreements. 
Although an industry-led task force made some progress on these issues, 
the Federal Reserve concluded that important problems were not likely 
to be successfully addressed in this process and has been using 
supervisory authority over the past year to press for further and 
faster action by the clearing banks and the dealer affiliates of bank 
holding companies. \2\ The amount of intraday credit being provided by 
the clearing banks in the triparty repo market has been reduced and is 
scheduled to be reduced much further in the coming years as a result of 
these efforts. But vulnerabilities in this market remain a concern, and 
addressing these vulnerabilities will require the cooperation of the 
broad array of participants in this market and their Federal 
regulators. The Federal Reserve will continue to report to Congress and 
publicly on progress made to address the risks in the triparty repo 
market.
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     \2\ For additional information, see, www.newyorkfed.org/banking/
tpr_infr_reform.html.
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    In addition to these concrete steps to address concrete problems, 
regulators must continue to closely monitor the shadow banking sector 
and be wary of signs that excessive leverage and maturity 
transformation are developing outside of the banking system.

Conclusion
    The financial regulatory architecture is stronger today than it was 
in the years leading up to the crisis, but considerable work remains to 
complete implementation of the Dodd-Frank Act and the postcrisis global 
financial reform program. Over the coming year, the Federal Reserve 
will be working with other U.S. financial regulatory agencies, and with 
foreign central banks and regulators, to propose and finalize a number 
of ongoing initiatives. In this endeavor, our goal is to preserve 
financial stability at the least cost to credit availability and 
economic growth. We are focused on the monitoring of emerging systemic 
risks, reducing the probability of failure of systemic financial firms, 
improving the resolvability of systemic financial firms, and building 
up buffers throughout the financial system to enable the system to 
absorb shocks.
    As we take this work forward, it is important to remember that 
preventing a financial crisis is not an end in itself. Financial crises 
are profoundly debilitating to the economic well-being of the Nation.
    Thank you for your attention. I would be pleased to answer any 
questions you might have.
                                 ______
                                 
               PREPARED STATEMENT OF MARTIN J. GRUENBERG
            Chairman, Federal Deposit Insurance Corporation
                           February 14, 2013

    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to testify today on the 
Federal Deposit Insurance Corporation's (FDIC) efforts to implement the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act).
    The economic dislocations experienced in recent years, which far 
exceeded any since the 1930s, were the direct result of the financial 
crisis of 2007-08. The reforms enacted by Congress in the Dodd-Frank 
Act were aimed at addressing the causes of the crisis. The reforms 
included changes to the FDIC's deposit insurance program, a series of 
measures to curb excessive risk-taking at large, complex banks and 
nonbank financial companies and a mechanism for orderly resolution of 
large, nonbank financial companies.
    The regulatory changes mandated by the Dodd-Frank Act require 
careful implementation to ensure they address the risks posed by the 
largest, most complex institutions while being sensitive to the impact 
on community banks that did not contribute significantly to the crisis. 
As implementation moves forward, the FDIC has been engaged as well in 
an extensive effort to better understand the forces driving long-term 
change among U.S. community banks and to solicit input from community 
bankers on these trends and on the regulatory process.
    My testimony will address the impact of the Dodd-Frank Act on the 
restoration of the Deposit Insurance Fund (DIF), our efforts to carry 
out the requirement of the Act to develop the ability to resolve large, 
systemic financial institutions, and our progress on some of the key 
rulemakings. In addition, I will briefly discuss the results of our 
recent community banking initiative.

Condition of the FDIC Deposit Insurance Fund (DIF)
Restoring the DIF
    The Dodd-Frank Act raised the minimum reserve ratio for the DIF 
from 1.15 percent of estimated insured deposits to 1.35 percent, and 
required that the reserve ratio reach 1.35 percent by September 30, 
2020. The FDIC is currently operating under a DIF Restoration Plan that 
is designed to meet this deadline, and the DIF reserve ratio is 
recovering at a pace that remains on track under the Plan. As of 
September 30, 2012, the DIF reserve ratio stood at 0.35 percent of 
estimated insured deposits, up from 0.12 percent a year earlier. The 
fund balance has grown for 11 consecutive quarters, increasing to $25.2 
billion at the end of the third quarter of 2012. Assessment revenue, 
fewer anticipated bank failures, and the transfer of fees previously 
set aside for the Temporary Liquidity Guarantee Program (TLGP) have 
helped to increase the fund balance.

Expiration of the Transaction Account Guarantee (TAG) Program
    The Dodd-Frank Act provided temporary unlimited deposit insurance 
coverage for non- interest-bearing transaction accounts from December 
31, 2010, through December 31, 2012. This unlimited coverage was 
available to all depositors, including consumers, businesses, and 
Government entities, as long as the accounts were truly non- interest 
bearing. As the TAG came to a conclusion, the FDIC worked closely with 
banks to ensure that they would continue to be able to meet their 
funding and liquidity needs after expiration of the program. Thus far, 
the transition away from this emergency program has proceeded smoothly.

Expiration of the Debt Guarantee Program
    Although not established by the Dodd-Frank Act, another program 
created in response to the crisis, the Debt Guarantee Program (DGP), 
was established under emergency authority to provide an FDIC guarantee 
of certain newly issued senior unsecured debt. The program enabled 
financial institutions to meet their financing needs during a period of 
record high credit spreads and aided the successful return of the 
credit markets to near normalcy, despite the recession and slow 
economic recovery. By providing the ability to issue debt guaranteed by 
the FDIC, the DGP allowed institutions to extend maturities and obtain 
more stable unsecured funding.
    As with the Dodd-Frank TAG program, the DGP came to a close at the 
end of 2012. One hundred twenty-two banks and other financial companies 
participated in the DGP, and the volume of guaranteed debt peaked in 
early 2009 at $345.8 billion. The FDIC collected $10.4 billion in fees 
and surcharges under the program. Ultimately, over $9.3 billion in fees 
collected under the DGP have been transferred to assist in the 
restoration of the DIF to its statutorily mandated reserve ratio of 
1.35 percent of insured deposits.

Implementation of Title I ``Living Wills''
    In 2011, the FDIC and the Federal Reserve Board (FRB) jointly 
issued the basic rulemaking regarding resolution plans that 
systemically important financial institutions (SIFIs) are required to 
prepare--the so-called ``living wills.'' The rule requires bank holding 
companies with total consolidated assets of $50 billion or more, and 
certain nonbank financial companies that the Financial Stability 
Oversight Council (FSOC) designates as systemic, to develop, maintain 
and periodically submit to the FDIC and the FRB resolution plans that 
are credible and that would enable these entities to be resolved under 
the Bankruptcy Code. Complementing this joint rulemaking, the FDIC also 
issued a rule requiring any FDIC-insured depository institution with 
assets over $50 billion to develop, maintain and periodically submit 
plans outlining how the FDIC could resolve the institution using the 
traditional resolution powers under the Federal Deposit Insurance Act.
    The two resolution plan rulemakings are designed to work in tandem 
by covering the full range of business lines, legal entities and 
capital-structure combinations within a large financial firm. The 
rulemakings establish a schedule for staggered annual filings. On July 
1, 2012, the first group of living wills, generally involving bank 
holding companies and foreign banking organizations with $250 billion 
or more in nonbank assets, was received. Banking organizations with 
less than $250 billion, but $100 billion or more, in assets will file 
by July 1 of this year, and all other banking organizations with assets 
over $50 billion will file by December 31.
    The Dodd-Frank Act requires that at the end of this process these 
plans be credible and facilitate an orderly resolution of these firms 
under the Bankruptcy Code. In 2013, the 11 firms that submitted initial 
plans in 2012 will be expected to refine and clarify their submissions. 
The agencies expect the refined plans to focus on key issues and 
obstacles to an orderly resolution in bankruptcy including global 
cooperation and the risk of ring-fencing or other precipitous actions. 
To assess this potential risk, the firms will need to provide detailed, 
jurisdiction-by-jurisdiction analyses of the actions each would need to 
take in a resolution, as well as the discretionary actions or 
forbearances required to be taken by host authorities. Other key issues 
include the continuity of critical operations, particularly maintaining 
access to shared services and payment and clearing systems, the 
potential systemic consequences of counterparty actions, and global 
liquidity and funding with an emphasis on providing a detailed 
understanding of the firm's funding operations and flows.

Implementation of Title II Orderly Liquidation Authority
Coordination With Foreign Resolution Authorities
    The FDIC has largely completed the rulemaking necessary to carry 
out its systemic resolution responsibilities under Title II of the 
Dodd-Frank Act. In July 2011, the FDIC Board approved a final rule 
implementing the Title II Orderly Liquidation Authority. This 
rulemaking addressed, among other things, the priority of claims and 
the treatment of similarly situated creditors.
    The experience of the financial crisis highlighted the importance 
of coordinating resolution strategies across national jurisdictions. 
Section 210 of the Dodd-Frank Act expressly requires the FDIC to 
``coordinate, to the maximum extent possible'' with appropriate foreign 
regulatory authorities in the event of the resolution of a covered 
financial company with cross-border operations. As we plan internally 
for such a resolution, the FDIC has continued to work on both 
multilateral and bilateral bases with our foreign counterparts in 
supervision and resolution. The aim is to promote cross-border 
cooperation and coordination associated with planning for an orderly 
resolution of a globally active, systemically important financial 
institution (G-SIFIs).
    As part of our bilateral efforts, the FDIC and the Bank of England, 
in conjunction with the prudential regulators in our jurisdictions, 
have been working to develop contingency plans for the failure of G-
SIFIs that have operations in both the U.S. and the U.K. Of the 28 G-
SIFIs designated by the Financial Stability Board of the G20 countries, 
4 are headquartered in the U.K., and another 8 are headquartered in the 
U.S. Moreover, around two-thirds of the reported foreign activities of 
the 8 U.S. SIFIs emanates from the U.K. \1\ The magnitude of these 
financial relationships makes the U.S.-U.K. bilateral relationship by 
far the most important with regard to global financial stability. As a 
result, our two countries have a strong mutual interest in ensuring 
that, if such an institution should fail, it can be resolved at no cost 
to taxpayers and without placing the financial system at risk. An 
indication of the close working relationship between the FDIC and U.K. 
authorities is the joint paper on resolution strategies that we 
released in December. \2\
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     \1\ Reported foreign activities encompass sum of assets, the 
notional value of off-balance-sheet derivatives, and other off-balance-
sheet items of foreign subsidiaries and branches.
     \2\ ``Resolving Globally Active, Systemically Important, Financial 
Institutions'', http://www.fdic.gov/about/srac/2012/gsifi.pdf.
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    In addition to the close working relationship with the U.K., the 
FDIC and the European Commission (E.C.) have agreed to establish a 
joint Working Group comprised of senior staff to discuss resolution and 
deposit guarantee issues common to our respective jurisdictions. The 
Working Group will convene twice a year, once in Washington, once in 
Brussels, with less formal communications continuing in between. The 
first of these meetings will take place later this month. We expect 
that these meetings will enhance close coordination on resolution 
related matters between the FDIC and the E.C., as well as European 
Union Member States.
    While there is clearly much more work to be done in coordinating 
SIFI resolution strategies across major jurisdictions, these 
developments mark significant progress in fulfilling the mandate of 
section 210 of the Dodd-Frank Act and achieving the type of 
international coordination that would be needed to effectively resolve 
a G-SIFI in some future crisis situation.

Stress Testing Final Rule
    Section 165(i) of the Dodd Frank Act requires the FRB to conduct 
annual stress tests of Bank Holding Companies with assets of $50 
billion or more and nonbank SIFIs designated by FSOC for FRB 
supervision. This section of the Act also requires financial 
institutions with assets greater than $10 billion, including insured 
depository institutions, to conduct company run stress tests in 
accordance with regulations developed by their primary Federal 
regulator. The FDIC views the stress tests as an important source of 
forward-looking analysis of institutions' risk exposures that will 
enhance the supervisory process for these institutions. We also have 
clarified that these requirements apply only to institutions with 
assets greater than $10 billion, and not to smaller institutions.
    The FDIC issued a proposed rule to implement the requirements of 
section 165(i) in January 2012, and a final rule in October 2012. The 
rule, which is substantially similar to rules issued by the Office of 
the Comptroller of the Currency (OCC) and the FRB, tailors the 
timelines and requirements of the stress testing process to the size of 
the institutions, as requested by commenters on the proposed rule.
    The agencies are closely coordinating their efforts in the 
promulgation of scenarios and the review of stress testing results. The 
first round of stress tests, for certain insured institutions and Bank 
Holding Companies with assets of $50 billion or more, is underway. 
Institutions were asked to develop financial projections under defined 
stress scenarios provided by the agencies in November 2012, based on 
their September 30, 2012, financial data. Institutions with assets 
greater than $10 billion, but less than $50 billion, and larger 
institutions that have not had previous experience with stress testing, 
will conduct their first round of stress tests this fall.

Other Dodd-Frank Act Rulemakings
The Volcker Rule
    The Dodd-Frank Act requires the Securities and Exchange Commission 
(SEC), the Commodities Futures Trading Commission (CFTC), and the 
Federal banking agencies to adopt regulations generally prohibiting 
proprietary trading and certain acquisitions of interest in hedge funds 
or private equity funds. The FDIC, jointly with the FRB, OCC, and SEC, 
published a notice of proposed rulemaking (NPR) requesting public 
comment on a proposed regulation implementing the prohibition against 
proprietary trading. The CFTC separately approved the issuance of its 
NPR to implement the Volcker Rule, with a substantially identical 
proposed rule text.
    The proposed rule also requires banking entities with significant 
covered trading activities to furnish periodic reports with 
quantitative measurements designed to help differentiate permitted 
market-making-related activities from prohibited proprietary trading. 
Under the proposed rule, these requirements contain important 
exclusions for banking organizations with trading assets and 
liabilities less than $1 billion, and reduced reporting requirements 
for organizations with trading assets and liabilities of less than $5 
billion. These thresholds are designed to reduce the burden on smaller, 
less complex banking entities, which generally engage in limited 
market-making and other trading activities.
    The agencies are evaluating a large body of comments on whether the 
proposed rule represents a balanced and effective approach or whether 
alternative approaches exist that would provide greater benefits or 
implement the statutory requirements with fewer costs. The FDIC is 
committed to developing a final rule that meets the objectives of the 
statute while preserving the ability of banking entities to perform 
important underwriting and market-making functions, including the 
ability to effectively carry out these functions in less-liquid 
markets. Most community banks do not engage in trading activities that 
would be subject to the proposed rule.

Appraisal-Related Provisions
    The final rule regarding appraisals for higher-risk mortgages, 
which implements section 1471 of the Dodd-Frank Act, was adopted by the 
FDIC and five other agencies earlier this year. \3\ The final rule, 
which will become effective on January 18, 2014, requires creditors 
making higher-risk mortgages to use a licensed or certified appraiser 
who prepares a written appraisal report based on a physical visit of 
the interior of the property. The rule also requires creditors to 
disclose to applicants information about the purpose of the appraisal 
and provide consumers with a free copy of any appraisal report. 
Finally, if the seller acquired the property for a lower price during 
the prior 6 months and the price difference exceeds certain thresholds, 
creditors will have to obtain a second appraisal at no cost to the 
consumer. This requirement is intended to address fraudulent property 
flipping by seeking to ensure that the value of the property 
legitimately increased. Certain types of loans are exempted from the 
rule, such as qualified mortgages, and there are limited exemptions 
from the second appraisal requirement. By ensuring that homes secured 
by higher-risk mortgages are appraised at their true market value by a 
qualified appraiser, the rule will benefit both lenders and consumers.
---------------------------------------------------------------------------
     \3\ The other agencies are: the FRB, the Consumer Financial 
Protection Bureau, the Federal Housing Finance Agency, the National 
Credit Union Administration, and the OCC.
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    The agencies also are developing notices of proposed rulemaking to 
address other appraisal-related provisions of the Dodd-Frank Act. These 
provisions include registration and operating requirements for 
appraisal management companies and quality controls for automated 
valuation models. We look forward to considering the public comments we 
receive on these proposals.

Rulemaking on Risk Retention in Mortgage Securitization
    Six agencies, \4\ including the FDIC, previously issued a joint 
notice of proposed rulemaking seeking comment on a proposal to 
implement section 941 of the Dodd-Frank Act. The proposed rule would 
require sponsors of asset-backed securities to retain at least 5 
percent of the credit risk of the assets underlying the securities and 
not permit sponsors to transfer or hedge that credit risk. The proposed 
rule would provide sponsors with various options for meeting the risk-
retention requirements. It also provides, as required by section 941, 
proposed standards for a Qualified Residential Mortgage (QRM) which, if 
met, would result in exemption from the risk retention requirement.
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     \4\ The rule was proposed by the FRB, the OCC, the FDIC, the SEC, 
the Federal Housing Finance Agency, and the Department of Housing and 
Urban Development.
---------------------------------------------------------------------------
    The interagency staff group addressing the credit risk retention 
rule under section 941 of DFA has been working to address the numerous 
issues raised by the many comments received on the proposed rule. After 
initial discussions about QRM, in view of the fact that the statute 
provides that the definition of QRM can be no broader than the 
definition of QM, staff turned its attention to the non-QRM issues 
pending issuance by the Consumer Financial Protection Bureau (CFPB) of 
its QM rule. With the recent issuance of the QM rule by the CFPB, the 
interagency group plans to turn its attention back to issues regarding 
QRM.

Community Banking Initiatives
    In light of concerns raised about the future of community banking 
in the aftermath of the financial crisis, as well as the potential 
impact of the various rulemakings under the Dodd-Frank Act, the FDIC 
engaged in a series of initiatives during 2012 focusing on the 
challenges and opportunities facing community banks in the United 
States.

FDIC Community Banking Study
    In December 2012, the FDIC released the FDIC Community Banking 
Study, a comprehensive review of the U.S. community banking sector 
covering 27 years of data. The study set out to explore some of the 
important trends that have shaped the operating environment for 
community banks over this period, including: long-term industry 
consolidation; the geographic footprint of community banks; their 
comparative financial performance overall and by lending specialty 
group; efficiency and economies of scale; and access to capital. This 
research was based on a new definition of community bank that goes 
beyond size, and also accounts for the types of lending and deposit 
gathering activities and limited geographic scope that are 
characteristic of community banks.
    Our research confirms the crucial role that community banks play in 
the American financial system. As defined by the Study, community banks 
represented 95 percent of all U.S. banking organizations in 2011. These 
institutions account for just 14 percent of the U.S. banking assets in 
our Nation, but hold 46 percent of all the small loans to businesses 
and farms made by FDIC-insured institutions. While their share of total 
deposits has declined over time, community banks still hold the 
majority of bank deposits in rural and micropolitan counties. \5\ The 
Study showed that in 629 U.S. counties (or almost one-fifth of all U.S. 
counties), the only banking offices operated by FDIC-insured 
institutions at year-end 2011 were those operated by community banks. 
Without community banks, many rural areas, small towns, and even 
certain urban neighborhoods, would have little or no physical access to 
mainstream banking services.
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     \5\ The 3,238 U.S. counties in 2010 included 694 micropolitan 
counties centered on an urban core with population between 10,000 and 
50,000 people, and 1,376 rural counties with populations less than 
10,000 people.
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    Our Study took an in-depth look at the long-term trend of banking 
industry consolidation that has reduced the number of federally insured 
banks and thrifts from 17,901 in 1984 to 7,357 in 2011. All of this net 
consolidation can be accounted for by an even larger decline in the 
number of institutions with assets less than $100 million. But a closer 
look casts significant doubt on the notion that future consolidation 
will continue at this same pace, or that the community banking model is 
in any way obsolete.
    More than 2,500 institutions have failed since 1984, with the vast 
majority failing in the crisis periods of the 1980s and early 1990s and 
the period since 2007. To the extent that future crises can be avoided 
or mitigated, bank failures should contribute much less to future 
consolidation. In addition, about one third of the consolidation that 
has taken place since 1984 is the result of charter consolidation 
within bank holding companies, while just under half is the result of 
voluntary mergers. But both of these trends were greatly facilitated by 
the gradual relaxation of restrictions on intrastate branching at the 
State level in the 1980s and early 1990s, as well as the interstate 
branching that came about following enactment of the Riegle-Neal 
Interstate Banking and Branching Efficiency Act of 1994. The pace of 
voluntary consolidation has indeed slowed over the past 15 years as the 
effects of these one-time changes were realized. Finally, the Study 
questions whether the rapid precrisis growth of some of the Nation's 
largest banks, which came about largely due to mergers and acquisitions 
and a focus on retail lending, can continue at the same pace going 
forward. Some of the precrisis cost savings realized by large banks 
have proven to be unsustainable in the postcrisis period, and a return 
to precrisis rates of growth in consumer and mortgage lending appears, 
for now anyway, to be a questionable assumption.
    The Study finds that community banks that grew slowly and 
maintained diversified portfolios or otherwise stuck to their core 
lending competencies during the study period exhibited relatively 
strong and stable performance over time. Other institutions that 
pursued higher-growth strategies--frequently through commercial real 
estate or construction and development lending--encountered severe 
problems during real estate downturns and generally underperformed over 
the long run. Moreover, the Study finds that economies of scale play a 
limited role in the viability of community banks. While average costs 
are found to be higher for very small community banks, economies of 
scale are largely realized by the time an institution reaches $100 
million in size, and there is no indication of any significant cost 
savings beyond $500 million in size. These results comport well with 
the experience of banking industry consolidation since 1984, in which 
the number of bank and thrift charters with assets less than $25 
million has declined by 96 percent, while the number of charters with 
assets between $100 million and $10 billion has grown by 19 percent.
    In summary, the FDIC Study finds that despite the challenges of the 
current operating environment, the community banking sector remains a 
viable and vital component of the overall U.S. financial system. It 
identifies a number of issues for future research, including the role 
of commercial real estate lending at community banks, their use of new 
technologies, and how additional information might be obtained on 
regulatory compliance costs.

Examination and Rulemaking Review
    The FDIC also reviewed examination, rulemaking, and guidance 
processes during 2012 with a goal of identifying ways to make the 
supervisory process more efficient, consistent, and transparent--
especially with regard to community banks--consistent with safe and 
sound banking practices. This review was informed by a series of 
nationwide roundtable discussions with community bankers, and with the 
FDIC's Advisory Committee on Community Banking.
    Based on concerns raised, the FDIC has implemented a number of 
enhancements to our supervisory and rulemaking processes. First, the 
FDIC has revamped the preexam process to better scope examinations, 
define expectations and improve efficiency. Second, the FDIC is taking 
steps to improve communication by using Web-based tools to provide 
critical information regarding new or changing rules and regulations as 
well as comment deadlines. Finally, the FDIC has instituted a number of 
outreach and technical assistance efforts, including increased direct 
communication between examinations, increased opportunities for 
attendance at training workshops and symposiums, and current and 
planned conference calls and training videos on complex subjects of 
interest. The FDIC considers its review of examination and rulemaking 
processes ongoing, and additional enhancements and modifications to our 
processes will likely continue.

Conclusion
    Successful implementation of the various provisions of the Dodd-
Frank Act will provide a foundation for a financial system that is more 
stable and less susceptible to crises, and a regulatory system that is 
better able to respond to future crises. Significant progress has been 
made in implementing these reforms. The FDIC has completed the core 
rulemakings for carrying out its lead responsibilities under the Act 
regarding deposit insurance and systemic resolution. As we move forward 
in completing this process, we will continue to rely on constructive 
input from the regulatory comment process and our other outreach 
initiatives.
                                 ______
                                 
                 PREPARED STATEMENT OF THOMAS J. CURRY
         Comptroller, Office of the Comptroller of the Currency
                           February 14, 2013

    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to report on the Office of the 
Comptroller of the Currency's (OCC) progress in implementing the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or 
Act).* Before providing that progress report, however, I would like to 
begin with a brief review of current conditions in the portions of the 
banking industry that the OCC supervises.
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     * Statement Required by 12 U.S.C. 250: The views expressed herein 
are those of the Office of the Comptroller of the Currency and do not 
necessarily represent the views of the President.
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    The OCC supervises more than 1,800 national banks and Federal 
savings associations, constituting approximately 26 percent of all 
federally insured banks and savings associations which, together, hold 
more than 69 percent of all commercial bank and thrift assets. These 
institutions range in size from over 1,600 community banks with assets 
of $1 billion or less to the Nation's largest and most complex 
financial institutions with assets exceeding $1 trillion. I am pleased 
to report that the institutions we supervise have made significant 
strides since the financial crisis in repairing their balance sheets 
through stronger capital, improved liquidity, and timely recognition 
and resolution of problem loans. For national banks and Federal savings 
associations, Tier 1 common equity is at 12.5 percent of risk-weighted 
assets, up from its low of just over 9 percent in the fall of 2008. \1\ 
The current capital leverage ratio is now about 9 percent, which is up 
almost a third from its recent low. Reliance on volatile funding 
sources has dropped from its fall 2006 peak of 46 percent of total 
liabilities to 24 percent today. Asset quality indicators are improving 
with charge-off rates declining for all major loan categories. Indeed, 
for all but residential mortgages, charge-off rates have now dropped 
below their post-1990 averages. Reflecting these positive trends, the 
number of problem institutions on the Federal Deposit Insurance 
Corporation's (FDIC) problem bank list has dropped from 888 in March 
2011 to 694 in September 2012. Problem national banks and Federal 
savings associations dropped from 192 in March 2011 to 165 in September 
2012. There were 146 problem national banks and Federal savings 
associations in January 2013.
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     \1\ Performance and financial data are based on September 30, 
2012, Call Report information.
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    While these are encouraging developments, banks and thrifts 
continue to face significant challenges. Net interest margins are being 
squeezed for both large and small banks. This problem is especially 
acute for banks under $1 billion in asset size--a group that represents 
90 percent of the institutions we supervise--whose margins are near 
their 20-year low point. Loan growth, while improved, is still only 
about one-half its historical average pace. We are monitoring these 
conditions closely and are stressing that, in this environment, 
institutions should be especially vigilant about monitoring the risks 
they are taking on. This is certainly not the time to let up on risk 
management.
    We are also mindful that we cannot let the progress that has been 
made lessen our sense of urgency in addressing the weaknesses and flaws 
the crisis revealed in our financial system. The global financial 
crisis was unprecedented in severity and duration, and the depth of the 
associated recession was the most severe we have experienced in the 
U.S. since the Great Depression of the 1930s. These financial and 
economic developments led to a reconsideration of the ways financial 
markets and financial firms operate and gave impetus to efforts to 
reform the financial system and its oversight. The Dodd-Frank Act 
addresses major gaps and flaws in the regulatory landscape, tackles 
systemic issues that contributed to, or accentuated and amplified, the 
effects of the recent financial crisis, and built a stronger financial 
system. The Act requires the Federal regulators to put in place new 
buffers and safeguards to protect against future financial crises and 
to revise and rewrite many of the rules governing the most complex 
areas of finance. Additionally, it consolidates authority that had been 
spread among multiple agencies, and it provides the Federal regulators 
a number of new tools that should help us avoid problems in the future.
    The OCC is committed to fully implementing those provisions where 
we have sole rule-writing authority as expeditiously as possible, and 
to working cooperatively with our regulatory colleagues on those rules 
and provisions that require coordinated or joint action. As I testified 
before this Committee in June, I am keenly aware of the critical role 
that community banks play in providing consumers and small businesses 
in communities across the Nation with essential financial services and 
access to credit. As we move forward with Dodd-Frank Act 
implementation, I have directed my staff to look for ways to minimize 
potential burden on community institutions, and to organize and explain 
our rulemaking documents to facilitate community bankers' understanding 
of how the rules affect their institutions.
    In response to the Committee's letter of invitation, my testimony 
will focus on the OCC's overall implementation of the Dodd-Frank Act by 
providing an update on key provisions of the Act where the OCC has 
direct rulemaking or other implementation responsibilities.

OCC/OTS Integration
General
    One of the most significant of the OCC's milestones in implementing 
the Dodd-Frank Act has been the successful integration of former Office 
of Thrift Supervision (OTS) employees and the supervision of Federal 
savings associations into the OCC. The commitment of all involved 
resulted in a smooth transition, reflecting a merger of experience with 
a strong vision for the future. This combination was helped by the 
close relationship forged over the years through our work on common 
problems and issues. In this spirit of continuity, the OCC has renewed 
the charters of two advisory committees that the OTS established. I 
recently attended the first meeting of the Mutual Savings Associations 
Advisory Committee, where participants engaged in a robust discussion 
about the challenges that mutual savings associations confront. At next 
month's Minority Depository Institutions Advisory Committee meeting, I 
look forward to a productive exchange about the issues that minority-
owned depository institutions are facing.

Integration of Regulations
    As we have reported previously to the Committee, the OCC also is 
engaged in a comprehensive effort to integrate the rules applicable to 
Federal savings associations with those that apply to national banks. 
Our objectives are, first, to develop a single rulebook applicable to 
both national banks and Federal savings associations (except where 
statutory differences between the two charter types require otherwise); 
and, second, for both charter types, to identify and eliminate 
regulatory requirements that are unnecessarily burdensome.
    As I have noted before, while we believe a single set of rules will 
benefit both national banks and Federal savings associations, we 
recognize that change can create uncertainty. We are aiming to begin 
proposing these integrated rules over the course of this year. As part 
of our proposals, we will be seeking comments on ways that we can make 
our rules easier to implement and reduce burden, and I look forward to 
receiving comments from interested parties on this important issue.

Completed Rulemakings
Final Rule To Revise OCC Regulations To Remove References to Credit 
        Ratings
    On June 13, 2012, the OCC published in the Federal Register a final 
rule to implement section 939A of the Dodd-Frank Act by removing 
references to credit ratings from the OCC's noncapital regulations, 
including the OCC's investment securities regulation, which sets forth 
the types of investment securities that national banks and Federal 
savings associations may purchase, sell, deal in, underwrite, and hold. 
\2\ These revisions became effective on January 1, 2013.
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     \2\ The Federal banking agencies' June 2012 proposed capital 
rulemakings include provisions to remove references to credit ratings 
from the agencies' capital regulations.
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    Under prior OCC rules, permissible investment securities generally 
included Treasury securities, agency securities, municipal bonds, and 
other securities rated ``investment grade'' by nationally recognized 
statistical rating organizations such as Moody's, S&P, or Fitch 
Ratings. The OCC's final rule revised the definition of ``investment 
grade'' to remove the reference to credit ratings and replaced it with 
a new nonratings based creditworthiness standard. To determine that a 
security is ``investment grade'' under the new standard, a bank must 
perform due diligence necessary to establish: (1) that the risk of 
default by the obligor is low; and (2) that full and timely repayment 
of principal and interest is expected. Generally, securities with good 
to very strong credit quality will meet this standard.
    In comments on the proposed rule, banks and industry groups 
expressed concern about the amount of due diligence the OCC will 
require a bank to conduct to determine whether the issuer of a security 
has an adequate capacity to meet financial commitments under the 
security. The OCC believes that the due diligence required to meet the 
new standard is consistent with our prior due diligence requirements 
and guidance. Under the prior ratings-based standards, national banks 
and Federal savings associations of all sizes should not have relied 
solely on credit ratings to evaluate the credit risk of a security, and 
were advised to supplement any use of credit ratings with additional 
diligence to independently assess the credit risk of a particular 
security. Nevertheless, the OCC recognized that some national banks and 
Federal savings associations needed time to make the adjustments 
necessary to make ``investment grade'' determinations under the new 
standard. Therefore, the OCC allowed institutions nearly 6 months to 
come into compliance with the final rule.
    To aid this adjustment process, the OCC also published guidance to 
assist banks in interpreting the new standard and to clarify the steps 
banks can take to demonstrate that they meet their diligence 
requirements when purchasing investment securities and conducting 
ongoing reviews of their investment portfolios.

Final Rule on Dodd-Frank Stress Tests
    On October 9, 2012, the OCC published a final rule that implements 
section 165(i)(2) of the Dodd-Frank Act and requires certain companies 
to conduct annual stress tests pursuant to regulations prescribed by 
their respective primary financial regulator. Specifically, this rule 
requires national banks and Federal savings associations with total 
consolidated assets over $10 billion (covered institutions) to conduct 
an annual stress test as prescribed by the rule.
    Consistent with the requirements of section 165(i)(2), the final 
rule defines ``stress test,'' establishes methods for the conduct of 
the company-run stress test that must include at least three different 
scenarios (baseline, adverse, and severely adverse), establishes the 
form and content of reporting, and compels the covered institutions to 
publish a summary of the results of the stress tests. Commenters on the 
proposal expressed concern that developing robust procedures for stress 
testing might require more time at some banks, particularly those that 
had not participated in the Supervisory Capital Assessment Program or 
Comprehensive Capital Analysis and Review program. Therefore, the final 
rule provided that covered institutions with assets over $50 billion 
were required to start stress testing under the rule in 2012, while 
covered institutions with assets from $10 to $50 billion are not 
required to start stress testing until 2013. The final rules of the 
Board of Governors of the Federal Reserve System (FRB) and the FDIC 
adopted similar transition provisions.
    The requirements for these company-run stress tests are separate 
and distinct from the supervisory stress tests required under section 
165(i)(1) that are conducted by the FRB. Nevertheless, we believe these 
efforts are complementary and as a result we are committed to working 
closely with the FRB and the FDIC in coordinating the timing of, and 
the scenarios for, these tests.
    The company-run stress tests under this rule began with the release 
of stress scenarios by the OCC and other regulators on November 15, 
2012, with scenarios covering baseline, adverse, and severely adverse 
conditions as required under the rule. The rule required covered 
institutions with more than $50 billion in assets to report the results 
of the stress tests to the OCC and the FRB by January 5, 2013. The OCC 
is in the process of reviewing those results. Covered institutions are 
required to disclose a summary of the results in March of this year.

Interim Final Rule on Lending Limits
    The OCC also recently completed a rulemaking to implement Dodd-
Frank Act changes to the lending limit rules. Under the National Bank 
Act, the total loans and extensions of credit by a national bank to a 
person outstanding at one time may not exceed 15 percent of the 
unimpaired capital and unimpaired surplus of the bank if the loan is 
not fully secured plus an additional 10 percent of unimpaired capital 
and unimpaired surplus if the loan is fully secured. The Home Owners' 
Loan Act applies this lending limits rule to savings associations, with 
some exceptions.
    Section 610 of the Dodd-Frank Act amended the definition of ``loans 
and extensions of credit'' to include any credit exposure to a person 
arising from a derivative transaction, or a repurchase agreement, 
reverse repurchase agreement, securities lending transaction, or 
securities borrowing transaction (securities financing transaction) 
between a national bank and that person. This new definition also 
applies to savings associations. This amendment was effective July 21, 
2012.
    On June 21, 2012, the OCC issued an interim final rule and request 
for comments that amended the OCC's lending limits regulation to 
implement section 610 of the Dodd-Frank Act and to provide guidance on 
how to measure the fluctuating credit exposure of derivatives and 
securities financing transactions for purposes of the lending limit. 
This interim rule also consolidated the OCC's lending limits rules 
applicable to national banks and savings associations. Specifically, 
the interim final rule provides national banks and savings associations 
with three methods for calculating the credit exposure of derivative 
transactions other than credit derivatives, and two methods for 
calculating such exposure for securities financing transactions. These 
methods vary in complexity and permit institutions to adopt compliance 
alternatives that fit their size and risk management requirements, 
consistent with safety and soundness and the goals of the statute. 
Providing these options is intended to reduce regulatory burden, 
particularly for smaller and midsize banks and savings associations. To 
permit institutions the time necessary to conform their operations to 
the amendments implementing section 610, the OCC has provided a 
temporary exception from the lending limit rules for extensions of 
credit arising from derivative transactions or securities financing 
transactions until July 1, 2013. The OCC expects to publish a final 
rule that amends and finalizes this interim rule in the near future.

Final Rule on Appraisals for Higher Priced Mortgage Loans
    In the years leading up to the financial crisis, several 
consecutive periods of rapid increases in home prices put increasing 
pressure on the Nation's infrastructure for determining the value of 
properties in connection with underwriting mortgages. The Dodd-Frank 
Act reflects congressional concern about appraiser independence, 
appraisal management companies, and alternative property valuation 
techniques, and adopts several reform measures on these and related 
topics. Section 1471 of the Dodd-Frank Act, in particular, focuses on 
property valuation in connection with so-called ``higher priced 
mortgage loans,'' (HPMLs) which are consumer mortgages made at interest 
rates that are typically indicative of subprime credit status of the 
borrower.
    Section 1471 amended the Truth in Lending Act to require the OCC, 
along with the other Federal banking agencies, the Bureau of Consumer 
Financial Protection (CFPB), and the Federal Housing Finance Agency 
(FHFA), to issue regulations implementing three main requirements for 
HPML home valuations. First, a creditor is prohibited from extending an 
HPML to any consumer without first obtaining a full written appraisal 
performed by a certified or licensed appraiser who conducts a physical 
property visit of the interior of the property. Second, the creditor 
must obtain an additional written appraisal from a different certified 
or licensed appraiser if the HPML finances the purchase or acquisition 
of a ``flipped'' property--that is, a property being bought from a 
seller at a higher price than the seller paid, within 180 days of the 
seller's purchase or acquisition. The creditor may not charge the 
consumer for this additional appraisal. Third, the creditor must also 
provide the applicant with disclosures at the time of the initial 
mortgage application about the purpose of the appraisal, and must give 
the borrower a copy of each appraisal at least three days prior to the 
transaction closing date.
    The agencies issued a joint final rule to implement section 1471 on 
January 18, 2013. Creditors have 1 year to come into compliance with 
the new rule's requirements. Consistent with the statute, the final 
rule exempts all HPMLs that meet the CFPB's definition of a ``qualified 
mortgage'' (QM) under the CFPB's ``ability to repay'' mortgage rules. 
The CFPB has indicated that this QM exemption will cover a significant 
portion of the current mortgage market. The agencies also incorporated 
exemptions from the second appraisal requirement for a number of 
different types of transactions, including sales in rural areas, and 
sales by servicemembers who receive deployment or change of station 
orders.
    The agencies also included two key provisions in the final rule to 
provide creditors with clear guidance on their obligations under the 
statute. First, the rule provides a specific set of standards the 
creditor can apply in determining whether the appraiser has submitted 
an appraisal report that meets the requirements of the statute for an 
appraisal prepared in accordance with the Uniform Standards of 
Appraisal Practice and the banking agencies' appraisal regulations 
pursuant to Title XI of the Financial Institutions Recovery, Reform, 
and Enforcement Act of 1989. Creditors applying these standards in 
connection with their review of each appraisal are afforded a safe 
harbor under the rule. Second, for HPMLs that are originated to fund 
the purchase of a dwelling, the rule provides numerous examples of the 
types of documents a creditor may rely upon in determining whether the 
seller is ``flipping'' the property within the meaning of the statute.

Final Rule on Retail Foreign Exchange Transactions
    On July 14, 2011, the OCC published in the Federal Register its 
final retail foreign exchange transactions rule (Retail Forex Rule) for 
national banks and Federal branches and agencies of foreign banks. The 
Retail Forex Rule imposes a variety of consumer protections--including 
margin requirements, required disclosures, and business conduct 
standards--on foreign exchange options, futures, and futures-like 
transactions with retail customers (persons that are not eligible 
contract participants under the Commodity Exchange Act). To promote 
regulatory comparability, the OCC worked closely with the Commodity 
Futures Trading Commission (CFTC), Securities Exchange Commission 
(SEC), FDIC, and FRB in developing the OCC Retail Forex Rule and 
modeled the OCC Retail Forex Rule on the CFTC's rule.
    After the transfer of regulatory authority from the OTS, the OCC 
updated its Retail Forex Rule to apply to Federal savings associations. 
This interim final rule with request for comments was published in the 
Federal Register on September 12, 2011. The OCC also proposed last 
October to update its Retail Forex Rule to incorporate the CFTC's and 
SEC's recent further definition of ``eligible contract participant'' 
and related guidance. The OCC is currently working to finalize that 
proposal.

Ongoing Dodd-Frank Act Rulemakings
    The OCC also is continuing to work closely with other Federal 
financial agencies on a number of important regulations to implement 
provisions of the Dodd-Frank Act where we have joint rulemaking 
responsibility. I am committed to completing these rulemakings as 
quickly as possible while recognizing the need to carefully consider 
and address the important issues that commenters have raised with the 
proposals.

Volcker Rule
    Section 619 of the Dodd-Frank Act added a new section 13 to the 
Bank Holding Company Act that contains certain prohibitions and 
limitations on the ability of a banking entity and a nonbank financial 
company supervised by the FRB to engage in proprietary trading and to 
have certain interests in, or relationships with, a hedge fund or 
private equity fund. The OCC, FDIC, FRB, and the SEC issued proposed 
rules implementing that section's requirements on October 11, 2011. On 
January 3, 2012, the period for filing public comments on this proposal 
was extended for an additional 30 days, until February 13, 2012. On 
January 11, 2012, the CFTC issued a substantively similar proposed rule 
implementing section 619 and invited public comment through April 16, 
2012. The agencies received more than 18,000 comments regarding the 
proposed implementing rules and are carefully considering these 
comments as they work toward development of final rules.
    Commenters, including members of Congress, representatives of 
Federal and State agencies, foreign Governments, domestic and foreign 
banking entities and industry trade associations, public interest 
groups, academics and private citizens, offered a wide range of 
perspectives on nearly every aspect of the proposed rule. Overall, 
commenters urged the agencies to simplify the final rule, to reduce 
compliance burdens for entities that do not engage in significant 
trading or covered fund activities, and to address unintended 
consequences of the proposed rule. Some commenters urged the agencies 
to adopt a final rule that would set forth fairly prescriptive 
standards and narrowly construed exemptions as they believed this would 
minimize potential loopholes and the possibility of evasion. Other 
commenters urged the agencies to adopt a more flexible, principles-
based approach in the final rule as they believed this would reduce 
burden and lessen possible unintended consequences.
    For example, an area that has drawn much attention from commenters 
is the proposed approach for distinguishing permissible market-making-
related activities from prohibited proprietary trading. Commenters 
expressed concern that the proposed rule could have an adverse impact 
on financial markets, investors, and customers that rely on such 
markets for liquidity. Other commenters advocated that the market-
making exemption should be narrowed. Commenters also highlighted issues 
with the proposed approach for implementing the prohibition on 
investing in and having certain relationships with a hedge fund and 
private equity funds, in particular with the manner in which the 
proposal defines what is a covered fund. Some commenters thought the 
proposed definition of covered fund was over-inclusive, while others 
felt it was under-inclusive. Finally, commenters addressed the 
international implications of the proposal, both in terms of 
competitiveness of U.S. banking entities and the extraterritorial 
impact of the proposal on activities of non-U.S. banking entities 
conducted solely outside of the United States.
    Section 619, by its terms, became effective on July 21, 2012. The 
FRB, in consultation with the other agencies, issued rules governing 
the period for conforming with Section 619 and in a statement issued on 
April 19, 2012, further clarified that covered entities have a period 
of 2 years after the statutory effective date, which would be until 
July 21, 2014, to fully conform their activities to the statutory 
provisions and any final rules adopted, unless the period is extended 
by the FRB. The OCC, FDIC, SEC, and the CFTC confirmed that they plan 
to administer their oversight of banking entities under their 
respective jurisdiction in accordance with the FRB's statement of April 
19.
    The OCC, together with the other agencies, continues to work 
diligently in reviewing the comments submitted during the rulemaking 
process and toward the development of final rules consistent with the 
statutory language. To ensure, to the extent possible, that the rules 
implementing section 619 are comparable and provide for consistent 
application, the OCC has been regularly consulting with the other 
agencies and will continue to do so.

Credit Risk Retention Rulemaking
    Securitization markets are an important source of credit to U.S. 
households, businesses, and State and local governments. When properly 
structured, securitization provides economic benefits that lower the 
cost of credit. However, when incentives are not properly aligned and 
there is a lack of discipline in the origination process, 
securitization can result in harm to investors, consumers, financial 
institutions, and the financial system. During the financial crisis, 
securitization displayed significant vulnerabilities, including 
informational asymmetries and incentive problems among various parties 
involved in the process. To address these concerns, section 941 of the 
Dodd-Frank Act requires the OCC, together with the other Federal 
banking agencies, as well as the Department of Housing and Urban 
Development, FHFA, and the SEC, to require sponsors of asset-backed 
securities to retain at least 5 percent of the credit risk of the 
assets they securitize. The purpose of this new regulatory regime is to 
correct adverse market incentive structures by giving securitizers 
direct financial disincentives against packaging loans that are 
underwritten poorly.
    Pursuant to this requirement, the agencies issued a joint proposed 
rulemaking in the Federal Register on April 29, 2011. The proposal 
includes a number of options by which securitization sponsors could 
satisfy the statute's central requirement to retain at least 5 percent 
of the credit risk of securitized assets. This aspect of the proposal 
is designed to recognize that the securitization markets have evolved 
over time to foster liquidity in a wide diversity of different credit 
products, using different types of securitization structures and to 
avoid a ``one size fits all'' approach that would disrupt private 
securitization and restrict credit availability.
    The proposal would also establish certain exemptions from the risk 
retention requirement, most notably, an exemption for securitizations 
backed entirely by ``qualified residential mortgages'' (QRMs). 
Consistent with the statutory provision, the definition of QRM includes 
underwriting and product features that historical loan performance data 
indicate result in a low risk of default. The proposed QRM definition 
seeks to set out a conservative, verifiable set of underwriting 
standards that would provide clarity and confidence to mortgage 
originators, securitizers, and investors about the loans that would 
qualify for the exemption. The standards are also designed to 
simultaneously foster securitization of non-QRM loans, by leaving room 
for a liquid and competitive market of soundly underwritten non-QRM 
loans sufficient to support robust securitization activity.
    The proposal generated significant levels of comment on a number of 
key issues from loan originators, securitizers, consumers, and policy 
makers. These comments included the role of risk retention and the QRM 
exemption in the future of the residential mortgage market. Most 
commenters on the QRM criteria expressed great concern that the QRM 
criteria were too stringent, particularly the 80 percent loan-to-value 
requirement for purchase money mortgages. Several commenters also were 
divided on the current risk retention practices of Fannie Mae and 
Freddie Mac, with some opposing the difference in treatment from 
private securitizers and others favoring it in recognition of the 
market liquidity the GSEs presently provide. We recognize this is a 
significant policy area and are continuing to review the issue.
    The proposed menu of risk retention alternatives also attracted 
significant comment. While many commenters supported the overall 
approach, securitizers raised numerous concerns about whether the 
particular options would accommodate established structures for risk 
retention in differing types of securitization transactions. These 
commenters recommended a number of structural modifications to the 
details of the risk retention alternatives.
    The agencies have carefully evaluated this extensive body of 
comments. In addition, the agencies have reviewed the QM criteria 
issued by the CFPB in January, to which the QRM criteria are 
statutorily linked. With the QM criteria completing the picture, the 
agencies are now in a position to consolidate the analytical work done 
since the comment period closed and finalize the rule.

Margin and Capital Requirements for Covered Swap Entities
    During the financial crisis, the lack of transparency in 
derivatives transactions among dealer banks and between dealer banks 
and their counterparties created uncertainty about whether market 
participants were significantly exposed to the risk of a default by a 
swap counterparty. To address this uncertainty, sections 731 and 764 of 
the Dodd-Frank Act require the OCC, together with the FRB, FDIC, FHFA, 
and Farm Credit Administration, to impose minimum margin requirements 
on noncleared derivatives.
    The OCC, together with the FRB, FDIC, FHFA, and Farm Credit 
Administration, published a proposal in the Federal Register on May 11, 
2011, to establish minimum margin and capital requirements for 
registered swap dealers, major swap participants, security-based swap 
dealers, and major security-based swap participants (swap entities) 
subject to agency supervision. To address systemic risk concerns, 
consistent with the Dodd-Frank Act requirement, the agencies proposed 
to require swaps entities to collect margin for all uncleared 
transactions with other swaps entities, and with financial 
counterparties. However, for low-risk financial counterparties, the 
agencies proposed that swap entities would not be required to collect 
margin as long as its margin exposure to a particular low-risk 
financial counterparty does not exceed a specific threshold amount of 
margin. Consistent with the minimal risk that derivatives with 
commercial end users pose to the safety and soundness of swap entities 
and the U.S. financial system, the proposal also included a margin 
threshold approach for these end users, with the swap entity setting a 
margin threshold for each commercial end user in light of the swap 
entity's assessment of credit risk of the end user. The proposed margin 
requirements would apply to new, noncleared swaps or security-based 
swaps entered into after the proposed rule's effective date.
    With very limited exception, commenters opposed the agencies' 
proposed treatment of commercial end users. They urged the agencies to 
implement a categorical exemption, like the statutory exception from 
clearing requirements for commercial end users. They also indicated 
that the agencies' proposal on documentation of margin obligations was 
a departure from existing practice and burdensome to implement. They 
further indicated that, as drafted, the agencies' proposed threshold-
based approach was inconsistent with the current credit assessment-
based practices of swaps entities. Commenters also raised a number of 
other important issues, including the types of collateral eligible to 
be posted for margin obligations, and concerns that the agencies' 
proposed margin calculation methodology was not properly calibrated to 
the level of risk presented by the underlying transactions. They also 
expressed concerns that U.S. and foreign regulators must coordinate as 
to the level and effective dates of their respective margin 
requirements, and anticipated that unilateral U.S. implementation of 
margin rules would eliminate U.S. banks' ability to continue competing 
in foreign markets that are behind the U.S. in formulating margin rules 
for their own dealers.
    Given the global nature of major derivatives markets and 
activities, we agree that international harmonization of margin 
requirements is critical, and we are participating in efforts by the 
Basel Committee on Bank Supervision (BCBS) and International 
Organization of Securities Commissions (IOSCO), to address coordinated 
implementation of margin requirements across G20 Nations. The BCBS-
IOSCO working group issued a consultative document in July of 2012, 
seeking public feedback on a broad policy framework for margin 
requirements on uncleared swap transactions that would be applied on a 
coordinated and nonduplicative basis across international regulatory 
jurisdictions. We and the other U.S. banking agencies and the CFTC re-
opened the comment periods on our margin proposals to give interested 
persons additional time to analyze those proposals in light of the 
BCBS-IOSCO consultative framework. The banking agencies' comment period 
closed on November 26, 2012. Most commenters once again focused on the 
treatment of commercial end users, urging the agencies to adopt the 
exemptive approach suggested by the BCBS-IOSCO proposal. The BCBS-IOSCO 
working group continues its discussions with its parent committees to 
analyze the questions and alternatives presented in the working group's 
consultative document, and to formulate a regulatory template to guide 
the participating jurisdictions to a coordinated regulatory structure 
on uncleared swap margin issues.
    Also notable with regard to swap entities, section 716 of the Dodd-
Frank Act prohibits the provision of Federal assistance (i.e., use of 
certain FRB advances and FDIC insurance or guarantees for certain 
purposes) to swaps entities with respect to any swap, security-based 
swap or other activity of the swaps entity. On May 10, 2012, the OCC, 
FRB, and FDIC published joint guidance for those entities for which 
they are each the prudential regulator to clarify that the effective 
date of section 716, i.e., the date on which the prohibition would take 
effect, is July 16, 2013. Under section 716, following consultation 
with the CFTC or the SEC, the Federal banking agencies shall permit 
insured depository institutions that qualify as swap entities subject 
to the prohibition on Federal assistance, a transition period of up to 
24 months to either divest the swaps entity or cease the activities 
that would require registration as a swaps entity. The transition 
period may be extended for up to one additional year by the Federal 
banking agencies after consultation with the CFTC or SEC. The OCC has 
received a number of requests from national banks for transition 
periods under section 716 and we are in the process of reviewing and 
evaluating these requests pursuant to the statutory requirements.

Incentive-Based Compensation
    Pursuant to section 956 of the Dodd-Frank Act, in April 2011, the 
OCC, FRB, FDIC, OTS, National Credit Union Association (NCUA), SEC, and 
the FHFA (the agencies) issued a joint proposed rule that would require 
the reporting of certain incentive-based compensation arrangements by a 
covered financial institution and prohibit incentive-based compensation 
arrangements at a covered financial institution that provide excessive 
compensation or that could expose the institution to inappropriate 
risks that could lead to a material financial loss. \3\
---------------------------------------------------------------------------
     \3\ A ``covered financial institution'' is a depository 
institution or depository institution holding company; a registered 
broker-dealer; a credit union; an investment adviser; Fannie Mae; 
Freddie Mac; and ``any other financial institution'' that the 
regulators jointly determine, by rule, should be covered by section 
956.
---------------------------------------------------------------------------
    The material financial loss provisions of the proposed rule would 
establish general requirements applicable to all covered institutions 
and additional proposed requirements applicable to certain larger 
covered financial institutions. The generally applicable requirements 
would provide that an incentive-based compensation arrangement, or any 
feature of any such arrangement, established or maintained by any 
covered financial institution for one or more covered persons, must 
balance risk and financial rewards and be compatible with effective 
controls and risk management, and supported by strong corporate 
governance.
    The proposed rule included two additional requirements for ``larger 
financial institutions,'' which for the Federal banking agencies, NCUA 
and the SEC means those covered financial institutions with total 
consolidated assets of $50 billion or more. First, a larger financial 
institution would be required to defer 50 percent of incentive-based 
compensation for its executive officers for a period of at least 3 
years. Second, the board of directors (or a committee thereof) of a 
larger financial institution also would be required to identify, and 
approve the incentive-based compensation arrangements for, individuals 
(other than executive officers) who have the ability to expose the 
institution to possible losses that are substantial in relation to the 
institution's size, capital, or overall risk tolerance. These 
individuals may include, for example, traders with large position 
limits relative to the institution's overall risk tolerance and other 
individuals that have the authority to place at risk a substantial part 
of the capital of the covered financial institution.
    The agencies received thousands of comments on the proposal, many 
of which concerned the additional requirements for larger financial 
institutions. The agencies are continuing to work together to prepare a 
final rule that will address the many issues raised by the commenters.

Conclusion
    I appreciate the opportunity to update the Committee on the work 
the OCC has done to implement the provisions of the Dodd-Frank Act, in 
particular, the completion of a number of important rulemakings and the 
significant progress that has been made on ongoing regulatory projects. 
While much has been accomplished, we will continue to move these 
ongoing projects toward completion. We look forward to keeping the 
Committee apprised of our progress.
                                 ______
                                 
                 PREPARED STATEMENT OF RICHARD CORDRAY
             Director, Consumer Financial Protection Bureau
                           February 14, 2013

Introduction
    Thank you Chairman Johnson, Ranking Member Crapo, and Members of 
the Committee for inviting me back today to testify about 
implementation of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. My colleagues and I at the Consumer Financial 
Protection Bureau are always happy to testify before the Congress, 
something we have done now 30 times.
    Congress created the Bureau in the wake of the greatest financial 
crisis since the Great Depression. Our mission is to make consumer 
financial markets work for both consumers and responsible businesses.
    Since the Bureau opened for business in 2011, our team has been 
hard at work. We are examining both banks and nonbank financial 
institutions for compliance with the law and we have addressed and 
resolved many issues through these efforts. In addition, for consumers 
who have been mistreated by credit card companies, we have worked in 
coordination with our fellow regulators to return roughly $425 million 
to their pockets. For those consumers who need information or help in 
understanding financial products and services, we have developed 
AskCFPB, a database of hundreds of answers to questions frequently 
asked by consumers. And our Consumer Response center has helped more 
than 100,000 consumers with their individual problems related to their 
credit cards, mortgages, student loans, and bank accounts.
    We have also faithfully carried out the law that Congress enacted 
by writing rules designed to help consumers throughout their mortgage 
experience--from signing up for a loan to paying it off. In the Dodd-
Frank Act, Congress gave the Bureau the responsibility to adopt 
specific mortgage rules with a legal deadline of January 21, 2013. If 
we had failed to do so, there were specific statutory provisions that 
would have automatically taken effect, which would have been 
problematic in various respects for consumers and the financial 
industry alike. We worked hard to meet our deadlines on those rules, 
which are the focus of my testimony today.

Ability-to-Repay
    As we all know now, one of the reasons for the collapse of the 
housing market in 2007 and 2008 was the dramatic decline in 
underwriting standards in the mortgage market in the years leading up 
to the crisis. It became a race to the bottom, and in the end it was 
the American public and the American economy who were the losers in 
that unappetizing race. Many mortgage lenders made loans that borrowers 
had little realistic chance of being able to pay back. Some of those 
loans were high priced; many contained risky features. For example, 
lenders were selling ``no-doc'' (no documentation) and ``low-doc'' 
(little documentation) mortgages to consumers who were ``qualifying'' 
for loans beyond their means. Far too many borrowers found they had no 
problem getting so-called ``NINJA'' loans--even if you had no income, 
no job, and no assets, you still could get a loan.
    The Dodd-Frank Act contains a provision to protect consumers from 
irresponsible mortgage lending by requiring lenders to make a 
reasonable, good faith determination based upon verified and documented 
information that prospective borrowers have the ability to repay their 
mortgages. Last month, the Bureau issued a rule to implement that 
requirement and provide further clarity as to what will be required of 
lenders.
    In writing the Ability-to-Repay rule, we recognized that today's 
consumers are faced with a very different problem than the one that 
consumers faced before the crisis. Access to credit has become so 
constrained that many consumers--even those with strong credit--cannot 
refinance or buy a house.
    So our rule strikes a balance and addresses both problems by 
enabling safer lending and providing certainty to the market. It rests 
on two basic, commonsense precepts: Lenders will have to check on the 
numbers and make sure the numbers check out. It is the essence of 
responsible lending.
    Under the rule, lenders will have to evaluate the borrower's 
income, savings, other assets, and debts. No-doc loans are prohibited, 
and affordability cannot be evaluated based only on low introductory 
``teaser'' interest rates. By rooting out reckless and unsustainable 
lending, while enabling safer lending, the rule protects consumers and 
strengthens the housing market.
    In addition, Congress created a category of ``Qualified Mortgages'' 
that are presumed to meet the ability-to-repay requirements because 
they are subject to additional safeguards. Congress defined some of the 
criteria for these Qualified Mortgages, but recognized that it may be 
necessary for the Bureau to prescribe further specifics.
    Our rule prohibits certain features that often have harmed 
consumers. Qualified mortgages cannot be negative-amortization loans--
where the principal amount actually increases for some period because 
the borrower does not even pay the interest, and the unpaid interest 
gets added to the amount borrowed--or have interest-only periods. They 
cannot have up-front costs in points and fees above the level specified 
by Congress.
    The rules also require that lenders carefully assess the burden 
that the loan places on the borrower. The consumer's total monthly 
debts--including the mortgage payment and related housing expenses such 
as taxes and insurance--generally cannot add up to more than 43 percent 
of a consumer's monthly gross income. The Bureau believes that this 
standard will help to draw a clear line that will provide a real 
measure of protection to borrowers and increased certainty to the 
mortgage market.

Loan Origination
    The second rule I want to tell you about today has to do with 
mortgage loan originators.
    Mortgage loan originators, which include mortgage brokers and 
retail loan officers, perform a variety of valuable services. They can 
assist consumers in obtaining or applying for mortgage loans, and they 
can offer or negotiate terms of those loans, whether the loans are for 
buying a home or refinancing an existing one. The financial reform law 
placed certain restrictions on a mortgage loan originator's 
qualifications and compensation. Building on rules issued earlier by 
the Federal Reserve, the Bureau applied what it heard from industry and 
consumers across the country to implement the new statutory 
restrictions.
    The rules address critical conflicts of interest created by certain 
compensation practices in the run-up to the financial crisis, such as 
paying loan originators more money whenever they steered consumers into 
a more expensive loan and allowing them to take payments from both 
consumers and creditors in the same transaction. These practices gave 
loan originators strong incentives to steer borrowers toward risky and 
high-cost loans, and they created confusion among consumers about loan 
originators' loyalties. Restricting these practices will help ensure 
the mortgage market is more stable and sustainable.
    Specifically, our mortgage loan origination rules help ensure that 
loan originator compensation may not be based on the terms of the 
mortgage transaction. At the same time, the rules spell out legitimate 
and permissible compensation practices, such as allowing certain 
profit-sharing plans. The rules say a broker or loan officer cannot get 
paid more by directing the consumer toward a loan with a higher 
interest rate, a prepayment penalty, or higher fees. The loan 
originator cannot get paid more for directing the consumer to buy an 
additional product like title insurance from the lender's affiliate. 
The rules also ban ``dual compensation,'' whereby a broker gets paid by 
both the consumer and the creditor for the same transaction. Finally, 
our rules make existing requirements more consistent on matters such as 
screening, background checks, and training of loan originators, to 
provide more confidence to consumers.

Mortgage Servicing
    For consumers who already have mortgage loans and are paying them 
back, the Bureau has adopted mortgage servicing rules to give them 
greater protections. The rules require commonsense policies and 
procedures for servicers' handling of consumer accounts.
    By bearing responsibility for managing mortgage loans, mortgage 
servicers play a central role in homeowners' lives. They collect and 
apply payments to loans. They can work out modifications to loan terms. 
And they handle the difficult foreclosure process.
    Even before the mortgage crisis unfolded, many servicers failed to 
provide a basic level of customer service. As the crisis unfolded, 
problems worsened. Servicers were unprepared to work with the number of 
borrowers who needed help. People did not get the help or support they 
needed, such as timely and accurate information about their options for 
saving their homes. Servicers failed to answer phone calls, lost 
paperwork, and mishandled accounts. Communication and coordination were 
poor, leading many homeowners to think they were on their way to a 
solution, only to find later that their homes had been foreclosed on 
and sold. In some cases, people arrived home to find they had been 
locked out unexpectedly.
    To compound the frustrations, often the consumer's relationship 
with a mortgage servicer is not a matter of choice. After a borrower 
picks a lender and takes on a mortgage, the responsibility for managing 
that loan can be transferred to another provider without any approval 
from the borrower. So if consumers are dissatisfied with their customer 
service, they cannot protect themselves by switching to another 
servicer.
    In this market, as in every other, consumers have the right to 
expect information that is clear, timely, and accurate. The Dodd-Frank 
Act added protections to consumers by establishing new servicer 
requirements. Last month, the Bureau issued rules to implement these 
provisions.
    These provisions require that payments must be credited the day 
they are received. They require servicers to deal promptly with 
consumer complaints about errors. They require servicers to provide 
periodic statements to mortgage borrowers that break downpayments by 
principal, interest, fees, and escrow. They require disclosure of the 
amount and due date of the next payment. (To help industry on this 
requirement, the Bureau is providing model forms that we developed and 
tested with consumers.)
    Our servicing rules also implement Dodd-Frank Act requirements that 
mortgage servicers provide earlier advance notice the first time an 
interest rates adjusts for most adjustable-rate mortgages. The 
disclosure must provide an estimate of the new interest rate, the 
payment amount, and when that payment is due. It must also include 
information about alternatives and counseling services, which can 
provide valuable assistance for consumers in all circumstances, and 
particularly if the new payment turns out to be unaffordable.
    All of these Dodd-Frank provisions address normal mortgage 
servicing. They protect everyday mortgage borrowers from costly 
surprises and runarounds by their servicers. But the Dodd-Frank Act did 
not speak specifically or comprehensively to the unique problems faced 
by borrowers who fall behind on their mortgages. Instead, Congress gave 
the Bureau general rulemaking authority to address these kinds of 
consumer protection problems.
    Many American homeowners are struggling to stay on top of their 
mortgages. Our Office of Consumer Response has already fielded more 
than 47,000 complaints about mortgages. More than half were about 
problems people have when they are unable to make their payments, such 
as issues relating to loan modifications, collections, or foreclosure.
    Accordingly, the Bureau's mortgage servicing rules put into place 
fairer and more effective processes for troubled borrowers. Beginning 
with the early stage of delinquency, we are providing new protections 
to help consumers save their homes.
    Under our rules, servicers will be required to establish policies 
and procedures to ensure that their records are accurate and 
accessible. The idea is that servicers should be able to provide 
correct and timely information to borrowers, mortgage owners (including 
investors), and the courts. This provision will help prevent the 
egregious ``robo-signing'' practices that were found to be rampant in 
the marketplace. The rules also require servicers to have policies and 
procedures that assure a smooth transfer of information--including 
pending applications for foreclosure alternatives--when an account 
transfers from one servicer to another.
    Our rules also require that servicers reach out to borrowers within 
the first 36 days after a payment is delinquent to determine whether 
the borrowers may need assistance. After 45 days, servicers must 
provide information about loss mitigation options and make staff 
available who will be responsible for helping borrowers apply for loan 
modifications or other foreclosure alternatives. The rules also 
carefully regulate the process for evaluating borrowers' loss 
mitigation applications and so-called ``dual tracking,'' where a 
consumer is being evaluated for loss mitigation at the same time that 
the servicer is taking steps to foreclose on the property. The rules 
are designed to ensure that borrowers who submit a complete application 
by specified timelines are assessed for all available loss mitigation 
options and have an opportunity to appeal mistakes to their servicer.
    The rules also require servicers to maintain policies and 
procedures that will ensure better coordination with loan owners to 
ensure that servicers offer all loss mitigation options that the owners 
permit, correctly apply the criteria for the loss mitigation options, 
and report back to the loan owners about how borrower applications are 
resolved. The goal is to avoid needless foreclosures--which is in the 
best interest of the borrower, the lender, and our entire economy.
    In pursuing these rules, the Bureau struck a carefully calibrated 
balance. The rules mandate a fair process but do not require that a 
servicer, or an investor, offer any particular type of loss mitigation 
option or apply any particular criteria in considering such options. 
The rules likewise balance private and public enforcement.
    Importantly, the rules apply to the entire market, not just to 
banks and other depository institutions. Many provisions are subject to 
private enforcement directly by consumers, and others will be monitored 
closely by the Bureau and other regulators. The rules also ensure 
better communications with loan owners, including investors, so that 
they too can be more effective in monitoring servicers' activities.
    We will be vigilant about monitoring and enforcing these rules, and 
are coordinating on an ongoing basis with other Federal agencies to 
address servicing issues. These rules mean a brand-new day for 
effective oversight of mortgage servicers by ensuring that no servicer 
can act in a manner that is indifferent to the plight of consumers.

Other Rules
    The Bureau has also issued rules to implement a number of other 
provisions in the Dodd-Frank Act to strengthen consumer protections and 
address problematic practices that existed in the run-up to the 
financial crisis. For instance, the rules implement strict limitations 
on prepayment penalties that may have discouraged or disabled consumers 
from refinancing expensive or risky loans. The rules require creditors 
to maintain escrow accounts for borrowers who take out higher-priced 
mortgage loans for a longer period to help borrowers set aside money 
for taxes and property insurance. We also adopted new rules 
implementing the statutory requirement that mortgage lenders 
automatically provide applicants with free copies of all appraisals and 
other home-value estimates, as well as new and broader protections for 
high-cost ``HOEPA'' loans.
    And in partnership with the Federal Reserve, Federal Deposit 
Insurance Corporation, Federal Housing Finance Agency, National Credit 
Union Administration, and Office of the Comptroller of the Currency, 
the Consumer Bureau adopted a new rule that implements Dodd-Frank's 
special requirements for appraisals of certain higher-priced mortgage 
loans. By requiring that creditors use a licensed or certified 
appraiser to prepare the written appraisal report based on a physical 
inspection of the property, the new rule creates an additional level of 
due diligence. The rule also requires creditors to disclose to 
applicants information about the purpose of the appraisal and provide 
consumers with a free copy of any appraisal report.

Smaller Institutions
    As the Bureau worked through the requirements Congress imposed in 
the Dodd-Frank Act, we paid attention to the potential impacts on 
different types and sizes of creditors, servicers, and other financial 
service providers. To inform its work, the Bureau received input from 
banks, other lenders, mortgage brokers, service providers, trade 
associations, consumer groups, nonprofits, and other Government 
stakeholders. We also convened small business review panels for input 
on various rules as prescribed by statute.
    It is widely accepted that with few exceptions, community banks and 
credit unions did not engage in the kind of misdeeds that led to the 
mortgage crisis. Data available to the Bureau indicates that these 
institutions have lower severe delinquency rates and loss rates. At the 
same time, the Bureau knows these institutions may be more likely to 
retreat from the mortgage market if the regulations implementing the 
Dodd-Frank Act are too burdensome.
    Accordingly, the Bureau created specific exceptions and tailored 
various rules to encourage small providers such as community banks and 
credit unions to continue providing credit and other services, while 
carefully balancing consumer protections. For example, we expanded 
earlier proposals to exempt certain small creditors operating 
predominantly in rural or underserved areas from the escrow rule 
requirements. We also issued a further proposal along with the Ability-
to-Repay rule, which would treat various loans held by small creditors 
in portfolio as ``Qualified Mortgages'' subject to protections against 
any potential liability. We also finalized exceptions to substantial 
portions of our servicing rules for small companies such as community 
banks and credit unions that are servicing loans they originated or 
own.
    We have carefully calibrated concerns about consumer protection and 
access to credit in making these distinctions. We know community banks 
and credit unions have strong practical reasons to provide responsible 
credit and have a long tradition of excellent customer service, both to 
protect their own balance sheets and because they care deeply about 
their reputations in their local communities. We know they provide 
vital financial services in rural areas, small towns, and underserved 
communities across this country. We believe the rules strike an 
appropriate balance to ensure consumers can continue to access this 
source of valuable and responsible credit.

Conclusion
    As the Bureau has been working to finalize these mortgage rules by 
the statutory deadline, we have also been thinking hard about the 
process for implementing them. We know the new protections afforded by 
the Dodd-Frank Act and our rules will no doubt bring great change to 
the mortgage market, and we are committed to doing what we can to 
achieve effective, efficient, complete implementation by engaging with 
all stakeholders in the coming year. We know that it is in the best 
interests of the consumer for the industry to understand these rules--
because if they cannot understand, they cannot properly implement.
    To this end, we have announced an implementation support plan. We 
will publish plain-English summaries. We will publish readiness guides 
to help industry run through check-lists of things to do prior to the 
rules going into effect--like updating their policies and procedures 
and providing training for staff. We will work with other Government 
agencies to prepare in a transparent manner for both our and their 
examinations. And we will publish clarifications of the rules as needed 
to respond to questions and inquiries.
    Most importantly, we will continue to listen to consumers and 
businesses as we work to help the mortgage market--and American 
consumers--recover from the financial crisis.
    I am very proud of the tremendous work our team has done on 
rulemaking and implementation efforts under the Dodd-Frank Act. And as 
I have said to you before, we always welcome your questions and your 
thoughts about our work.
    Thank you.
                                 ______
                                 
                 PREPARED STATEMENT OF ELISSE B. WALTER
              Chairman, Securities and Exchange Commission
                           February 14, 2013

    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee: Thank you for inviting me to testify on behalf of the 
Securities and Exchange Commission regarding our ongoing implementation 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'' or ``Act''). We appreciate the opportunity to share 
with you the steps we have been taking and the procedures we have 
followed.
    As you know, the Dodd-Frank Act added significant new 
responsibilities to the SEC's portfolio, as well as creating new tools 
for use in executing those and other responsibilities. To date, the 
Commission has made substantial progress in writing the huge volume of 
new rules the Act directs, as well as in conducting the various studies 
required by the Act. Of the more than 90 Dodd-Frank provisions that 
require SEC rulemaking, the SEC has proposed or adopted rules for over 
80 percent of them, and also has finalized 17 of the more than 20 
studies and reports that the Act directs us to complete. While this has 
been a challenge, the considerable progress the Commission has made is 
a direct result of the thoughtful, thorough, and professional efforts 
of our staff, whose efforts in fulfilling the Dodd-Frank Act mandates 
have come in addition to carrying their normal workloads.
    My testimony today will provide an overview of the Commission's 
Dodd-Frank Act activities, emphasizing our accomplishments over the 
past year.

Hedge Fund and Other Private Fund Adviser Registration and Reporting
    The Dodd-Frank Act mandated that the Commission require private 
fund advisers (including hedge and private equity fund advisers) to 
confidentially report information about the private funds they manage 
for the protection of investors or for the assessment of systemic risk 
by the Financial Stability Oversight Council (FSOC). On October 31, 
2011, in a joint release with the Commodity Futures Trading Commission 
(CFTC), the Commission adopted a new rule that requires hedge fund 
advisers and other private fund advisers registered with the Commission 
periodically to report systemic risk information on a new form, ``Form 
PF''. \1\
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     \1\ See, Release No. IA-3308, ``Reporting by Investment Advisers 
to Private Funds and Certain Commodity Pool Operators and Commodity 
Trading Advisors on Form PF'' (October 31, 2011), http://www.sec.gov/
rules/final/2011/ia-3308.pdf.
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    Under the rule, registered investment advisers managing at least 
$150 million in private fund assets must periodically file Form PF. 
Both the amount of information required to be reported and the 
frequency with which Form PF must be filed are scaled to the size of 
the adviser and the nature of its advisory activities. \2\ This scaled 
approach will provide FSOC and the Commission with a broad view of the 
industry while relieving smaller advisers from much of the reporting 
burden. In addition, the reporting requirements are tailored to the 
types of funds an adviser manages and the potential risks those funds 
may present, meaning that an adviser will respond only to questions 
relevant to its business model. The Dodd-Frank Act provides special 
confidentiality protections for this data. To ensure that the data is 
handled in a manner that reflects its sensitivity and statutory 
confidentiality protections, a Steering Committee composed of senior 
officers from various Divisions and Offices within the Commission has 
been established to implement a consistent approach regarding the 
access to, and use, sharing, and data security of, information 
collected through Form PF. The Steering Committee is also working with 
FINRA (the contractor that operates the Form PF filing system) and the 
Office of Financial Research (the FSOC entity that will receive and use 
the data on behalf of FSOC) to implement appropriate controls to 
protect it.
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     \2\ To the extent an investment adviser is currently required to 
file Form PF, examination staff review the individual filings prior to 
conducting investment adviser examinations. The review of Form PF 
assists in identifying additional risk areas and may highlight 
particular funds for focus during the exam.
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    The largest advisers to liquidity funds and hedge funds began 
filing Form PF reports in the summer of 2012. As of December 31, 2012, 
the Commission received filings from 228 registered advisers of private 
funds. Smaller private fund advisers generally must begin filing with 
the Commission in March and April of this year.
    In addition to Form PF, the Commission has implemented a number of 
other Dodd-Frank provisions that serve to enhance oversight of private 
funds advisers. These enable, for the first time, regulators and 
investors to have a more comprehensive view of the private fund 
universe and the investment advisers managing those assets.

    In June 2011, the Commission adopted rules that require the 
        registration of, and reporting by, advisers to hedge funds and 
        other private funds and other advisers previously exempt from 
        SEC registration. As a result, the number of private fund 
        advisers registered with the Commission--advisers that manage 
        one or more private funds--increased significantly. As of 
        January 2, 2013, the number of SEC-registered private fund 
        advisers had increased by more than 50 percent from the 
        effective date of the Dodd-Frank Act to 4,020 advisers. These 
        advisers now represent approximately 37 percent of all SEC-
        registered investment advisers and collectively manage over 
        24,000 private funds with total assets of $8 trillion. \3\
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     \3\ For more information on investment advisers registered with 
the Commission and advisers required to report information to the 
Commission after the Dodd-Frank Act, as well as the private funds they 
manage, see, ``Dodd-Frank Act Changes to Investment Adviser 
Registration Requirements'', http://www.sec.gov/divisions/investment/
imissues/df-iaregistration.pdf.

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

    These new rules also implement the Dodd-Frank requirement 
        for public reporting by investment advisers to venture capital 
---------------------------------------------------------------------------
        funds and others that are exempt from SEC registration.

    The rules also reallocate regulatory responsibility to 
        State securities authorities for advisers with between $25 
        million and $100 million in assets under management. \5\ To 
        facilitate the reallocation of regulatory responsibility, the 
        Commission issued an order in February 2013 canceling the 
        registrations of certain SEC-registered investment advisers no 
        longer eligible to remain registered. \6\
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     \5\ See, Release No. IA-3221, ``Rules Implementing Amendments to 
the Investment Advisers Act'' (June 22, 2011), http://www.sec.gov/
rules/final/2011/ia-3221.pdf.
     \6\ See, Release No. IA-3547, ``Order Cancelling Registrations of 
Certain Investment Advisers Pursuant to Section 203(h) of the 
Investment Advisers Act of 1940'' (February 6, 2013), http://
www.sec.gov/rules/other/2013/ia-3547.pdf.

    In June 2012, the Commission also adopted a new rule 
        defining ``family offices,'' a group that historically has not 
        been required to register as advisers and that is now excluded 
        by rule from the Investment Advisers Act of 1940 (Advisers Act) 
        definition of an investment adviser. \7\
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     \7\ See, Release No. IA-3220, ``Family Offices'' (June 22, 2011), 
http://www.sec.gov/rules/final/ia-3220.pdf.

    In February 2012, the Commission adopted amendments to the 
        rule that permits investment advisers to charge performance 
        fees to ``qualified clients.'' \8\ The amendments codified the 
        Commission's 2011 inflation adjustments to the net worth and 
        assets-under-management thresholds that clients must satisfy 
        for the adviser to charge these fees. The amendments also 
        excluded the value of a person's primary residence from the 
        rule's net worth test and provided that, as required by the 
        Dodd-Frank Act, the Commission will issue an order every 5 
        years adjusting the rule's dollar amount thresholds for 
        inflation.
---------------------------------------------------------------------------
     \8\ See, Release No. IA-3372, ``Investment Adviser Performance 
Compensation'' (February 15, 2012), http://www.sec.gov/rules/final/
2012/ia-3372.pdf.

    Since the Act became effective, approximately 2,250 formerly SEC 
registered advisers have transitioned to State registration and 
approximately 1,500 advisers to hedge funds and private equity funds 
have registered with the Commission. These new adviser registrants 
report over $3 trillion in assets under management, while those that 
transitioned to State registration manage about $115 billion. Most of 
these new registrants had never been registered, regulated, or examined 
and many have complex business models, investment programs and trading 
strategies. Commission staff, through our National Exam Program, has 
developed and begun implementing a program for these new advisers which 
includes outreach, examination, and, ultimately, where appropriate, 
written reports highlighting exam findings.

Whistleblower Program
    Pursuant to Section 922 of the Dodd-Frank Act, the SEC established 
a whistleblower program to pay awards to eligible whistleblowers that 
voluntarily provide the agency with original information about a 
violation of the Federal securities laws that leads to a successful SEC 
enforcement action. The SEC's Office of the Whistleblower filed its 
second Annual Report to Congress on November 15, 2012, detailing the 
Office's activities during the fiscal year. \9\ As detailed in the 
Annual Report, during fiscal year 2012 the Commission received 3,001 
tips from whistleblowers in the U.S. and 49 other countries. Among 
other things, the Office (1) regularly communicates with 
whistleblowers, returning over 3,050 phone calls to the public hotline 
during fiscal year 2012; (2) identifies and tracks whistleblower tips 
that may lead to enforcement actions; (3) reviews and processes 
applications for whistleblower awards; (4) facilitates meetings between 
whistleblowers and SEC Enforcement staff; and (5) provides extensive 
guidance to Enforcement staff on various aspects of the program, 
including proper handling of confidential whistleblower identifying 
information.
---------------------------------------------------------------------------
     \9\ ``Annual Report on the Dodd-Frank Whistleblower Program Fiscal 
2012'' (November 2012), http://www.sec.gov/about/offices/owb/annual-
report-2012.pdf.
---------------------------------------------------------------------------
    The high quality information that we have been receiving from 
whistleblowers has, in many instances, allowed our investigative staff 
to work more efficiently and permitted us to better utilize agency 
resources.
    In August, 2012, the Commission made its first award under the 
whistleblower program. \10\ We expect future payments to further 
increase the visibility and effectiveness of this important Enforcement 
initiative.
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     \10\ A whistleblower who helped the Commission stop a multimillion 
dollar fraud received an award of 30 percent of the amount collected in 
the Commission's enforcement action against the perpetrators of the 
scheme, the maximum amount permitted by the Act. The award recipient in 
this matter submitted a tip concerning the fraud and then provided 
documents and other significant information that allowed the 
Commission's investigation to move at an accelerated pace and 
ultimately led to the filing of an emergency action in Federal court to 
prevent the defendants from ensnaring additional victims and further 
dissipating investor funds. See, ``In the Matter of the Claim for 
Award'', Release No. 34-67698 (August 21, 2012), http://www.sec.gov/
rules/other/2012/34-67698.pdf, and ``In the Matter of the Claim for 
Award'', SEC Release No. 34-67699 (August 21, 2012), http://
www.sec.gov/rules/other/2012/34-67699.pdf.
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OTC Derivatives
    Among the key provisions of the Dodd-Frank Act are those that 
establish a new oversight regime for the over-the-counter (OTC) 
derivatives marketplace. Title VII of the Act requires the Commission 
to regulate ``security-based swaps'' and to write rules that address, 
among other things, mandatory clearing, reporting and trade execution, 
the operation of clearing agencies, data repositories and trade 
execution facilities, capital and margin requirements and business 
conduct standards for dealers and major market participants, and public 
transparency for transactional information. Among other things, such 
rules are intended to:

    Facilitate the centralized clearing of swaps, with the 
        intent of reducing counterparty and systemic risk;

    Increase market transparency;

    Increase security-based swap transaction disclosure; and

    Address potential conflict of issues relating to security-
        based swaps.

Title VII Implementation Generally
    The Commission has proposed substantially all of the core rules 
required by Title VII. In addition, the Commission has adopted a number 
of final rules and interpretations, provided a ``roadmap'' to 
implementation of Title VII, and taken other actions to provide legal 
certainty to market participants during the implementation process. In 
implementing Title VII, Commission staff is in regular contact with the 
staffs of the CFTC, the Board of Governors of the Federal Reserve 
System (Board), and other Federal financial regulators, and in 
particular has consulted and coordinated extensively with CFTC staff.

Adoption of Key Definitional Rules
    In July 2012, the Commission adopted final rules and 
interpretations jointly with the CFTC regarding key product definitions 
under Title VII. \11\ This effort follows the Commission's work on the 
entity definitions rules, which the Commission adopted jointly with the 
CFTC in April 2012. \12\ The completions of these joint rulemakings are 
foundational steps toward the complete implementation of Title VII.
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     \11\ See, Release No. 33-9338, ``Further Definition of `Swap', 
`Security-Based Swap', and `Security-Based Swap Agreement'; Mixed 
Swaps; Security-Based Swap Agreement Recordkeeping'' (July 18, 2012) 
http://www.sec.gov/rules/final/2012/33-9338.pdf.
     \12\ See, Release No. 34-66868, ``Further Definition of `Swap 
Dealer', `Security-Based Swap Dealer', `Major Swap Participant', `Major 
Security-Based Swap Participant', and `Eligible Contract Participant' 
'' (April 27, 2012) http://www.sec.gov/rules/final/2012/34-66868.pdf.
---------------------------------------------------------------------------
    The July joint rulemaking addressed certain product definitions and 
further defined the key terms ``swap,'' ``security-based swap,'' and 
``security-based swap agreement.'' It also adopted rules regarding the 
regulation of ``mixed swaps'' and the books and records requirements 
for security-based swap agreements. The April joint rulemaking further 
defined the key terms ``swap dealer'' and ``security-based swap 
dealer,'' providing guidance as to what constitutes dealing activity, 
and distinguishing dealing from nondealing activities such as hedging. 
The rulemaking also implemented the Dodd-Frank Act's statutory de 
minimis exception to the security-based swap dealer definition in a way 
tailored to reflect the different types of security-based swaps. 
Additionally, the rulemaking implemented the Dodd-Frank Act's ``major 
security-based swap participant'' definition through the use of three 
objective tests.
    While foundational, these final rules did not trigger compliance 
with the other rules the Commission is adopting under Title VII. 
Instead, the compliance dates applicable to each final rule will be set 
forth in the adopting release for the applicable rule. In this way, the 
Commission is better able to provide for an orderly implementation of 
the various Title VII rules.

Adoption of Rules and Other Action Related to Clearing
    In addition to the key definitional rules, the Commission has 
adopted rules under Title VII relating to clearing infrastructure. In 
October 2012, the Commission adopted a rule that establishes 
operational and risk management standards for clearing agencies, 
including clearing agencies that clear security-based swaps. \13\ The 
rule, discussed in more detail below, is designed to help ensure that 
clearing agencies will be able to fulfill their responsibilities in the 
multitrillion dollar derivatives market as well as in more traditional 
securities markets.
---------------------------------------------------------------------------
     \13\ See, Release No. 34-68080, ``Clearing Agency Standards'' 
(October 22, 2012), http://www.sec.gov/rules/final/2012/34-68080.pdf.
---------------------------------------------------------------------------
    In June 2012, the Commission adopted rules that establish 
procedures for its review of certain actions undertaken by clearing 
agencies. \14\ These rules detail how clearing agencies will provide 
information to the Commission about the security-based swaps the 
clearing agencies plan to accept for clearing, which will then be used 
by the Commission to aid in determining whether those security-based 
swaps are required to be cleared. The adopted rules also include rules 
requiring clearing agencies that are designated as ``systemically 
important'' under Title VIII of the Dodd-Frank Act to submit advance 
notice of changes to their rules, procedures, or operations if the 
changes could materially affect the nature or level of risk at those 
clearing agencies.
---------------------------------------------------------------------------
     \14\ See, Release No. 34-67286, ``Process for Submissions for 
Review of Security-Based Swaps for Mandatory Clearing and Notice Filing 
Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 
and Form 19b-4 Applicable to All Self-Regulatory Organizations'' (June 
28, 2012), http://www.sec.gov/rules/final/2012/34-67286.pdf.
---------------------------------------------------------------------------
    In addition, in December 2012, the Commission issued an order 
providing exemptive relief in connection with a program to commingle 
and portfolio margin customer positions in cleared credit default swaps 
which include both swaps and security-based swaps. \15\ Portfolio 
margining may be of benefit to investors and the market by, among other 
things, promoting greater efficiency in clearing, helping to alleviate 
excessive margin calls, improving cash flow and liquidity, and reducing 
volatility. Previously, in March 2012, the Commission had adopted rules 
providing exemptions under the Securities Act of 1933 (Securities Act), 
the Securities Exchange Act of 1934 (Exchange Act), and the Trust 
Indenture Act of 1939 for security-based swaps transactions involving 
certain clearing agencies satisfying certain conditions. \16\
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     \15\ See, Release No. 34-68433, ``Order Granting Conditional 
Exemptions Under the Securities Exchange Act of 1934 in connection with 
Portfolio Margining of Swaps and Security-Based Swaps'' (December 14, 
2012), http://sec.gov/rules/exorders/2012/34-68433.pdf.
     \16\ See, Release No. 33-9308, ``Exemptions for Security-Based 
Swaps Issued by Certain Clearing Agencies'' (March 30, 2012), http://
www.sec.gov/rules/final/2012/33-9308.pdf.
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Adoption of Rules Related to Reporting
    In 2010, the Commission adopted an interim final temporary rule 
regarding the reporting of certain information relating to outstanding 
security-based swap transactions entered into prior to the date of 
enactment of the Dodd-Frank Act. \17\ In 2011, we also readopted 
certain of our beneficial ownership rules to preserve their application 
to persons who purchase or sell security-based swaps. \18\
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     \17\ See, Release No. 34-63094, ``Reporting of Security-Based Swap 
Transaction Data'' (October 13, 2010), http://www.sec.gov/rules/
interim/2010/34-63094.pdf.
     \18\ See, Release No. 34-64628, ``Beneficial Ownership Reporting 
Requirements and Security-Based Swaps'' (June 8, 2011), http://
www.sec.gov/rules/final/2011/34-64628.pdf.
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Issuance of Implementation Policy Statement
    In addition to its work to propose and adopt Title VII rules, the 
Commission issued a policy statement in June 2012, describing and 
requesting public comment on the order in which it expects to require 
compliance by market participants with the final Title VII rules. \19\ 
The Commission's approach aims to avoid the disruption and cost that 
could result if compliance with all of the rules were required 
simultaneously or haphazardly. More generally, the policy statement is 
part of our overall commitment to making sure that market participants 
know what the ``rules of the road'' are before requiring compliance 
with those rules.
---------------------------------------------------------------------------
     \19\ See, Release No. 34-37177, ``Statement of General Policy on 
the Sequencing of the Compliance Dates for Rules Applicable to 
Security-Based Swaps'' (June 11, 2012), http://www.sec.gov/rules/
policy/2012/34-67177.pdf.
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    The implementation policy statement is divided into five broad 
categories of final rules to be adopted by the Commission and explains 
how the compliance dates of these rules would be sequenced in relative 
terms by describing the dependencies that exist within and among the 
categories. The statement emphasizes that those subject to the new 
regulatory requirements arising from these rules will be given 
adequate, but not excessive, time to come into compliance with them.
    The statement also discusses the timing of the expiration of 
temporary relief the Commission previously granted security-based swap 
market participants from certain provisions of the Federal securities 
laws. The expiration of much of this relief is tied to the effective or 
compliance dates of certain rules to be adopted pursuant to Title VII.
    Market participants have provided comments on the sequencing set 
out in the policy statement, and we are taking those into account as we 
work toward completing the Title VII adoption process.

Provision of Legal Certainty
    Consistent with our commitment to an orderly Title VII 
implementation process, the Commission has taken a number of steps to 
provide legal certainty and avoid unnecessary market disruption that 
might otherwise have arisen as a result of final rules not having been 
adopted by the July 16, 2011, effective date of Title VII. 
Specifically, we have:

    Provided guidance regarding which provisions in Title VII 
        governing security-based swaps became operable as of the 
        effective date and provided temporary relief from several of 
        these provisions; \20\
---------------------------------------------------------------------------
     \20\ See, Release No. 34-64678, ``Temporary Exemptions and Other 
Temporary Relief, Together With Information on Compliance Dates for New 
Provisions of the Securities Exchange Act of 1934 Applicable to 
Security-Based Swaps'' (June 15, 2011), http://www.sec.gov/rules/
exorders/2011/34-64678.pdf.

    Provided guidance regarding--and, where appropriate, 
        interim exemptions from--the various pre- Dodd-Frank provisions 
        that otherwise would have applied to security-based swaps on 
        July 16, 2011; \21\ and
---------------------------------------------------------------------------
     \21\ See, Release No. 34-64795, ``Order Granting Temporary 
Exemptions Under the Securities Exchange Act of 1934 in Connection with 
the Pending Revision of the Definition of `Security' to Encompass 
Security-Based Swaps, and Request for Comment'' (July 1, 2011), http://
sec.gov/rules/exorders/2011/34-64795.pdf; Release No. 33-9231, 
``Exemptions for Security-Based Swaps'' (July 1, 2011), http://
www.sec.gov/rules/interim/2011/33-9231.pdf; and Release No. 33-9383, 
``Extension of Exemptions for Security-Based Swaps'' (January 29, 
2013), http://www.sec.gov/rules/interim/2013/33-9383.pdf.

    Provided temporary relief for entities providing certain 
        clearing services for security-based swaps. \22\
---------------------------------------------------------------------------
     \22\ See, Release No. 34-64796, ``Order Pursuant to Section 36 of 
the Securities Exchange Act of 1934 Granting Temporary Exemptions From 
Clearing Agency Registration Requirements Under Section 17A(b) of the 
Exchange Act for Entities Providing Certain Clearing Services for 
Security-Based Swaps'' (July 1, 2011), http://sec.gov/rules/exorders/
2011/34-64796.pdf.
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Next Steps for Implementation of Title VII: Application of Title VII in 
        the Cross-Border Context
    With very limited exceptions, the Commission has not addressed the 
application of the security-based swap provisions of Title VII in the 
cross-border context in its proposed or final rules. Rather than 
addressing these issues in a piecemeal fashion through each of the 
various substantive rulemakings implementing Title VII, we instead plan 
to address them holistically in a single proposing release. We believe 
this approach will provide investors, market participants, foreign 
regulators, and other interested parties with the opportunity to 
consider, as an integrated whole, the Commission's proposed approach to 
the application of the security-based swap provisions of Title VII in 
the cross-border context.
    As we have indicated previously, we expect the scope of the effort 
to be broad. The proposal will address the application of Title VII in 
the cross-border context with respect to each of the major registration 
categories covered by Title VII for security-based swaps: security-
based swap dealers; major security-based swap participants; security-
based swap clearing agencies; security-based swap data repositories; 
and security-based swap execution facilities. It also will address the 
application of Title VII in connection with reporting and 
dissemination, clearing, and trade execution, as well as the sharing of 
information with regulators and related preservation of confidentiality 
with respect to data collected and maintained by security-based swap 
data repositories.
    The cross-border release will involve notice-and-comment 
rulemaking, not just interpretive guidance. As a rulemaking proposal, 
the release will consider investor protection and incorporate an 
economic analysis that considers, among other things, the effects of 
the proposal on efficiency, competition, and capital formation. 
Although the rulemaking approach takes more time, we believe there are 
a number of benefits to this approach, including the opportunity to 
benefit from public input and the opportunity to provide a full 
articulation of the rationales for, and consideration of reasonable 
alternatives to, particular approaches that achieve the statutory 
purpose.
    The Dodd-Frank Act specifically requires that the Commission, the 
CFTC, and the prudential regulators ``consult and coordinate with 
foreign regulatory authorities on the establishment of consistent 
international standards'' with respect to the regulation of OTC 
derivatives. The Commission has been actively working on a bilateral 
and multilateral basis with our fellow regulators abroad in such groups 
as the International Organization of Securities Commissions, the 
Financial Stability Board, and the OTC Derivatives Regulators Group, as 
we develop our proposed approach to cross-border issues under Title 
VII. Through these discussions and our participation in various 
international task forces and working groups, we also have gathered 
extensive information about foreign regulatory reform efforts, 
identified potential gaps, overlaps, and conflicts between U.S. and 
foreign regulatory regimes, and encouraged foreign regulators to 
develop rules and standards complementary to our own under the Dodd-
Frank Act.

Additional Steps
    In addition to proposing rules and interpretive guidance addressing 
the international implications of Title VII, the Commission expects to 
propose rules relating to books and records and reporting requirements 
for security-based swap dealers and major security-based swap 
participants. The Commission also expects soon to consider the 
application of mandatory clearing requirements to single-name credit 
default swaps, starting with those that were first cleared prior to the 
enactment of the Dodd-Frank Act.
    Finally, the Commission staff continues to work diligently to 
develop recommendations for final rules required by Title VII that have 
been proposed but not yet been adopted, including rules relating to:

    Security-Based Swap Dealers and Major Security-Based Swap 
        Participant Requirements; \23\
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     \23\ See, Release No. 34-65543, ``Registration of Security-Based 
Swap Dealers and Major Security-Based Swap Participants'' (October 12, 
2011), http://www.sec.gov/rules/proposed/2011/34-65543.pdf; Release No. 
34-68071, ``Capital, Margin, and Segregation Requirements for Security-
Based Swap Dealers and Major Security-Based Swap Participants and 
Capital Requirements for Broker-Dealers'' (October 18, 2012), http://
www.sec.gov/rules/proposed/2012/34-68071.pdf; Release No. 34-64766, 
``Business Conduct Standards for Security-Based Swaps Dealer and Major 
Security-Based Swap Participants'' (June 29, 2011), http://www.sec.gov/
rules/proposed/2011/34-64766.pdf; and Release No. 34-63727, ``Trade 
Acknowledgment and Verification on Security-Based Swap Transactions'' 
(January 14, 2011), http://www.sec.gov/rules/proposed/2011/34-
63727.pdf.

    Regulatory Reporting and Post-Trade Public Transparency; 
        \24\
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     \24\ See, Release No. 34-63346, ``Regulation SBSR--Reporting and 
Dissemination of Security-Based Swap Information'' (November 19, 2010), 
http://www.sec.gov/rules/proposed/2010/34-63346.pdf; and Release No. 
34-63347, ``Security-Based Swap Data Repository Registration, Duties, 
and Core Principles'' (November 19, 2010), http://www.sec.gov/rules/
proposed/2010/34-63347.pdf.

    Mandatory Clearing and Trade Execution and the Regulation 
        of Clearing Agencies and Security-Based Swap Execution 
        Facilities; \25\ and
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     \25\ See, Release No. 34-63556, ``End-User Exception of Mandatory 
Clearing of Security-Based Swaps'' (December 15, 2010), http://
www.sec.gov/rules/proposed/2010/34-63556.pdf; Release No. 34-63107, 
``Ownership Limitations and Governance Requirements for Security-Based 
Swap Clearing Agencies, Security-Based Swap Execution Facilities, and 
National Securities Exchanges with Respect to Security-Based Swaps 
under Regulation MC'' (October 14, 2010), http://www.sec.gov/rules/
proposed/2010/34-63107.pdf; and ``Registration and Regulation of 
Security-Based Swap Execution Facilities'' (February 2, 2011), http://
www.sec.gov/rules/proposed/2011/34-63825.pdf.

    Enforcement and Market Integrity. \26\
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     \26\ See, Release No. 34-63236, ``Prohibition Against Fraud, 
Manipulation, and Deception in Connection with Security-Based Swaps'' 
(November 3, 2010), http://www.sec.gov/rules/proposed/2010/34-
63236.pdf.
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Clearing Agencies
    Title VIII of the Dodd-Frank Act provides for increased regulation 
of financial market utilities \27\ (FMUs) and financial institutions 
that engage in payment, clearing, and settlement activities that are 
designated as systemically important. The purpose of Title VIII is to 
mitigate systemic risk in the financial system and promote financial 
stability. In addition, Title VII of the Dodd-Frank Act requires, among 
other things, that an entity acting as a clearing agency with respect 
to security-based swaps register with the Commission and that the 
Commission adopt rules with respect to clearing agencies that clear 
security-based swaps.
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     \27\ Section 803(6) of the Dodd-Frank Act defines a financial 
market utility as ``any person that manages or operates a multilateral 
system for the purpose of transferring, clearing, or settling payments, 
securities, or other financial transactions among financial 
institutions or between financial institutions and the person.''
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Adoption of Clearing Agency Standards
    Clearing agencies play a critical role in the financial markets by 
ensuring that transactions settle on time and on agreed-upon terms. To 
promote the integrity of clearing agency operations and governance, the 
Commission adopted rules requiring all registered clearing agencies to 
maintain certain standards with respect to risk management and certain 
operational matters. \28\ The rules also contain specific requirements 
for clearing agencies that perform central counterparty services. For 
example, such clearing agencies must have in place written policies and 
procedures reasonably designed to:
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     \28\ See, Release No. 34-68080, ``Clearing Agency Standards'' 
(October 22, 2012), http://www.sec.gov/rules/final/2012/34-68080.pdf.

    Measure their credit exposures to participants at least 
---------------------------------------------------------------------------
        once a day;

    Use margin requirements to limit their credit exposures to 
        participants, to be reviewed at least monthly;

    Maintain sufficient financial resources to withstand, at a 
        minimum, a default by the participant family to which the 
        clearing agency has the largest exposure in extreme but 
        plausible market conditions (with a higher requirement that 
        agencies clearing security-based swaps maintain sufficient 
        resources to cover the two largest participant family 
        exposures); and

    Provide the opportunity to obtain membership in the 
        clearing agency for persons who are not dealers or security-
        based swap dealers on fair and reasonable terms.

    The rules also establish record keeping and financial disclosure 
requirements for all registered clearing agencies as well as several 
new standards for clearance and settlement.
    The new rules were the result of close work between the Commission 
staff and staffs of the CFTC and the Board. The requirements take into 
consideration recognized international standards, and they are designed 
to further strengthen the Commission's oversight of securities clearing 
agencies, promote consistency in the regulation of clearing 
organizations generally, and thereby help to ensure that clearing 
agency regulation reduces systemic risk in the financial markets.

Systemically Important Clearing Agencies
    SEC staff has worked with colleagues at the CFTC, the Board, the 
Department of Treasury, and other U.S. financial agencies on the 
designation of certain clearing agencies as systemically important 
FMUs. Title VIII of the Dodd-Frank Act provides important new 
enhancements to the regulation and supervision of designated FMUs that 
are designed to provide consistency, promote robust risk management and 
safety and soundness, reduce systemic risks, and support the stability 
of the broader financial system. \29\
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     \29\ See, Dodd-Frank Act 802.
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    Under Title VIII, FSOC is authorized to designate an FMU as 
systemically important if the failure or a disruption to the 
functioning of the FMU could create or increase the risk of significant 
liquidity or credit problems spreading among financial institutions or 
markets and thereby threaten the stability of the U.S. financial 
system. Since FSOC established an interagency FMU designations 
committee to develop a framework for the designation of systemically 
important FMUs, SEC staff has actively participated in the designations 
committee. In July 2012, FSOC designated six clearing agencies 
registered with the Commission as systemically important FMUs under 
Title VIII. \30\ The SEC staff played an important role in preparing 
the analysis that provided the basis for these designations.
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     \30\ Clearing agencies that have been designated systemically 
important are Chicago Mercantile Exchange, Inc., The Depository Trust 
Company, Fixed Income Clearing Corporation, ICE Clear Credit LLC, 
National Securities Clearing Corporation, and The Options Clearing 
Corporation. Two payment systems were also designated systemically 
important: The Clearing House Payments Company L.L.C. on the basis of 
its role as operation of the Clearing House Interbank Payments System 
and CLS Bank International.
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    In addition, as directed by Title VIII and prior to the completion 
of the designation process, the SEC staff worked jointly with the 
staffs of the CFTC and the Board to develop a report to Congress 
containing recommendations regarding risk management supervision of 
clearing entities designated as systemically important. The staffs of 
the agencies met regularly to develop a framework for (1) improving 
consistency in the clearing entity oversight programs of the SEC and 
CFTC; (2) promoting robust risk management by designated clearing 
agencies; and (3) improving regulators' ability to monitor the 
potential effects of such risk management on the stability of the U.S. 
financial system. The joint report was submitted to Congress in July 
2011. \31\ Consistent with the framework set out in the report, the SEC 
has been engaged in ongoing consultation and cooperation in clearing 
agency oversight with the staffs of the CFTC and the Board.
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     \31\ ``Risk Management Supervision of Designated Clearing 
Entities'', http://www.sec.gov/news/studies/2011/813study.pdf.
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Staff Studies Regarding Investment Advisers and Broker-Dealers
    In January 2011, the Commission submitted to Congress two staff 
studies in the investment management area required by the Dodd-Frank 
Act.
    The first study, mandated by Section 914, analyzed the need for 
enhanced examination and enforcement resources for investment advisers 
registered with the Commission. \32\ It found that the Commission 
likely will not have sufficient capacity in the near or long term to 
conduct effective examinations of registered investment advisers with 
adequate frequency. Therefore, the study stated that the Commission's 
examination program requires a source of funding adequate to permit the 
Commission to meet new examination challenges and sufficiently stable 
to prevent adviser examination resources from continuously being 
outstripped by growth in the number of registered investment advisers.
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     \32\ See, ``Study on Enhancing Investor Adviser Examinations'' 
(January 2011), http://www.sec.gov/news/studies/2011/914studyfinal.pdf; 
see also, Commissioner Elisse B. Walter, Statement on Study Enhancing 
Investment Adviser Examinations (Required by Section 914 of Title IX of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act) (Jan. 
2010), http://www.sec.gov/news/speech/2011/spch011911ebw.pdf.
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    The study outlined the following three options for strengthening 
the Commission's investment adviser examination program: (1) imposing 
user fees on Commission-registered investment advisers to fund their 
examinations; (2) authorizing one or more self-regulatory organizations 
that assess fees on their members to examine, subject to Commission 
oversight, all Commission-registered investment advisers; or (3) 
authorizing FINRA to examine a subset of advisers--specifically, dually 
registered investment advisers and broker-dealers--for compliance with 
the Advisers Act.
    The second staff study, required by Section 913 of the Dodd-Frank 
Act (the ``IA/BD Study''), addressed the obligations of investment 
advisers and broker-dealers when providing personalized investment 
advice about securities to retail customers. \33\ The staff study noted 
that retail investors generally are not aware of the differences 
between the regulation of investment advisers and broker-dealers, or 
the legal implications of those differences. The staff study also noted 
that many investors are confused by the different standards of care 
that apply to investment advisers and broker-dealers. The IA/BD Study 
made two primary recommendations: that the Commission (1) exercise the 
discretionary rulemaking authority provided by Section 913 of the Dodd-
Frank Act to implement a uniform fiduciary standard of conduct for 
broker-dealers and investment advisers when they are providing 
personalized investment advice about securities to retail investors; 
and (2) consider harmonization of broker-dealer and investment adviser 
regulation when broker-dealers and investment advisers provide the same 
or substantially similar services to retail investors and when such 
harmonization adds meaningfully to investor protection.
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     \33\ See, ``Study on Investment Advisers and Broker-Dealers'' 
(January 2011), http://www.sec.gov/news/studies/2011/913studyfinal.pdf; 
see also, Statement by SEC Commissioners Kathleen L. Casey and Troy A. 
Paredes Regarding Study on Investment Advisers and Broker-Dealers 
(January 21, 2011), http://www.sec.gov/news/speech/2011/
spch012211klctap.htm.
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    Under Section 913, the uniform fiduciary standard to which broker-
dealers and investment advisers would be subject would be ``to act in 
the best interest of the customer without regard to the financial or 
other interest of the broker, dealer, or investment adviser providing 
the advice.'' The uniform fiduciary standard would be ``no less 
stringent'' than the standard that applies to investment advisers 
today.
    We are giving serious consideration to the study's recommendations. 
Since publishing the IA/BD Study, the staff, including the Commission's 
economists, continues to review current information and available data 
about the marketplace for personalized investment advice and the 
potential impact of the study's recommendations. While we have 
extensive experience in the regulation of broker-dealers and investment 
advisers, we believe the public can provide further data and other 
information to assist us in determining whether or not to adopt a 
uniform fiduciary standard of conduct or otherwise use the authority 
provided under Section 913 of the Dodd-Frank Act. To this end, the 
staff is drafting a public request for information to obtain data 
specific to the provision of retail financial advice and the regulatory 
alternatives. The request aims to seek information from commenters--
including retail investors, as well as industry participants--that will 
be helpful to us as we continue to analyze the various components of 
the market for retail financial advice.

Credit Rating Agencies
    Under the Dodd-Frank Act, the Commission is required to undertake 
approximately a dozen rulemakings related to nationally recognized 
statistical rating organizations (NRSROs). The Act requires the SEC to 
address, among other things, internal controls and procedures, 
conflicts of interest, credit rating methodologies, transparency, 
ratings performance, analyst training, credit rating symbols and 
definitions, and disclosures accompanying the publication of credit 
ratings. The Commission adopted the first of these required rulemakings 
in January 2011, \34\ and in May 2011 published for public comment a 
series of proposed rules that would further implement this requirement. 
\35\ The proposed rules are intended to strengthen the integrity of 
credit ratings by, among other things, improving their transparency. 
Under the Commission's proposals, NRSROs would, among other things, be 
required to:
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     \34\ See, Release No. 33-9175, ``Disclosure for Asset-Backed 
Securities Required by Section 943 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act'' (January 20, 2011), http://www.sec.gov/
rules/final/2011/33-9175.pdf. In addition, in September 2010, the 
Commission issued an amendment to Regulation FD that implements Section 
939B of the Act, which requires that the SEC amend Regulation FD to 
remove the specific exemption from the rule for disclosures made to 
NRSROs and credit rating agencies for the purpose of determining or 
monitoring credit ratings. See, Release No. 33-9146, ``Removal From 
Regulation FD of the Exemption for Credit Rating Agencies'' (September 
29, 2010), http://www.sec.gov/rules/final/2010/33-9146.pdf.
     \35\ See, Release No. 34-64514, ``Proposed Rules for Nationally 
Recognized Statistical Rating Organizations'' (May 18, 2011), http://
www.sec.gov/rules/proposed/2011/34-64514.pdf.

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

    Better protect against conflicts of interest;

    Establish professional standards for their credit analysts;

    Provide, along with the publication of any credit rating, 
        public disclosure about the credit rating and the methodology 
        used to determine it; and

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

    The Dodd-Frank Act also mandated three studies relating to credit 
rating agencies: (1) a study on the feasibility and desirability of 
standardizing credit rating terminology, which was published in 
September 2012; \36\ (2) a study on alternative compensation models for 
rating structured finance products, which was published in December 
2012; \37\ and (3) a study on NRSRO independence, which the Commission 
staff is actively developing and which is due in July 2013. \38\
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     \36\ ``Credit Rating Standardization Study'' (September 2012), 
http://www.sec.gov/news/studies/2012/
939h_credit_rating_standardization.pdf.
     \37\ ``Report to Congress on Assigned Credit Ratings'' (December 
2012), http://www.sec.gov/news/studies/2012/assigned-credit-ratings-
study.pdf. The staff is currently in the process of organizing a public 
roundtable to invite discussion from proponents and critics of the 
three courses of action discussed in the report.
     \38\ See, Dodd-Frank Act 939C.
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    The Act also requires every Federal agency to review its 
regulations that require use of credit ratings as an assessment of the 
credit-worthiness of a security and undertake rulemakings to remove 
these references and replace them with other standards of 
creditworthiness deemed appropriate. In July 2011, the staff published 
a report discussing the following steps the Commission has taken to 
fulfill this requirement: \39\
---------------------------------------------------------------------------
     \39\ ``Report on Review of Reliance on Credit Ratings'' (July 
2011), http://www.sec.gov/news/studies/2011/939astudy.pdf.

    In July 2011, the Commission adopted rule amendments 
        removing credit ratings as conditions for companies seeking to 
        use short-form registration when registering nonconvertible 
        securities for public sale. \40\ In addition, prior to adoption 
        of the Act, in April 2010, the Commission proposed new 
        requirements to replace the current credit rating references in 
        shelf eligibility criteria for asset-backed security issuers 
        with new shelf eligibility criteria. \41\ In light of the Act 
        and comment received on the April 2010 proposal, in July 2011, 
        the Commission reproposed the shelf eligibility criteria for 
        offerings of asset-backed securities.
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     \40\ See, Release No. 33-9245, ``Security Ratings'' (July 27, 
2011), http://www.sec.gov/rules/final/2011/33-9245.pdf.
     \41\ See, Release No. 33-9117, ``Asset-Backed Securities'' (April 
7, 2010), http://www.sec.gov/rules/proposed/2010/33-9117.pdf.

    In April 2011, the Commission proposed removing references 
        to credit ratings in rules concerning broker-dealer financial 
        responsibility, distributions of securities, and confirmations 
        of transactions. \42\ Also, in July 2012, the Commission issued 
        an Interpretive Release in response to Section 939(e) of the 
        Dodd-Frank Act, which removes references to credit ratings by 
        NRSROs in two definitions in the Exchange Act. \43\
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     \42\ See, Release No. 34-64352, ``Removal of Certain References to 
Credit Ratings Under the Securities Exchange Act of 1934'' (April 27, 
2011), http://www.sec.gov/rules/proposed/2011/34-64352.pdf.
     \43\ See, Release No. 34-67448, ``Commission Guidance Regarding 
Definitions of Mortgage Related Security and Small Business Related 
Security'' (July 17, 2012), http://www.sec.gov/rules/interp/2012/34-
67448.pdf.

    In March 2011, the Commission proposed to remove credit 
        ratings from rules relating to the types of securities in which 
        a money market fund can invest and the treatment of repurchase 
        agreements for certain purposes under the Investment Company 
        Act as well as from the disclosure forms that certain 
        investment companies must use. \44\
---------------------------------------------------------------------------
     \44\ See, Release Nos. 33-9193; IC-29592, ``References to Credit 
Ratings in Certain Investment Company Act Rules and Forms'' (March 3, 
2011), http://www.sec.gov/rules/proposed/2011/33-9193.pdf. In addition, 
in November 2012, the Commission adopted a rule establishing a credit 
quality standard that certain investments by business and industrial 
development companies must satisfy for those companies to qualify for 
an exemption from most provisions of the Investment Company Act. 
``Purchase of Certain Debt Securities by Business and Industrial 
Development Companies Relying on an Investment Company Act Exception'' 
(November 19, 2012), http://www.sec.gov/rules/final/2012/ic-30268.pdf.

    In September 2010, the Commission also adopted a rule amendment 
removing communications with credit rating agencies from the list of 
excepted communications in Regulation FD, as required by Section 939B 
of the Dodd-Frank Act. \45\
---------------------------------------------------------------------------
     \45\ See, Release No. 33-9146, ``Removal From Regulation FD of the 
Exemption for Credit Rating Agencies'' (September 29, 2010), http://
www.sec.gov/rules/final/2010/33-9146.pdf.
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    Finally, the Dodd-Frank Act requires the Commission to conduct 
staff examinations of each NRSRO at least annually and to issue an 
annual report summarizing the exam findings. As discussed in greater 
detail below, our staff recently completed the second cycle of these 
exams, and, following approval by the Commission, the staff's summary 
report of the examinations was published in November 2012. \46\ The 
staff will continue to focus on completing the statutorily mandated 
annual examinations of each NRSRO, including follow-up from prior 
examinations, and making public the summary report of those 
examinations to promote compliance with statutory and Commission 
requirements. It also is taking steps in response to a recent 
International Organization of Securities Commissions preliminary 
recommendation to establish ``colleges'' of regulators to provide a 
framework for information exchange and collaboration with foreign 
counterparts regarding large globally active credit rating agencies. 
\47\
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     \46\ ``2012 Summary Report of Commission Staff's Examinations of 
Each Nationally Recognized Statistical Rating Organization'' (November 
2012), http://www.sec.gov/news/studies/2012/nrsro-summary-report-
2012.pdf.
     \47\ See, Release No. IOSCO/MR/34/2012, ``IOSCO Publishes Two 
Reports Advancing Its Work on Credit Rating Agencies'' (Dec. 21, 2012) 
http://www.iosco.org/news/pdf/IOSCONEWS261.pdf.
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Volcker Rule
    In October 2011, the Commission proposed a rule jointly with the 
Board, the Federal Deposit Insurance Corporation, and the Office of the 
Comptroller of the Currency (collectively, the ``Federal banking 
agencies'') to implement Section 619 of the Dodd-Frank Act, commonly 
referred to as the ``Volcker Rule.'' \48\ This proposal reflects an 
extensive, collaborative effort among the Federal banking agencies, the 
SEC, and the CFTC, under the coordination of the Department of the 
Treasury (Treasury), to design a rule to implement the Volcker Rule's 
prohibitions and restrictions in a manner that is consistent with the 
language and purpose of the statute. \49\
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     \48\ See, Release No. 34-65545, ``Prohibitions and Restrictions on 
Proprietary Trading and Certain Interests in, and Relationships With, 
Hedge Funds and Private Equity Funds'' (October 12, 2011), http://
www.sec.gov/rules/proposed/2011/34-65545.pdf. The CFTC issued a 
substantially similar proposal in January 2012, which was published in 
the Federal Register in February 2012. See, 77 FR 8332 (February 14, 
2012), http://www.cftc.gov/LawRegulation/FederalRegister/ProposedRules/
2012-935.
     \49\ In developing this proposal, interagency staffs gave close 
and thoughtful consideration to the FSOC's January 2011 study and its 
recommendations for implementing Section 619, which can be found at 
http://www.treasury.gov/initiatives/Documents/
Volcker%20sec%20%20619%20study%20final%201%2018%2011%20rg.pdf. As a 
result, the joint proposal builds upon many of the recommendations set 
forth in the FSOC study.
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    As required by Section 619, the joint proposal generally prohibits 
banking entities--including bank-affiliated, SEC-registered broker-
dealers, security-based swap dealers, and investment advisers--from 
engaging in proprietary trading and having certain interests in, and 
relationships with, hedge funds and private equity funds (covered 
funds). \50\ Like the statute, the proposed rule provides certain 
exceptions to these general prohibitions. For example, the proposal 
permits a banking entity to engage in underwriting, market making-
related activity, risk-mitigating hedging, and organizing and offering 
a covered fund, among other permitted activities, provided that 
specific requirements are met. Further, consistent with the statute, an 
otherwise-permitted activity would be prohibited if it involved a 
material conflict of interest, high-risk assets or trading strategies, 
or a threat to the safety and soundness of the banking entity or to the 
financial stability of the United States. As set forth in the Dodd-
Frank Act, the Commission's rule would apply to banking entities for 
which the Commission is the primary financial regulatory agency, 
including, among others, certain SEC-registered broker-dealers, 
investment advisers, and security-based swap dealers.
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     \50\ Section 619 defines ``banking entity'' as any insured 
depository institution (other than certain limited purpose trust 
institutions), any company that controls an insured depository 
institution, any company that is treated as a bank holding company for 
purposes of section 8 of the International Banking Act of 1978 (i.e., a 
foreign entity with a branch, agency, or subsidiary bank operation in 
the U.S.), and any affiliate or subsidiary of any of the foregoing 
entities. See, 12 U.S.C. 1851(h)(1).
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    The joint proposal sought comment on a wide range of topics due, in 
part, to the breadth of issues presented by the statute and the 
proposal. In response, the Commission has received nearly 19,000 
comment letters, including more than 600 unique and detailed letters. 
\51\ These comments represent a wide variety of viewpoints on a number 
of complex topics, and we are closely considering them as we continue 
to work with the Federal banking agencies, the CFTC, and Treasury to 
develop rules to implement Section 619. Staffs from each of the 
regulatory agencies and Treasury are engaged in regular and active 
consultation to determine how best to move forward to implement the 
statute.
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     \51\ The Commission and the Federal banking agencies extended the 
comment period for the joint proposal from January 13, 2012 to February 
13, 2012. See, Release No. 34-66057 (December 23, 2011), http://
www.sec.gov/rules/proposed/2011/34-66057.pdf. The Commission's public 
comment file is available at http://www.sec.gov/comments/s7-41-11/
s74111.shtml.
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    Pursuant to the Dodd-Frank Act, the statutory requirements of 
Section 619 became effective on July 21, 2012. However, the statute 
also provides for a conformance period following the effective date. 
Section 619 authorizes the Board to establish rules regarding the 
conformance period. The Board issued a conformance rule in February 
2011 \52\ and a related policy statement in April 2012, which confirmed 
that banking entities have 2 years, beginning July 21, 2012, to conform 
all of their activities and investments to the requirements of Section 
619, unless the Board extends the conformance period. \53\
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     \52\ See, 76 FR 8265 (February 14, 2011).
     \53\ See, 77 FR 33949 (June 8, 2012). The Board policy statement 
further provides that, during the conformance period, banking entities 
should engage in good-faith planning efforts, appropriate for their 
activities and investments, to enable them to conform their activities 
and investments to the requirements of Section 619 and final 
implementing rules by no later than the end of the conformance period.
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Municipal Advisors
    Section 975 of the Dodd-Frank Act creates a new class of regulated 
persons, ``municipal advisors,'' and requires these advisors to 
register with the Commission. This new registration requirement, which 
became effective on October 1, 2010, makes it unlawful for any 
municipal advisor, among other things, to provide advice to a municipal 
entity unless the advisor is registered with the Commission. In 
September 2010, the Commission adopted, and subsequently extended, an 
interim final rule establishing a temporary means for municipal 
advisors to satisfy the registration requirement. \54\ The Commission 
has received over 1,100 confirmed registrations of municipal advisors 
pursuant to this temporary rule.
---------------------------------------------------------------------------
     \54\ See, Release No. 34-62824, ``Temporary Registration of 
Municipal Advisors'' (September 1, 2010), http://www.sec.gov/rules/
interim/2010/34-62824.pdf.
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    In December 2010, the Commission proposed a permanent rule to 
govern municipal advisor registration with the SEC. \55\ We have 
received over 1,000 comment letters on the proposal. Many expressed 
concern that the proposed rules were overbroad in various respects, 
including their potential impact on appointed board members of 
municipal entities, municipal investments unrelated to municipal 
securities, and traditional banking products and services.
---------------------------------------------------------------------------
     \55\ See, Release No. 34-63576, ``Registration of Municipal 
Advisors'' (December 20, 2010), http://sec.gov/rules/proposed/2010/34-
63576.pdf.
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    Finalizing the permanent rules for the registration of municipal 
advisors is now the highest immediate priority of the SEC's newly 
established Office of Municipal Securities. \56\ We anticipate that the 
final rules would address, among other things, the well-publicized 
concerns about the need for an exception from registration for 
appointed board members of municipal entities. In addition, the staff 
is continuing to discuss many interpretive issues with other regulators 
and interested market participants in pursuit of a final rule that 
requires appropriate registration of parties engaging in municipal 
advisory activities without unnecessarily imposing additional 
regulation.
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     \56\ The Office of Municipal Securities is described in more 
detail below.
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Asset-Backed Securities
    The Commission has been active in implementing Subtitle D of Title 
IX of the Dodd-Frank Act, entitled ``Improvements to the Asset-Backed 
Securitization Process''. In August 2011, the Commission adopted rules 
in connection with Section 942(a) of the Act, which eliminated the 
automatic suspension of the duty to file reports under Section 15(d) of 
the Exchange Act for asset-backed security (ABS) issuers and granted 
the Commission authority to issue rules providing for the suspension or 
termination of this duty to file reports. The new rules permit 
suspension of the reporting obligations for ABS issuers when there are 
no longer asset-backed securities of the class sold in a registered 
transaction held by nonaffiliates of the depositor. \57\
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     \57\ See, Release No. 34-65148, ``Suspension of the Duty to File 
Reports for Classes of Asset-Backed Securities Under Section 15(d) of 
the Securities Exchange Act of 1934'' (August 17, 2011), http://
www.sec.gov/rules/final/2011/34-65148.pdf.
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    The Commission also is working closely with other regulators to 
jointly create the risk retention rules required by Section 941 of the 
Act, which will address the appropriate amount, form and duration of 
required risk retention for ABS securitizers and will define qualified 
residential mortgages (QRMs). On March 30, 2011, the Commission joined 
its fellow regulators in issuing for public comment proposed risk 
retention rules to implement Section 941. \58\
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     \58\ See, Release No. 34-64148, ``Credit Risk Retention'' (March 
30, 2011), http://www.sec.gov/rules/proposed/2011/34-64148.pdf. Section 
941, is codified as the new Section 15G of the Exchange Act. It 
generally requires the Commission, the Board, Federal Deposit Insurance 
Corporation, Office of the Comptroller of the Currency and, in the case 
of the securitization of any ``residential mortgage asset,'' the 
Federal Housing Finance Agency and Department of Housing and Urban 
Development, to jointly prescribe regulations that require a 
securitizer to retain not less than 5 percent of the credit risk of any 
asset that the securitizer, through the issuance of an asset-backed 
security, transfers, sells, or conveys to a third party. Section 15G 
also provides that the jointly prescribed regulations must prohibit a 
securitizer from directly or indirectly hedging or otherwise 
transferring the credit risk that the securitizer is required to 
retain. See, 780-11(c)(1)(A).
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    Under the proposed rules, a sponsor generally would be permitted to 
choose from a menu of four risk retention options to satisfy its 
minimum 5 percent risk retention requirement. These options were 
designed to provide sponsors with flexibility while also ensuring that 
they actually retain credit risk to align incentives. The proposed 
rules also include three transaction-specific options related to 
securitizations involving revolving asset master trusts, asset-backed 
commercial paper conduits, and commercial mortgage-backed securities. 
Also, as required by Section 941, the proposal provides a complete 
exemption from the risk retention requirements for ABS collateralized 
solely by QRMs and establishes the terms and conditions under which a 
residential mortgage would qualify as a QRM. We have received a number 
of comments regarding the QRM exemption, as well as concerning other 
aspects of the proposal. \59\ The staff currently is considering those 
comments and diligently working with the other agencies' staff to move 
forward with this interagency rulemaking.
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     \59\ The SEC received letters on the proposal from over 10,000 
commentators, representing approximately 275 unique comment letters.
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    In January 2011 the Commission also adopted rules on the use of 
representations and warranties in the market for ABS as required by the 
Act's Section 943. \60\ The rules required ABS issuers to disclose the 
history of repurchase requests received and repurchases made relating 
to their outstanding ABS. Issuers were required to make their initial 
filing on February 14, 2012, disclosing the repurchase history for the 
3 years ending December 31, 2011. The disclosure requirements apply to 
issuers of registered and unregistered ABS, including municipal ABS, 
though the rules provide municipal ABS an additional 3-year phase-in 
period.
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     \60\ See, Release No. 33-9175, ``Disclosure for Asset-Backed 
Securities Required by Section 943 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act'' (January 20, 2011), http://www.sec.gov/
rules/final/2011/33-9175.pdf.
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    The Commission also adopted rules in January 2011 to implement 
Section 945, which required an asset-backed issuer in a Securities Act 
registered transaction to perform a review of the assets underlying the 
ABS and disclose the nature of such review. \61\ Under the final rules, 
the type of review conducted may vary, but at a minimum must be 
designed and effected to provide reasonable assurance that the 
prospectus disclosure about the assets is accurate in all material 
respects. The final rule provided a phase-in period to allow market 
participants to adjust their practices to comply with the new 
requirements.
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     \61\ See, Release No. 33-9176, ``Issuer Review of Assets in 
Offerings of Asset-Backed Securities'' (January 20, 2011), http://
www.sec.gov/rules/final/2011/33-9176.pdf.
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Prohibition Against Conflicts of Interest in Certain Securitizations
    In September 2011, the Commission proposed a rule to implement the 
prohibition under Section 621 of the Act, which prohibited entities 
that create and distribute ABS from engaging in transactions that 
involve or result in material conflicts of interest with respect to the 
investors in such ABS. \62\ The proposed rule would implement this 
provision by prohibiting underwriters, placement agents, initial 
purchasers, sponsors of ABS, or any affiliate or subsidiary of such 
entity from engaging in any transaction that would involve or result in 
any material conflicts of interest with respect to any investor in the 
relevant ABS. These entities, referred to as ``securitization 
participants,'' assemble, package, and distribute ABS, so they may 
benefit from the activity that Section 621 is designed to prohibit. The 
prohibition would apply to both nonsynthetic and synthetic asset-backed 
securities and would apply to both registered and unregistered 
offerings of asset-backed securities.
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     \62\ See, Release No. 34-65355, ``Prohibition Against Conflicts of 
Interest in Certain Securitizations'' (September 19, 2011), http://
www.sec.gov/rules/proposed/2011/34-65355.pdf.
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    The proposal is not intended to prohibit legitimate securitization 
activities. We asked many questions in the release to help us strike 
the right balance of prohibiting the type of conduct at which the 
statute is targeted without restricting legitimate securitization 
activities. The Commission received a number of comments on the 
proposal, and the staff is carefully considering those comments in 
preparing its recommendation to the Commission.

Corporate Governance and Executive Compensation
    The Dodd-Frank Act includes a number of corporate governance and 
executive compensation provisions that require Commission rulemaking. 
Among others, such rulemakings include:

    Say on Pay. In accordance with Section 951 of the Act, in 
        January 2011 the Commission adopted rules that require public 
        companies subject to the Federal proxy rules to provide a 
        shareholder advisory ``say-on-pay'' vote on executive 
        compensation, a separate shareholder advisory vote on the 
        frequency of the say-on-pay vote, and disclosure about, and a 
        shareholder advisory vote to approve, compensation related to 
        merger or similar transactions, known as ``golden parachute'' 
        arrangements. \63\ Companies (other than smaller reporting 
        companies) began providing these say-on-pay and ``say-on-
        frequency'' advisory votes at shareholder meetings occurring on 
        or after January 21, 2011. The rules provided smaller reporting 
        companies a 2-year delayed compliance period for the say-on-pay 
        and ``frequency'' votes, and those companies began complying 
        with the rules on January 21, 2013. The Commission also 
        proposed rules to implement the Section 951 requirement that 
        institutional investment managers report their votes on these 
        matters at least annually. \64\
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     \63\ See, Release No. 33-9178, ``Shareholder Approval of Executive 
Compensation and Golden Parachute Compensation'' (January 25, 2011), 
http://www.sec.gov/rules/final/2011/33-9178.pdf.
     \64\ See, Release No. 34-63123, ``Reporting of Proxy Votes on 
Executive Compensation and Other Matters'' (October 18, 2010), http://
www.sec.gov/rules/proposed/2010/34-63123.pdf.

    Compensation Committee and Adviser Requirements. In June 
        2012, the Commission adopted rules to implement Section 952 of 
        the Act, which requires the Commission to, by rule, direct the 
        national securities exchanges and national securities 
        associations to prohibit the listing of any equity security of 
        an issuer that does not comply with new compensation committee 
        and compensation adviser requirements. \65\ The new rules 
        direct the exchanges to establish listing standards concerning 
        compensation advisers and listing standards that require each 
        member of a listed issuer's compensation committee to be an 
        ``independent'' member of the board of directors. The rules 
        also require disclosure about the use of compensation 
        consultants and related conflicts of interest. Each national 
        securities exchange must have final rules or rule amendments 
        complying with the new rules approved by the Commission no 
        later than June 27, 2013. To conform their rules governing 
        independent compensation committees to the new requirements, 
        national securities exchanges that have rules providing for the 
        listing of equity securities have filed proposed rule changes 
        with the Commission. \66\ The Commission issued final orders 
        approving the proposed rule changes in January 2013. \67\
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     \65\ See, Release No. 33-9330, ``Listing Standards for 
Compensation Committees'' (June 20, 2012), http://www.sec.gov/rules/
final/2012/33-9330.pdf.
     \66\ See, Release No. 34-68022 (October 9, 2012), http://
www.sec.gov/rules/sro/bats/2012/34-68022.pdf (BATS Exchange, Inc.); 
Release No. 34-68020 (October 9, 2012), http://www.sec.gov/rules/sro/
cboe/2012/34-68020.pdf (Chicago Board of Options Exchange, Inc.); 
Release No. 34-68033 (October 10, 2012), http://www.sec.gov/rules/sro/
chx/2012/34-68033.pdf (Chicago Stock Exchange, Inc.); Release No. 34-
68013 (October 9, 2012), http://www.sec.gov/rules/sro/nasdaq/2012/34-
68013.pdf (Nasdaq Stock Market LLC); Release No. 34-68018 (October 9, 
2012), http://www.sec.gov/rules/sro/bx/2012/34-68018.pdf (Nasdaq OMX 
BX, Inc.); Release No. 34-68039 (October 11, 2012), http://www.sec.gov/
rules/sro/nsx/2012/34-68039.pdf (National Stock Exchange, Inc.); 
Release No. 34-68011 (October 9, 2012), http://www.sec.gov/rules/sro/
nyse/2012/34-68011.pdf (New York Stock Exchange LLC); Release No. 34-
68006 (October 9, 2012), http://www.sec.gov/rules/sro/nysearca/2012/34-
68006.pdf (NYSEArca LLC); Release No. 34-68007 (October 9, 2012), 
http://www.sec.gov/rules/sro/nysemkt/2012/34-68007.pdf (NYSE MKT LLC).
     \67\ See, Release No. 34-68643 (January 11, 2013), http://
www.sec.gov/rules/sro/bats/2013/34-68643.pdf (BATS Exchange, Inc.); 
Release No. 34-68642 (January 11, 2013), http://www.sec.gov/rules/sro/
cboe/2013/34-68642.pdf (Chicago Board of Options Exchange, Inc.); 
Release No. 34-68653 (January 14, 2013), http://www.sec.gov/rules/sro/
chx/2013/34-68653.pdf (Chicago Stock Exchange, Inc.); Release No. 34-
68640 (January 11, 2013), http://www.sec.gov/rules/sro/nasdaq/2013/34-
68640.pdf (Nasdaq Stock Market LLC); Release No. 34-68641 (January 11, 
2012), http://www.sec.gov/rules/sro/bx/2013/34-68641.pdf (Nasdaq OMX 
BX, Inc.); Release No. 34-68662 (January 15, 2012), http://www.sec.gov/
rules/sro/nsx/2013/34-68662.pdf (National Stock Exchange, Inc.); 
Release No. 34-68635 (January 11, 2013), http://www.sec.gov/rules/sro/
nyse/2013/34-68635.pdf (New York Stock Exchange LLC); Release No. 34-
68638 (January 11, 2013), http://www.sec.gov/rules/sro/nysearca/2013/
34-68638.pdf (NYSEArca LLC); Release No. 34-68637 (January 11, 2013), 
http://www.sec.gov/rules/sro/nysemkt/2013/34-68637.pdf (NYSE MKT LLC).

    Incentive-Based Compensation Arrangements. Section 956 of 
        the Dodd-Frank Act requires the Commission, along with six 
        other financial regulators, to jointly adopt regulations or 
        guidelines governing the incentive-based compensation 
        arrangements of certain financial institutions, including 
        broker-dealers and investment advisers with $1 billion or more 
        of assets. Working with the other regulators, in March 2011 the 
        Commission published for public comment a proposed rule that 
        would address such arrangements. \68\ The Commission has 
        received many comment letters on the proposed rule, and the 
        Commission staff, together with staff from the other 
        regulators, is carefully considering the issues and concerns 
        raised in those comments before adopting final rules.
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     \68\ See, Release no. 34-64140 (March 29, 2011), http://
www.sec.gov/rules/proposed/2011/34-64140.pdf.

    Prohibition on Broker Voting of Uninstructed Shares. 
        Section 957 of the Act requires the rules of each national 
        securities exchange to be amended to prohibit brokers from 
        voting uninstructed shares in director elections (other than 
        uncontested elections of directors of registered investment 
        companies), executive compensation matters, or any other 
        significant matter, as determined by the Commission by rule. 
        The Commission has approved changes to the rules with regard to 
        director elections and executive compensation matters for all 
        of the national securities exchanges. \69\
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     \69\ See, Release No. 34-62874 (September 9, 2010), http://
www.sec.gov/rules/sro/nyse/2010/34-62874.pdf (New York Stock Exchange); 
Release No. 34-62992 (September 24, 2010), http://www.sec.gov/rules/
sro/nasdaq/2010/34-62992.pdf (NASDAQ Stock Market LLC); Release No. 34-
63139 (October 20, 2010), http://www.sec.gov/rules/sro/ise/2010/34-
63139.pdf (International Securities Exchange); Release No. 34-63917 
(February 16, 2011), http://www.sec.gov/rules/sro/cboe/2011/34-
63917.pdf (Chicago Board Options Exchange); Release No. 34-63918 
(February 16, 2011), http://www.sec.gov/rules/sro/c2/2011/34-63918.pdf 
(C2 Options Exchange, Incorporated); Release No. 34-64023 (March 3, 
2011), http://www.sec.gov/rules/sro/bx/2011/34-64023.pdf (NASDAQ OMX 
BX, Inc.); Release No. 34-64024 (March 3, 2011), http://www.sec.gov/
rules/sro/bx/2011/34-64024.pdf (Boston Options Exchange Group, LLC); 
Release No. 34-64121 (March 24, 2011), http://www.sec.gov/rules/sro/
chx/2011/34-64121.pdf (Chicago Stock Exchange); Release No. 34-64122 
(March 24, 2011), http://www.sec.gov/rules/sro/phlx/2011/34-64122.pdf 
(NASDAQ OMX PHLX LLC); Release No. 34-64186 (April 5, 2011), http://
www.sec.gov/rules/sro/edgx/2011/34-64186.pdf (EDGX Exchange); Release 
No. 34-64187 (April 5, 2011), http://www.sec.gov/rules/sro/edga/2011/
34-64187.pdf (EDGA Exchange); Release No. 34-65449 (September 30, 
2011), http://www.sec.gov/rules/sro/bats/2011/34-65449.pdf (BATS 
Exchange, Inc.); Release No. 34-65448 (September 30, 2011), http://
www.sec.gov/rules/sro/byx/2011/34-65448.pdf (BATS Y-Exchange, Inc.); 
Release No. 34-65804 (November 22, 2011), http://www.sec.gov/rules/sro/
nsx/2011/34-65804.pdf (National Stock Exchange, Inc.); Release No. 34-
66006 (December 20, 2011) http://www.sec.gov/rules/sro/nyseamex/2011/
34-66006.pdf (NYSE Amex LLC); Release No. 34-66192 (January 19, 2012), 
http://www.sec.gov/rules/sro/nysearca/2012/34-66192.pdf (NYSE Arca, 
Inc.); and Release No. 68723 (January 24, 2013) (MIAX-2013-02).

    The Commission also is required by the Act to adopt several 
additional rules related to corporate governance and executive 
compensation, including rules mandating new listing standards relating 
to specified ``claw back' policies \70\ and new disclosure requirements 
about executive compensation and company performance, \71\ executive 
pay ratios, \72\ and employee and director hedging. \73\ The staff is 
working diligently on developing recommendations for the Commission 
concerning the implementation of these provisions of the Act.
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     \70\ See, Section 954 of the Dodd-Frank Act.
     \71\ See, Section 953(a) of the Dodd-Frank Act.
     \72\ See, Section 953(b) of the Dodd-Frank Act.
     \73\ See, Section 955 of the Dodd-Frank Act.
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Specialized Disclosure Provisions
    Title XV of the Act contains specialized disclosure provisions 
related to conflict minerals, coal or other mine safety, and payments 
by resource extraction issuers to foreign or U.S. Government entities. 
The Commission adopted final rules for the mine safety provision in 
December 2011, \74\ and companies are currently complying with those 
rules. In addition, the Commission adopted final rules for disclosure 
relating to conflict minerals and payments by resource extraction 
issuers in August 2012. \75\ The conflict minerals and resource 
extraction issuer rulemakings were effective in November 2012 and 
established phase-in periods for compliance to provide issuers time to 
establish systems and processes to comply with the new rules. Companies 
subject to the conflict minerals disclosure requirement will be 
required to make their first filing with the disclosure on new Form SD 
on May 31, 2014, for the 2013 calendar year. Companies subject to the 
resource extraction issuer disclosure requirement will be required to 
comply with the rules for fiscal years ending after September 30, 2013. 
The conflict minerals and resource extraction issuer rulemakings are 
subject to pending litigation. \76\
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     \74\ See, Release No. 33-9286, ``Mine Safety Disclosure'' 
(December 21, 2011), http://www.sec.gov/rules/final/2011/33-9286.pdf.
     \75\ See, Release No. 34-67716, ``Conflict Minerals'' (August 22, 
2012), http://www.sec.gov/rules/final/2012/34-67716.pdf and 
``Disclosure of Payments by Resource Extraction Issuers'' (August 22, 
2012), http://www.sec.gov/rules/final/2012/34-67717.pdf.
     \76\ See, American Petroleum Institute, et al. v. United States 
Securities and Exchange Commission, No. 12-1398 (D.C. Cir. filed Oct. 
10, 2012) and National Association of Manufacturers, et al. v. United 
States Securities and Exchange Commission, No. 12-1422 (D.C. Cir. filed 
Oct. 19, 2012). The Commission received a motion requesting that it 
stay the newly adopted disclosure rules for resource extraction 
issuers, but the Commission declined to issue a stay order. See, http:/
/www.sec.gov/rules/final/2012/34-67717-motion-stay.pdf and Release No. 
68197 (November 8, 2012), http://www.sec.gov/rules/other/2012/34-
68197.pdf. The petitioners in the litigation concerning the conflict 
minerals rule did not request a stay of the newly adopted rule.
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Exempt Offerings
    In December 2011, the Commission adopted rule amendments to 
implement Section 413(a) of the Act, which requires the Commission to 
exclude the value of an individual's primary residence when determining 
if that individual's net worth exceeds the $1 million threshold 
required for ``accredited investor'' status. \77\ Section 413(a) was 
effective on the date of enactment of the Dodd-Frank Act and the 
implementing rules clarify the requirements and codify them in the 
Commission's rules.
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     \77\ See, Release No. 33-9287, ``Net Worth Standard for Accredited 
Investors'' (December 21, 2011) and (March 23, 2012), http://
www.sec.gov/rules/final/2011/33-9287.pdf and http://www.sec.gov/rules/
final/2012/33-9287a.pdf (technical amendment).
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    Under Section 926 of the Act, the Commission is required to adopt 
rules that disqualify securities offerings involving certain ``felons 
and other `bad actors' '' from relying on the safe harbor from 
Securities Act registration provided by Rule 506 of Regulation D. The 
Commission proposed rules to implement the requirements of Section 926 
on May 25, 2011. \78\ Under the proposal, the disqualifying events 
include certain criminal convictions, court injunctions and restraining 
orders; certain final orders of State securities, insurance, banking, 
savings association or credit union regulators, Federal banking 
agencies or the National Credit Union Administration; certain types of 
Commission disciplinary orders; suspension or expulsion from membership 
in, or from association with a member of, a securities self-regulatory 
organization; and certain other securities-law related sanctions. The 
comment period for this rule proposal has ended and the staff is 
developing recommendations for final rules.
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     \78\ See, Release No. 33-9211, ``Disqualification of Felons and 
Other `Bad Actors' From Rule 506 Offerings'' (May 25, 2011), http://
www.sec.gov/rules/proposed/2011/33-9211.pdf.
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Financial Stability Oversight Council
    Title I of the Dodd-Frank Act provides that the Chairman of the SEC 
shall serve as a voting member of FSOC. FSOC provides a formal 
structure for coordination among the various financial regulators to 
monitor systemic risk and to promote financial stability across our 
Nation's financial system. As Chairman of the SEC, I participate in the 
systemic risk oversight activities of the Council and coordinate with 
my colleagues on the Council to facilitate efficient and effective 
implementation of the Dodd-Frank Act.

New Commission Offices
    In addition to the Office of the Whistleblower mentioned above, the 
Dodd-Frank Act required the Commission to create four new offices: the 
Office of Credit Ratings, Office of the Investor Advocate, Office of 
Minority and Women Inclusion, and Office of Municipal Securities. As 
each of these offices is statutorily required to report directly to the 
Chairman, the creation of these offices was subject to approval by the 
Commission's Appropriations subcommittees.

Office of Credit Ratings
    As required by Section 932, the Commission established an Office of 
Credit Ratings (OCR) with the appointment of OCR's Director in June 
2012. OCR is charged with administering the rules of the Commission 
with respect to the practices of NRSROs in determining credit ratings 
for the protection of users of credit ratings and in the public 
interest, promoting accuracy in credit ratings issued by NRSROs and 
ensuring that credit ratings are not unduly influenced by conflicts of 
interest and that NRSROs provide greater disclosure to investors. OCR 
conducts examinations of NRSROs to assess and promote compliance with 
statutory and Commission requirements, monitors the activities of 
NRSROs, and provides guidance with respect to the Commission's policy 
and regulatory initiatives related to NRSROs.
    The examination activities of OCR are focused on conducting annual, 
risk-based examinations of all registered NRSROs to assess compliance 
with Federal securities laws and Commission rules. OCR also conducts 
special risk-targeted examinations based on credit market issues and 
concerns and to follow up on tips, complaints, and NRSRO self-reported 
incidents. The monitoring activities of OCR are geared towards 
informing Commission policy and rulemaking and include identifying and 
analyzing risks, monitoring industry trends, and administering and 
monitoring the NRSRO registration process as well as the periodic 
updates by existing registrants of their Forms NRSRO.
    The Dodd-Frank Act requires that the SEC conduct examinations of 
each NRSRO at least annually. OCR's scope for NRSRO examinations 
includes covering all eight areas required by the Dodd-Frank Act. 
Beginning in 2012, in an effort to be more tailored, OCR developed a 
risk-based approach to exam planning, identifying different risks for 
different NRSROs. During examinations, OCR also follows up on findings 
from prior exams and areas of identified risks. OCR prepares an annual 
public examination report as required by the Dodd-Frank Act, which 
summarizes the essential findings of the examinations and provides 
information on whether the NRSROs have appropriately addressed any 
previous examination recommendations. In November 2012, staff issued 
the second annual staff report including those findings.NRSROs have 
appropriately addressed any previous examination recommendations. In 
November 2012, staff issued the second annual staff report including 
those findings.NRSROs have appropriately addressed any previous 
examination recommendations. In November 2012, staff issued the second 
annual staff report including those findings. \79\
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     \79\ See, ``SEC Issues Staff Summary Report of Examinations of 
Nationally Recognized Statistical Rating Organizations'', 2012-228 
(November 2012), http://www.sec.gov/news/studies/2012/nrsro-summary-
report-2012.pdf.
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Office of the Investor Advocate
    Section 915 requires the SEC to establish an Office of the Investor 
Advocate to assist retail investors in resolving significant problems 
they may have with the Commission or with SROs. The Investor Advocate 
also will identify areas in which investors would benefit from changes 
in Commission regulations or SRO rules; identify problems that 
investors have with financial service providers and investment 
products; and analyze the potential impact on investors of proposed 
Commission regulations and SRO rules. The Investor Advocate also must 
hire an Ombudsman, whose activities will be included in the Advocate's 
reports to Congress. The Commission is in the process of filling the 
position of Investor Advocate.

Office of Minority and Women Inclusion
    In July 2011, shortly after the House and Senate Appropriations 
Committees approved the SEC's reprogramming request to create the 
office, the SEC formally established its Office of Minority and Women 
Inclusion (OMWI). The OMWI Director joined the office in January 2012.
    Under a broad outreach strategy developed by OMWI, the SEC has 
sponsored and/or attended more than 40 career fairs, conferences, and 
business matchmaking events to market the SEC to diverse suppliers and 
job seekers. OMWI continues to partner with leading organizations 
focused on developing employment opportunities for minorities and women 
at the SEC and in the financial services industry. In addition, the 
OMWI Director, along with OMWI directors from other agencies, 
participated in joint roundtables with financial industry groups and 
trade organizations to foster informed dialogue regarding the 
development of standards for assessing the diversity policies and 
practices of regulated entities.
    In fiscal year 2012, OMWI provided technical assistance to over 150 
vendors in its efforts to expand contracting opportunities for 
minority-owned and women-owned businesses. While we are pleased that 
the percentage of contracting dollars awarded to minority-owned and 
women-owned businesses--as well as the percentages of minority hires 
for certain demographic groups, including African Americans--increased 
from fiscal year 2011, more needs to be done. OMWI and the Commission 
are committed to continuing to work proactively to encourage diversity 
in the workforce and increase the participation of minority-owned and 
women-owned businesses in the SEC's programs and contracting 
opportunities.

Office of Municipal Securities
    Section 979 of the Dodd-Frank Act required the Commission to 
establish an Office of Municipal Securities (OMS), reporting directly 
to the Chairman, to administer the rules pertaining to broker-dealers, 
advisors, investors and issuers of municipal securities, and to 
coordinate with the MSRB on rulemaking and enforcement actions. In 
August 2012, the Commission announced the establishment of the OMS and 
appointed a director. The office was previously part of the Division of 
Trading and Markets. One purpose behind this legislative mandate was to 
focus priority attention on the significant municipal securities 
market, which encompasses over $3.7 trillion in outstanding municipal 
securities, over 44,000 municipal issuers, and an average of over 
12,000 bond issues annually.
    The highest immediate priority project for OMS is to work together 
with the Division of Trading and Markets to finalize pending rules 
regarding registration of municipal advisors. OMS's current initiatives 
also include assisting with the implementation of disclosure and market 
structure initiatives recommended for potential further consideration 
by the Commission in its Report on the Municipal Securities Market, 
issued on July 31, 2012, following a staff review of this market 
sector. Briefly, these recommended initiatives include:

    a series of legislative recommendations for potential 
        further consideration to grant the Commission direct authority 
        to set baseline disclosure and accounting standards for 
        municipal issuers;

    regulatory disclosure recommendations for potential further 
        consideration to update the Commission's 1994 interpretative 
        release concerning the disclosure obligations of issuers of 
        municipal securities; and

    a series of market structure recommendations for potential 
        further consideration to improve price transparency in the 
        municipal securities market.

    As noted in this Report, further action on specific recommendations 
will involve further study of relevant additional information, 
including information, as applicable, related to the costs and benefits 
of the recommendations and the consideration, as applicable, of public 
comment.

Economic Analysis
    The SEC considers economic analysis to be a critical element of its 
rule-writing process. We are mindful that our rules have both costs and 
benefits, and that the steps we take to protect the investing public 
also impact financial markets and industry participants who must comply 
with our rules. In recent years, even in the face of an unprecedented 
rulemaking burden generated by the passage of the Act, the agency has 
continually enhanced its economic analysis efforts by, among other 
things, hiring additional Ph.D. economists and involving our economists 
earlier and more comprehensively in the rulemaking process. In 
addition, last year SEC staff received new guidance to inform the 
manner in which they incorporate economic analysis into their 
rulemaking work. \80\
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     \80\ The memorandum ``Current Guidance on Economic Analysis in SEC 
Rulemakings'' is available at http://www.sec.gov/divisions/riskfin/
rsfi_guidance_econ_analy_secrulemaking.pdf. The guidance is in effect 
and being followed by the rule-writing teams as they develop rule 
recommendations.
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    Our Division of Risk, Strategy, and Financial Innovation (RSFI) 
directly assists in the rulemaking process by helping develop the 
conceptual framing for, and assisting in the subsequent writing of, the 
economic analysis in rule releases. Economic analysis of agency rules 
considers, among other things, the direct and indirect costs and 
benefits of the Commission's proposed regulations and reasonable 
alternative approaches, and the rule's effects on competition, 
efficiency and capital formation. Of course, analysis of the likely 
economic effects of proposed rules, while critical to the rulemaking 
process, can be challenging, and certain costs or benefits may be 
difficult to quantify or value with precision, particularly those that 
are indirect or intangible. We continue to be committed to meeting 
these challenges and to ensuring that the Commission engages in sound, 
robust analysis in its rulemaking, and we will continue to work to 
enhance both the process and substance of that analysis.

Section 967 Organizational Assessment
    Section 967 of the Act directed the agency to engage the services 
of an independent consultant to study a number of specific SEC internal 
operations. Boston Consulting Group, Inc. (BCG) performed the 
assessment and provided recommended initiatives in March 2011. \81\ The 
recommendations targeted various aspects of the SEC's mission, 
function, structure, and operations, including:
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     \81\ The BCG Report is available at http://www.sec.gov/news/
studies/2011/967study.pdf.

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    restructuring operating divisions and support offices;

    reshaping roles and governance;

    assessing potential reprioritization of regulatory 
        activities;

    reviewing Commission-staff interaction processes and 
        delegations of authority;

    enhancing the SEC's operational risk management 
        capabilities; and

    considering potential changes in the SEC's oversight of--
        and interaction with--self-regulatory organizations.

    Since that time, the staff has undertaken an assessment of the 
recommendations and has provided three reports to Congress detailing 
the staff activities taken to implement these objectives. Thus far, 
recommendations and implementation plans have been completed for 15 of 
the 20 initiatives examined, and the implementation phase is complete 
or in process for each.

Funding for Implementation of the Dodd-Frank Act
    Since passage of the Dodd-Frank Act, \82\ the agency's existing 
staff has worked extraordinarily hard to conduct the large number of 
rulemakings, studies, and analyses required by the Act. But it has been 
clear to me from the outset that the Act's significant expansion of the 
SEC's jurisdiction over OTC derivatives, private fund advisers, 
municipal advisors, clearing agencies, and credit rating agencies, 
among others, could not be handled appropriately with the agency's 
previous resource levels without undermining the agency's other core 
duties. This is proving especially true as we turn from the first step 
of rule writing to efforts to support and monitor implementation and 
the ongoing process of examinations and enforcement of those rules. 
With Congress's support, the SEC received a FY2012 appropriation that 
permitted us to begin hiring some of the new positions needed to 
fulfill these responsibilities.
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     \82\ In accordance with past practice, the FY2013 budget 
justification of the agency was submitted by the Chairman of the 
Commission and was not voted on by the full Commission. Therefore, this 
section of the testimony does not necessarily represent the views of 
all SEC Commissioners.
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    Despite this, I believe that the SEC does not yet have all the 
resources necessary to fully implement the law, and enactment of the 
President's Budget Request for FY2013 would be key for filling the 
remaining gaps. The Request was for $1.566 billion, and it would permit 
the agency to hire 676 additional individuals. A number of these new 
hires are needed to focus on enforcement, examinations, regulatory 
oversight, and economic and data analysis related to the Act.
    In FY2013, the SEC also is aiming to continue investing in its 
technology capabilities to implement the law and police the markets. In 
particular, we hope to strengthen our ability to take in, organize, and 
analyze data on the new markets and entities under the agency's 
jurisdiction. The enactment of the President's Budget Request, as well 
as the continued use of the agency's Reserve Fund, will be essential to 
that effort.
    If the SEC does not receive additional resources, I believe that 
many of the issues to which the Dodd-Frank Act is directed will not be 
adequately addressed. The SEC would be unable to sufficiently build out 
its technology and hire the industry experts and other staff sorely 
needed to oversee and police these new areas of responsibility.
    It is important to keep in mind that, under the Dodd-Frank Act, the 
SEC collects transaction fees that offset the annual appropriation to 
the SEC. Accordingly, regardless of the amount appropriated to the SEC, 
I believe that it is appropriate to note that the appropriation will be 
fully offset by the fees that we collect, and therefore will have no 
impact on the Nation's budget deficit.

Conclusion
    The Dodd-Frank Act has required the SEC to undertake the largest 
and most complex rulemaking agenda in the history of the agency. To 
date, a tremendous amount of progress has been made to implement that 
agenda, including significant effort intended to increase transparency, 
mitigate risk, protect against market abuse in security-based swaps 
markets, improve the oversight of credit rating agencies and hedge fund 
and other private fund advisers, and develop a better understanding of 
the systemic risk presented by large private funds. As the Commission 
strives to complete the additional work that remains, we look forward 
to working with this Committee and other stakeholders in the financial 
marketplace to adopt rules that protect investors, maintain fair, 
orderly, and efficient markets, and facilitate capital formation. Thank 
you for inviting us to share with you our progress to date and our 
plans going forward. I look forward to answering your questions.
                                 ______
                                 
                   PREPARED STATEMENT OF GARY GENSLER
             Chairman, Commodity Futures Trading Commission
                           February 14, 2013

    Good morning Chairman Johnson, Ranking Member Crapo, and Members of 
the Committee. I thank you for inviting me to today's hearing on 
implementation of Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act) swaps market reforms. I am pleased to testify 
along with my fellow regulators. I also want to thank the CFTC 
Commissioners and staff for their hard work and dedication.
The New Era of Swaps Market Reform
    This hearing is occurring at an historic time in the markets. The 
CFTC now oversees the derivatives marketplace--across both futures and 
swaps. The marketplace is increasingly shifting to implementation of 
the commonsense rules of the road for the swaps market that Congress 
included in the Dodd-Frank Act.
    For the first time, the public is benefiting from seeing the price 
and volume of each swap transaction. This post-trade transparency 
builds upon what has worked for decades in the futures and securities 
markets. The new swaps market information is available free of charge 
on a Web site, like a modern-day ticker tape.
    For the first time, the public will benefit from the greater access 
to the markets and the risk reduction that comes with central clearing. 
Required clearing of interest rate and credit index swaps between 
financial entities begins next month.
    For the first time, the public will benefit from specific oversight 
of swap dealers. As of today, 71 swap dealers are provisionally 
registered. They are subject to standards for sales practices, record 
keeping and business conduct to help lower risk to the economy and 
protect the public from fraud and manipulation. The full list of 
registered swap dealers is on the CFTC's Web site, and we will update 
it as more entities register.
    An earlier economic crisis led President Roosevelt and Congress to 
enact similar commonsense rules of the road for the futures and 
securities markets. I believe these critical reforms of the 1930s have 
been at the foundation of our strong capital markets and many decades 
of economic growth.
    In the 1980s, the swaps market emerged. Until now, though, it had 
lacked the benefit of rules to promote transparency, lower risk and 
protect the public, rules that we have come to depend upon in the 
securities and futures markets. What followed was the 2008 financial 
crisis. Eight million American jobs were lost. In contrast, the futures 
market, supported by earlier reforms, weathered the financial crisis.
    Congress and President Obama responded to the worst economic crisis 
since the Great Depression and carefully crafted the Dodd-Frank swaps 
provisions. They borrowed from what has worked best in the futures 
market for decades: transparency, clearing, and oversight of 
intermediaries.
    The CFTC has largely completed swaps market rule writing, with 80 
percent behind us. On October 12, the CFTC and Securities and Exchange 
Commission's (SEC) foundational definition rules went into effect. This 
marked the new era of swaps market reform.
    The CFTC is seeking to consider and finalize the remaining Dodd-
Frank swaps reforms this year. In addition, as Congress directed the 
CFTC to do, I believe it's critical that we continue our efforts to put 
in place aggregate speculative position limits across futures and swaps 
on physical commodities.
    The agency has completed each of our reforms with an eye toward 
ensuring that the swaps market works for end users, America's primary 
job providers. It's the end users in the nonfinancial side of our 
economy that provide 94 percent of private sector jobs.
    The CFTC's swaps market reforms benefit end users by lowering costs 
and increasing access to the markets. They benefit end users through 
greater transparency--shifting information from Wall Street to Main 
Street. Following Congress' direction, end users are not required to 
bring swaps into central clearing. Further, the Commission's proposed 
rule on margin provides that end users will not have to post margin for 
uncleared swaps. Also, nonfinancial companies, other than those 
genuinely making markets in swaps, will not be required to register as 
swap dealers. Lastly, when end users are required to report their 
transactions, they are given more time to do so than other market 
participants.
    Congress also authorized the CFTC to provide relief from the Dodd-
Frank Act's swaps reforms for certain electricity and electricity-
related energy transactions between rural electric cooperatives and 
Federal, State, municipal and tribal power authorities. Similarly, 
Congress authorized the CFTC to provide relief for certain transactions 
on markets administered by regional transmission organizations and 
independent system operators. The CFTC is looking to soon finalize two 
exemptive orders related to these various transactions, as Congress 
authorized.
    The CFTC has worked to complete the Dodd-Frank reforms in a 
deliberative way--not against a clock. We have been careful to consider 
significant public input, as well as the costs and benefits of each 
rule. CFTC Commissioners and staff have met more than 2,000 times with 
members of the public, and we have held 22 public roundtables. The 
agency has received more than 39,000 comment letters on matters related 
to reform. Our rules also have benefited from close consultation with 
domestic and international regulators and policy makers.
    Throughout this process, the Commission has sought input from 
market participants on appropriate schedules to phase in compliance 
with swaps reforms. Now, over 2\1/2\ years since Dodd-Frank passed and 
with 80 percent of our rules finalized, the market is moving to 
implementation. Thus, it's the natural order of things that market 
participants have questions and have come to us for further guidance. 
The CFTC welcomes inquiries from market participants, as some fine-
tuning is expected. As it is sometimes the case with human nature, the 
agency receives many inquiries as compliance deadlines approach.
    My fellow commissioners and I, along with CFTC staff, have listened 
to market participants and thoughtfully sorted through issues as they 
were brought to our attention, as we will continue to do.
    I now will go into further detail on the Commission's swaps market 
reform efforts.

Transparency--Lowering Cost and Increasing Liquidity, Efficiency, 
        Competition
    Transparency--a longstanding hallmark of the futures market--both 
pre- and post-trade--lowers costs for investors, consumers and 
businesses. It increases liquidity, efficiency and competition. A key 
benefit of swaps reform is providing this critical pricing information 
to businesses and other end users across this land that use the swaps 
market to lock in a price or hedge a risk.
    As of December 31, 2012, provisionally registered swap dealers are 
reporting in real time their interest rate and credit index swap 
transactions to the public and to regulators through swap data 
repositories. These are some of the same products that were at the 
center of the financial crisis. Building on this, swap dealers will 
begin reporting swap transactions in equity, foreign exchange and other 
commodity asset classes on February 28. Other market participants will 
begin reporting April 10.
    With these transparency reforms, the public and regulators now have 
their first full window into the swaps marketplace.
    Time delays for reporting currently range from 30 minutes to 
longer, but will generally be reduced to 15 minutes this October for 
interest rate and credit index swaps. For other asset classes, the time 
delay will be reduced next January. After the CFTC completes the block 
rule for swaps, trades smaller than a block will be reported as soon as 
technologically practicable.
    To further enhance liquidity and price competition, the CFTC is 
working to finish the pretrade transparency rules for swap execution 
facilities (SEFs), as well as the block rule for swaps. SEFs would 
allow market participants to view the prices of available bids and 
offers prior to making their decision on a transaction. These rules 
will build on the democratization of the swaps market that comes with 
the clearing of standardized swaps.

Clearing--Lowering Risk and Democratizing the Market
    Since the late 19th century, clearinghouses have lowered risk for 
the public and fostered competition in the futures market. Clearing 
also has democratized the market by fostering access for farmers, 
ranchers, merchants, and other participants.
    A key milestone was reached in November 2012 with the CFTC's 
adoption of the first clearing requirement determinations. The vast 
majority of interest rate and credit default index swaps will be 
brought into central clearing. This follows through on the U.S. 
commitment at the 2009 G20 meeting that standardized swaps should be 
brought into central clearing by the end of 2012. Compliance will be 
phased in throughout this year. Swap dealers and the largest hedge 
funds will be required to clear March 11, and all other financial 
entities follow June 10. Accounts managed by third party investment 
managers and ERISA pension plans have until September 9 to begin 
clearing.
    Consistent with the direction of Dodd-Frank, the Commission in the 
fall of 2011 adopted a comprehensive set of rules for the risk 
management of clearinghouses. These final rules were consistent with 
international standards, as evidenced by the Principles for Financial 
Market Infrastructures (PFMIs) consultative document that had been 
published by the Committee on Payment and Settlement Systems and the 
International Organization of Securities Commissions (CPSS-IOSCO).
    In April of 2012, CPSS-IOSCO issued the final PFMIs. The 
Commission's clearinghouse risk management rules cover the vast 
majority of the standards set forth in the final PFMIs. There are a 
small number of areas where it may be appropriate to augment our rules 
to meet those standards, particularly as it relates to systemically 
important clearinghouses. I have directed staff to work expeditiously 
to recommend the necessary steps so that the Commission may implement 
any remaining items from the PFMIs not yet incorporated in our 
clearinghouse rules. I look forward to the Commission considering 
action on this in 2013.
    I expect that soon we will complete a rule to exempt swaps between 
certain affiliated entities within a corporate group from the clearing 
requirement. This year, the CFTC also will be considering possible 
clearing determinations for other commodity swaps, including energy 
swaps.
Swap Dealer Oversight--Promoting Market Integrity and Lowering Risk
    Comprehensive oversight of swap dealers, a foundational piece of 
Dodd-Frank, will promote market integrity and lower risk to taxpayers 
and the rest of the economy. Congress wanted end users to continue 
benefiting from customized swaps (those not brought into central 
clearing) while being protected through the express oversight of swap 
dealers. In addition, Dodd-Frank extended the CFTC's existing oversight 
of previously regulated intermediaries to include their swaps activity. 
Such intermediaries have historically included futures commission 
merchants, introducing brokers, commodity pool operators, and commodity 
trading advisors.
    As the result of CFTC rules completed in the first half of last 
year, 71 swap dealers are now provisionally registered. This initial 
group of dealers includes the largest domestic and international 
financial institutions dealing in swaps with U.S. persons. It includes 
the 16 institutions commonly referred to as the G16 dealers. Other 
entities are expected to register over the course of this year once 
they exceed the de minimis threshold for swap dealing activity.
    In addition to reporting trades to both regulators and the public, 
swap dealers will implement crucial back office standards that lower 
risk and increase market integrity. These include promoting the timely 
confirmation of trades and documentation of the trading relationship. 
Swap dealers also will be required to implement sales practice 
standards that prohibit fraud, treat customers fairly and improve 
transparency. These reforms are being phased in over the course of this 
year.
    The CFTC is collaborating closely domestically and internationally 
on a global approach to margin requirements for uncleared swaps. We are 
working along with the Federal Reserve, the other U.S. banking 
regulators, the SEC and our international counterparts on a final set 
of standards to be published by the Basel Committee on Banking 
Supervision and the International Organization of Securities 
Commissions (IOSCO). The CFTC's proposed margin rules excluded 
nonfinancial end users from margin requirements for uncleared swaps. We 
have been advocating with global regulators for an approach consistent 
with that of the CFTC. I would anticipate that the CFTC, in 
consultation with European regulators, would take up a final margin 
rules, as well as related rules on capital, in the second half of this 
year.
    Following Congress' mandate, the CFTC also is working with our 
fellow domestic financial regulators to complete the Volcker Rule. In 
adopting the Volcker Rule, Congress prohibited banking entities from 
proprietary trading, an activity that may put taxpayers at risk. At the 
same time, Congress permitted banking entities to engage in certain 
activities, such as market making and risk mitigating hedging. One of 
the challenges in finalizing a rule is achieving these multiple 
objectives.

International Coordination on Swaps Market Reform
    In enacting financial reform, Congress recognized the basic lessons 
of modern finance and the 2008 crisis. During a default or crisis, risk 
knows no geographic border. Risk from our housing and financial crisis 
contributed to economic downturns around the globe. Further, if a run 
starts on one part of a modern financial institution, almost regardless 
of where it is around the globe, it invariably means a funding and 
liquidity crisis rapidly spreads and infects the entire consolidated 
financial entity.
    This phenomenon was true with the overseas affiliates and 
operations of AIG, Lehman Brothers, Citigroup, and Bear Stearns.
    AIG Financial Products, for instance, was a Connecticut subsidiary 
of New York insurance giant that used a French bank license to 
basically run its swaps operations out of Mayfair in London. Its 
collapse nearly brought down the U.S. economy.
    Last year's events of JPMorgan Chase, where it executed swaps 
through its London branch, are a stark reminder of this reality of 
modern finance. Though many of these transactions were entered into by 
an offshore office, the bank here in the United States absorbed the 
losses. Yet again, this was a reminder that in modern finance, trades 
booked offshore by U.S. financial institutions should not be confused 
with keeping that risk offshore.
    Failing to incorporate these basic lessons of modern finance into 
the CFTC's oversight of the swaps market would fall short of the goals 
of Dodd-Frank reform. It would leave the public at risk.
    More specifically, I believe that Dodd-Frank reform applies to 
transactions entered into by overseas branches of U.S. entities with 
non-U.S. persons, as well as between overseas affiliates guaranteed by 
U.S. entities. Failing to do so would mean American jobs and markets 
may move offshore, but, particularly in times of crisis, risk would 
come crashing back to our economy.
    Similar lessons of modern finance were evident, as well, with the 
collapse of the hedge fund Long-Term Capital Management in 1998. It was 
run out of Connecticut, but its $1.2 trillion swaps were booked in its 
Cayman Islands affiliate. The risk from those activities, as the events 
of the time highlighted, had a direct and significant effect here in 
the United States.
    The same was true when Bear Stearns in 2007 bailed out two of its 
sinking hedge fund affiliates, which had significant investments in 
subprime mortgages. They both were organized offshore. This was just 
the beginning of the end, as within months, the Federal Reserve 
provided extraordinary support for the failing Bear Stearns.
    We must thus ensure that collective investment vehicles, including 
hedge funds, that either have their principle place of business in the 
United States or are directly or indirectly majority owned by U.S. 
persons are not able to avoid the clearing requirement--or any other 
Dodd-Frank requirement--simply due to how they might be organized.
    We are hearing, though, that some swap dealers may be promoting to 
hedge funds an idea to avoid required clearing, at least during an 
interim period from March until July. I would be concerned if, in an 
effort to avoid clearing, swap dealers route to their foreign 
affiliates trades with hedge funds organized offshore, even though such 
hedge funds' principle place of business was in the United States or 
they are majority owned by U.S. persons. The CFTC is working to ensure 
that this idea does not prevail and develop into a practice that leaves 
the American public at risk. If we don't address this, the P.O. boxes 
may be offshore, but the risk will flow back here.
    Congress understood these issues and addressed this reality of 
modern finance in Section 722(d) of the Dodd-Frank Act, which states 
that swaps reforms shall not apply to activities outside the United 
States unless those activities have ``a direct and significant 
connection with activities in, or effect on, commerce of the United 
States.'' Congress provided this provision solely for swaps under the 
CFTC's oversight and provided a different standard for securities-based 
swaps under the SEC's oversight.
    To give financial institutions and market participants guidance on 
722(d), the CFTC last June sought public consultation on its 
interpretation of this provision. The proposed guidance is a balanced, 
measured approach, consistent with the cross-border provisions in Dodd-
Frank and Congress' recognition that risk easily crosses borders.
    Pursuant to Commission guidance, foreign firms that do more than a 
de minimis amount of swap-dealing activity with U.S. persons would be 
required to register with the CFTC within about 2 months after crossing 
the de minimis threshold. A number of international financial 
institutions are among the 71 swap dealers that are provisionally 
registered with the CFTC.
    Where appropriate, we are committed to permitting, foreign firms 
and, in certain circumstances, overseas branches and guaranteed 
affiliates of U.S. swap dealers, to comply with Dodd-Frank through 
complying with comparable and comprehensive foreign regulatory 
requirements. We call this substituted compliance.
    For foreign swap dealers, we would allow such substituted 
compliance for requirements that apply across a swap dealer's entity, 
as well as for certain transaction-level requirements when facing 
overseas branches of U.S. entities and overseas affiliates guaranteed 
by U.S. entities. Entity-level requirements include capital, chief 
compliance officer and swap data record keeping. Transaction-level 
requirements include clearing, margin, real-time public reporting, 
trade execution, trading documentation and sales practices.
    When foreign swaps dealers transact with a U.S. person, though, 
compliance with Dodd-Frank is required.
    To assist foreign swap dealers with Dodd-Frank compliance, the CFTC 
recently finalized an exemptive order that applies until mid-July 2013. 
This Final Order for foreign swap dealers incorporates many suggestions 
from the ongoing consultation on cross-border issues with foreign 
regulatory counterparts and market participants. For instance, the 
definition of ``U.S. person'' in the Order benefited from the comments 
in response to the July 2012 proposal.
    Under this Final Order, foreign swap dealers may phase in 
compliance with certain entity-level requirements. In addition, the 
Order provides time-limited relief for foreign dealers from specified 
transaction-level requirements when they transact with overseas 
affiliates guaranteed by U.S. entities, as well as with foreign 
branches of U.S. swap dealers.
    The Final Order provides time for the Commission to continue 
working with foreign regulators as they implement comparable swaps 
reforms and as the Commission considers substituted compliance 
determinations for the various foreign jurisdictions with entities that 
have registered as swap dealers under Dodd-Frank.
    The CFTC will continue engaging with our international counterparts 
through bilateral and multilateral discussions on reform and cross-
border swaps activity. Just last week, SEC Chairman Walter and I had a 
productive meeting with international market regulators in Brussels.
    Given our different cultures, political systems and legislative 
mandates some differences are unavoidable, but we've made great 
progress internationally on an aligned approach to reform. The CFTC is 
committed to working through any instances where we are made aware of a 
conflict between U.S. law and that of another jurisdiction.

Customer Protection
    Dodd-Frank included provisions directing the CFTC to enhance the 
protection of swaps customer funds. While it was not a requirement of 
Dodd-Frank, in 2009 the CFTC also reviewed our existing customer 
protection rules for futures market customers. As a result, a number of 
our customer protection enhancements affect both futures and swaps 
market customers. I would like to review our finalized enhancements, as 
well as an important customer protection proposal.
    The CFTC's completed amendments to rule 1.25 regarding the 
investment of customer funds benefit both futures and swaps customers. 
The amendments include preventing in-house lending of customer money 
through repurchase agreements. The CFTC's gross margining rules for 
futures and swaps customers require clearinghouses to collect margin on 
a gross basis. Futures commission merchants (FCMs) are no longer able 
to offset one customer's collateral against another or to send only the 
net to the clearinghouse.
    Swaps customers further benefit from the new so-called LSOC (legal 
segregation with operational comingling) rules, which ensure their 
money is protected individually all the way to the clearinghouse.
    The Commission also worked closely with market participants on new 
rules for customer protection adopted by the self-regulatory 
organization (SRO), the National Futures Association. These include 
requiring FCMs to hold sufficient funds for U.S. foreign futures and 
options customers trading on foreign contract markets (in Part 30 
secured accounts). Starting last year, they must meet their total 
obligations to customers trading on foreign markets computed under the 
net liquidating equity method. In addition, FCMs must maintain written 
policies and procedures governing the maintenance of excess funds in 
customer segregated and Part 30 secured accounts. Withdrawals of 25 
percent or more would necessitate preapproval in writing by senior 
management and must be reported to the designated SRO and the CFTC.
    These steps were significant, but market events have further 
highlighted that the Commission must do everything within our 
authorities and resources to strengthen oversight programs and the 
protection of customers and their funds.
    In the fall of 2012, the Commission sought public comment on a 
proposal to further enhance the protection of customer funds.
    The proposal, which the CFTC looks forward to finalizing this year, 
would strengthen the controls around customer funds at FCMs. It would 
set new regulatory accounting requirements and would raise minimum 
standards for independent public accountants who audit FCMs. And it 
would provide regulators with daily direct electronic access to the 
FCMs' bank and custodial accounts for customer funds. Last week, the 
CFTC held a public roundtable on this proposal, the third roundtable 
focused on customer protection.
    Further, the CFTC intends to finalize a rule this year on 
segregation for uncleared swaps.

Benchmark Interest Rates
    I'd like to now turn to the three cases the CFTC brought against 
Barclays, UBS, and RBS for manipulative conduct with respect to the 
London Interbank Offered Rate (LIBOR) and other benchmark interest rate 
submissions. The reason it's important to focus on these matters is not 
because there were $2.5 billion in fines, though the U.S. penalties 
against these three banks of more than $2 billion were significant. 
What this is about is the integrity of the financial markets. When a 
reference rate, such as LIBOR--central to borrowing, lending and 
hedging in our economy--has been so readily and pervasively rigged, 
it's critical that we discuss how to best change the system. We must 
ensure that reference rates are honest and reliable reflections of 
observable transactions in real markets.
    The three cases shared a number of common traits. Foremost, at each 
institution the misconduct spanned multiple years, involved offices in 
multiple cities around the globe, included numerous people, and 
affected multiple benchmark rates and currencies. In each case, there 
was evidence of collusion among banks. In both the UBS and RBS cases, 
one or more interdealer brokers were asked to paint false pictures to 
influence submissions of other banks, i.e., to spread the falsehoods 
more widely. At Barclays and UBS, the banks also were reporting falsely 
low borrowing rates in an effort to protect their reputation.
    Why does this matter?
    The derivatives marketplace that the CFTC oversees started about 
150 years ago. Futures contracts initially were linked to physical 
commodities, like corn and wheat. Such clear linkage ultimately comes 
from the ability of farmers, ranchers and other market participants to 
physically deliver the commodity at the expiration of the contract. As 
the markets evolved, cash-settled contracts emerged, often linked to 
markets for financial commodities, like the stock market or interest 
rates. These cash-settled derivatives generally reference indices or 
benchmarks.
    Whether linked to physical commodities or indices, derivatives--
both futures and swaps--should ultimately be anchored to observable 
prices established in real underlying cash markets. And it's only when 
there are real transactions entered into at arm's length between buyers 
and sellers that we can be confident that prices are discovered and set 
accurately.
    When market participants submit for a benchmark rate that lacks 
observable underlying transactions, even if operating in good faith, 
they may stray from what real transactions would reflect. When a 
benchmark is separated from real transactions, it is more vulnerable to 
misconduct.
    Today, LIBOR is the reference rate for 70 percent of the U.S. 
futures market, most of the swaps market and nearly half of U.S. 
adjustable rate mortgages. It's embedded in the wiring of our financial 
system.
    The challenge we face is that the market for interbank, unsecured 
borrowing has largely diminished over the last 5 years. Some say that 
it is essentially nonexistent. In 2008, Mervyn King, the governor of 
the Bank of England, said of Libor: ``It is, in many ways, the rate at 
which banks do not lend to each other.''
    The number of banks willing to lend to one another on such terms 
has been sharply reduced because of economic turmoil, including the 
2008 global financial crisis, the European debt crisis that began in 
2010, and the downgrading of large banks' credit ratings. In addition, 
there have been other factors that have led to unsecured, interbank 
lending drying up, including changes to Basel capital rules and central 
banks providing funding directly to banks.
    Fortunately, much work is occurring internationally to address 
these issues. I want to commend the work of Martin Wheatley and the 
U.K. Financial Services Authority (FSA) on the ``Wheatley Review of 
LIBOR''. Additionally, the CFTC and the FSA are cochairing the 
International Organization of Securities Commissions (IOSCO) Task Force 
that is developing international principles for benchmarks and 
examining best mechanisms or protocols for transition, if needed. On 
January 11, the IOSCO Task Force published the Consultation Report on 
Financial Benchmarks.
    The consultation report said: ``The Task Force is of the view that 
a benchmark should as a matter of priority be anchored by observable 
transactions entered into at arm's length between buyers and sellers in 
order for it to function as a credible indicator of prices, rates or 
index values.'' It went on to say: ``However, at some point, an 
insufficient level of actual transaction data raises concerns as to 
whether the benchmark continues to reflect prices or rates that have 
been formed by the competitive forces of supply and demand.''
    Among the questions for the public in the report are the following:

    What are the best practices to ensure that benchmark rates 
        honestly reflect market prices?

    What are best practices for benchmark administrators and 
        submitters?

    What factors should be considered in determining whether a 
        current benchmark's underlying market is sufficiently robust? 
        For instance, what is an insufficient level of actual 
        transaction activity?

    And what are the best mechanisms or protocols to transition 
        from an unreliable or obsolete benchmark?

    On February 20, we are holding a public roundtable in London. On 
February 26, the CFTC is hosting a second roundtable to gather input 
from market participants and other interested parties. A final report 
incorporating this crucial public input will be published this spring.

Resources
    The CFTC's hardworking team of 690 is less than 10 percent more in 
numbers than at our peak in the 1990s. Yet since that time, the futures 
market has grown five-fold, and the swaps market is eight times larger 
than the futures market. Market implementation of swaps reforms means 
additional resources for the CFTC are all the more essential. 
Investments in both technology and people are needed for effective 
oversight of these markets by regulators--like having more cops on the 
beat.
    Though data has started to be reported to the public and to 
regulators, we need the staff and technology to access, review and 
analyze the data. Though 71 entities have registered as new swap 
dealers, we need people to answer their questions and work with the NFA 
on the necessary oversight to ensure market integrity. Furthermore, as 
market participants expand their technological sophistication, CFTC 
technology upgrades are critical for market surveillance and to enhance 
customer fund protection programs.
    Without sufficient funding for the CFTC, the Nation cannot be 
assured this agency can closely monitor for the protection of customer 
funds and utilize our enforcement arm to its fullest potential to go 
after bad actors in the futures and swaps markets. Without sufficient 
funding for the CFTC, the Nation cannot be assured that this agency can 
effectively enforce essential rules that promote transparency and lower 
risk to the economy.
    The CFTC is currently funded at $207 million. To fulfill our 
mission for the benefit of the public, the President requested $308 
million for fiscal year 2013 and 1,015 full-time employees.
    Thank you again for inviting me today, and I look forward to your 
questions.

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM MARY J. MILLER

Q.1. Given how complex it is to determine whether a trade is a 
hedge or a proprietary trade, it appears the real issue is 
whether a trade threatens the safety and soundness of the bank. 
What benchmark does your agency use to determine whether a 
particular activity is or is not ``hedging''? How does your 
agency determine whether the trade presents risks to the safety 
and soundness of a financial institution?

A.1. Although Treasury is responsible for coordination of the 
regulations issued by the rulewriting agencies to implement the 
Volcker Rule, Treasury is not itself a rulewriting agency. The 
purpose of the Volcker Rule is to prohibit banking entities 
that have access to the Federal safety net from engaging in 
risky proprietary trading or making certain investments in 
private equity or hedge funds, while preserving important 
activities such as market making and hedging. As the Council 
noted in its Volcker Rule study in January 2011, and as the 
SEC, the CFTC, and the Federal banking agencies noted in their 
proposed rules to implement the Volcker Rule, the challenge 
inherent in creating a robust implementation framework is that 
certain classes of permitted activities--in particular, market 
making, hedging, underwriting, and other transactions on behalf 
of customers--often evidence outwardly similar characteristics 
to prohibited proprietary trading, even as they pursue 
different objectives. Additionally, effective implementation of 
the Volcker Rule requires careful attention to differences 
between types of financial markets and asset classes.
    Since the closing of the public comment period, the 
regulators have been working to address these and other issues 
raised in the thousands of comments submitted on the proposal.

Q.2. In its November 2011 report, GAO recommended that FSOC 
work with the Federal financial regulators to establish formal 
coordination policies for Dodd-Frank rulemakings, such as when 
coordination should occur. Nonetheless, the FSOC has not 
established such formal policies to date. In its September 2012 
report, GAO noted that a number of industry representatives 
questioned why FSOC could not play a greater role in 
coordinating member agencies' rulemaking efforts since the FSOC 
chairperson is responsible for regular consultation with 
regulators and other appropriate organizations of foreign 
Governments or international organizations. Does Treasury agree 
with GAO's recommendation? If so, when will FSOC issue formal 
interagency coordination policies? Is there a reason why FSOC 
could not play a greater role in coordinating member agencies' 
rulemaking efforts?

A.2. The Council appreciates the work of the GAO and the 
important oversight function that it provides. To that end, the 
Council has reviewed all recommendations made by the GAO 
regarding ways in which the Council might further enhance 
collaboration and coordination and has provided responses on 
actions planned and taken. As noted in its responses, the 
Council developed written protocols for the statutorily 
required consultations that are part of certain rulemakings 
required by the Dodd-Frank Act. Additionally, one of the 
Council's first activities was to establish an open operational 
framework that included the creation of standing committees 
composed of staff of Council members and member agencies. The 
interagency participation in these committees draws upon the 
collective policy and supervisory expertise of all of the 
Council members and institutionalizes opportunities for 
discussion, collaboration, and coordination. These teams have 
collaborated on the publication of three annual reports and six 
additional studies or reports related to important issues such 
as the Volcker Rule, the concentration limit on large financial 
companies, and contingent capital, and performed work enabling 
the Council to designate eight financial market utilities as 
systemically important. Interagency teams continue to support 
the Council on its evaluation of nonbank financial companies 
for potential designation, proposed recommendations for money 
market mutual fund reform, and coordination with the Federal 
Reserve Board on enhanced prudential standards.
    Congress did not provide the Council or its Chairperson 
with the authority to require coordination in all cases among 
its independent member agencies. However, the Council, the 
Deputies Committee, and Council staff are committed to 
identifying ways to enhance collaboration as work is conducted 
through the Council's committees and working groups.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHUMER
                      FROM MARY J. MILLER

Q.1. In September 2012, the Government Accountability Office 
(GAO) issued a report on the Financial Stability Oversight 
Council (FSOC) and the Office of Financial Research (OFR), \1\ 
in which it found that the FSOC has not fully leveraged outside 
expertise or used its authority to convene advisory committees 
comprised of industry representatives, academics, and State 
regulators to help inform its work. What has FSOC and/or OFR 
done since the report to address this finding? Should there be 
more formal structures and processes to ensure that the voices 
of key stakeholders and experts are heard?
---------------------------------------------------------------------------
     \1\ GAO-12-886 (Report to Congressional Requesters ``FINANCIAL 
STABILITY New Council and Research Office Should Strengthen the 
Accountability and Transparency of Their Decisions'' (September 2012)).

A.1. Since the GAO issued its report, the Council and the OFR 
have further leveraged outside expertise in several ways. Most 
notably, in November 2012, Treasury announced the members of a 
new Financial Research Advisory Committee, which will work with 
the OFR to recommend ways to develop and employ best practices 
for data management, data standards, and research 
methodologies. The committee is made up of 30 distinguished 
professionals in economics, finance, financial services, data 
management, risk management, and information technology. 
Members include two Nobel laureates in economics, leaders in 
business and nonprofit fields, and prominent researchers at 
major universities and think tanks. The committee held its 
inaugural meeting in December 2012 in Washington, DC, and has 
been active through subcommittees that are focused on research, 
data, technology, risk management, and other issues. In 
addition, through the OFR's ongoing work and symposia, the 
Council is able to draw on the insights and expertise of 
various industry experts and academics on cutting edge systemic 
risk and financial stability analyses and methods. The OFR's 
work to establish the Legal Entity Identifier has also involved 
extensive collaboration with global regulatory authorities, 
standards setting bodies, and industry professionals.
    Additionally, the Council and its committees are committed 
to continuing to facilitate information sharing among its 
members and other parties through the Council's existing 
collaboration and consultation practices. With respect to 
seeking input from State regulators in particular, State 
banking, State insurance, and State securities regulators are 
Council members and participate actively in the discussions of 
the Council and its committees. The Council has also 
demonstrated its commitment to public input by actively seeking 
public comment on a number of matters, including its rule and 
guidance regarding the designation of nonbank financial 
companies, and its proposed recommendations regarding money 
market mutual fund reform.

Q.2. While I understand the sensitivity of many of the issues 
within the FSOC's purview, the GAO report nevertheless raised 
serious concerns about the FSOC's and OFR's full commitment to 
transparency, a shortcoming that could undermine the ability of 
FSOC and OFR to carry out their Congressionally mandated 
mission. GAO observed that ``limits to FSOC's and OFR's 
transparency also contribute to questions about their 
effectiveness.'' \2\ What specific steps will you take to 
increase transparency at FSOC and OFR going forward?
---------------------------------------------------------------------------
     \2\ Id., p. 54.

A.2. The Council and the OFR have taken a number of steps in 
recent months to further demonstrate their commitment to 
transparency and accountability. Since the publication of the 
GAO report, the OFR and the Council completed redesigns of 
their Web sites to improve transparency and usability, to 
improve access to Council documents and reports, and to allow 
users to receive updates when new content is added. These 
include the annual reports of the Council and the OFR, working 
papers, Congressional testimony, Congressional briefings and 
meetings, the OFR's Annual Report to Congress on Human Capital 
Planning, and information about the Financial Research Advisory 
Committee, the Legal Entity Identifier Initiative, and 
assessments. Both redesigned Web sites were available to the 
public by December 2012, with continued enhancements expected 
over time. In addition, as noted above, in November 2012 
Treasury announced the members of a new Financial Research 
Advisory Committee, which will work with the OFR to recommend 
ways to develop and employ best practices for data management, 
data standards, and research methodologies. This committee has 
already held one public meeting and will hold more. The OFR 
also sponsored its second Web cast conference this year. 
Representatives of both the Council and the OFR have also 
testified publicly before Congress and responded to numerous 
requests for information from various oversight bodies. 
Further, the OFR has built on its strategic planning and 
performance management system by finalizing and beginning to 
track foundational performance measures for each of its 
strategic goals.
    The Council is firmly committed to holding open meetings, 
and closes meetings only when appropriate. The Council's 
transparency policy commits the Council to hold two open 
meetings each year, and the Council has held ten open meetings 
in its first 2\1/2\ years. However, the Council must continue 
to balance its responsibility to be transparent with its 
central mission to monitor emerging threats to financial 
stability. This frequently requires discussion of supervisory 
and other market-sensitive data during Council meetings, 
including information about individual firms, transactions, and 
markets that may only be obtained if maintained on a 
confidential basis. Continued protection of this information is 
necessary to prevent destabilizing market speculation that 
could occur if that information were to be disclosed. However, 
in light of the GAO's recommendation, the Council's Deputies 
Committee will consider whether to recommend any further 
changes to the Council's transparency policy.

Q.3. The FSOC stated, in April 2012, that it had requested that 
the OFR conduct a study of the asset management industry, to 
determine (i) what risks, if any, this industry poses to the 
U.S. financial system, and (ii) whether any such risks were 
best addressed through designation or some other means. The 
results of the study would presumably inform the FSOC whether 
to consider asset managers as potentially subject to 
designation as nonbank SIFIs. What process have the FSOC and 
OFR established to solicit and consider input from the public, 
including industry, regulators (FSOC members and non-FSOC 
members), academics, and other interested parties?
    Will the results of the analysis be made public and will 
interested parties be provided the opportunity to comment 
formally on the results?
    Will the FSOC provide the public with an opportunity to 
comment on any metrics and thresholds relating to the potential 
designation of asset management companies as nonbank 
systemically important financial institutions prior to the 
designation of any such company?

A.3. The Council is reviewing generally the activities of asset 
management companies and their impact on the U.S. financial 
system. The Council has asked the OFR to supply data and 
analysis to inform the Council's review. As part of this 
analysis, the Council and OFR staff have met with market 
participants, including asset managers, to learn more about the 
relevant activities and business models.
    The Council's work is ongoing. Were the Council to 
determine that it would be appropriate to develop additional 
metrics that would be used to identify asset management firms 
for further evaluation for potential designation, I expect that 
it would provide the public with an opportunity to review and 
comment on any such metrics, in accordance with past practice. 
As demonstrated by the Council's multiple requests for comment 
on its proposed rule and interpretive guidance regarding 
nonbank financial company designations, the Council values the 
input of all interested parties, stakeholders, and the public.
    Consistent with the Dodd-Frank Act, however, the Council 
does not intend to delay consideration of any nonbank financial 
company for potential designation, if the Council believes that 
material financial distress at the company, or the nature, 
scope, size, scale, concentration, interconnectedness, or mix 
of the activities of the company, could pose a threat to the 
financial stability of the United States.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                      FROM MARY J. MILLER

Q.1. The statutory language for funds defined under the Volcker 
Rule pointedly did not include venture funds, however the 
definition in the proposed rule seemed to indicate that venture 
funds would be covered. In addition to exceeding the statutory 
intent of Congress, this has created uncertainty in the market 
as firms await a final rule and refrain from making commitments 
which might be swept up in the final version of the Volcker 
Rule. Can you clarify whether venture funds are covered by the 
Volcker Rule?

A.1. Congress defined private equity and hedge funds for 
purposes of the Volcker Rule as those entities that rely on the 
exemptions under section 3(c)(1) or 3(c)(7) of the Investment 
Company Act, rather than creating a separate classification or 
treatment of venture capital funds. The Council recognized the 
potential overbreadth of this issue in its study and 
recommended that the rulemaking agencies consider whether 
certain entities should be exempted, including venture capital 
funds.
    The comment letters submitted in response to the proposed 
rules reflect sharply diverging views on whether venture 
capital funds should be exempted. As with the other issues 
raised in the comment letters, we expect the rulemaking 
agencies will consider these comments carefully and take them 
into consideration in developing the final rules.

Q.2. You have previously commented on the progress we have made 
on improving capital and the evolving market perception of too 
big to fail. Do you see any changes in the behavior of 
investors in distinguishing among large institutions and 
variance in their borrowing costs and credit default spreads?

A.2. If investors still perceived large banks as ``too big to 
fail,'' we would expect to see persistently low credit spreads 
for such firms with little variation between firms, as we did 
in the years leading up to the financial crisis. But in the 
aftermath of the crisis, investors are both assigning a greater 
likelihood of loss from default and also distinguishing between 
financial institutions, as measured by higher overall levels 
of, and a wider variance between credit default swap (CDS) 
spreads that markets use to assess credit risk.
    Also, we would expect the largest banks' borrowing costs to 
be low and vary little by the size of the institution or its 
activities, as was the case before the crisis. Today, while 
borrowing costs generally remain low for all banks as a result 
of historically low interest rates, long-term debt spreads have 
increased significantly more for the largest, most complex 
banks than their smaller competitors.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                      FROM MARY J. MILLER

Q.1. The latest report from the Special Inspector General for 
TARP revealed that AIG, GM, and Ally recently requested pay 
raises for 18 top executives. Fourteen of those 18 raises were 
for more than $100,000 and the highest amount was about $1 
million. Treasury approved 18 out of 18 requests.
    Can you explain what Treasury looked for in evaluating 
these salary increases?
    What sorts of factors would cause Treasury to reject a 
salary increase?
    What are Treasury's views on SIGTARP's ongoing 
recommendation to put in place more effective policies and 
procedures for evaluating compensation at these institutions?

A.1. The Interim Final Rule on TARP Standards for Compensation 
and Corporate Governance makes clear that Treasury's Office of 
the Special Master (OSM) must balance limiting compensation and 
making sure that pay is at levels that will permit the 
exceptional assistance recipients to compete--including 
maintaining the ability to attract and retain employees--so 
they can exit TARP and repay taxpayers. The process that OSM 
created in 2009, and that it continues to follow today, 
accomplishes this objective by requesting comprehensive 
submissions from the exceptional assistance companies, which it 
then thoroughly and carefully examines. In reviewing these 
submissions, OSM analyzes market data to determine what 
constitutes competitive marketplace compensation. It is also 
important to note that the companies are constantly evaluating 
the performance of their top executives, and it is not unusual 
for the companies to promote some individuals and propose pay 
decreases for others.
    Thus, OSM does not approve all pay increases. Where 
appropriate, it has permitted individual pay increases based on 
the unique facts and circumstances of each case, while at the 
same time emphasizing limitations on cash and total pay. For 
example, neither AIG nor Ally Financial proposed any net 
increase in compensation for its top 25 executives for 2012. 
The pay raises proposed by AIG and Ally Financial were more 
than offset by the pay decreases proposed by these companies. 
Although GM did propose a net increase in compensation for 
2012, its pay packages nevertheless were on average at the 50th 
percentile for comparable positions at comparable entities. 
Moreover, OSM required that more than 97 percent of the 
approved pay increases be in the form of stock compensation 
rather than cash, because the ultimate value of stock 
compensation is uncertain and will reflect the long-term 
performance of the company. In addition, the three current CEOs 
of the exceptional assistance companies subject to the 2012 
determination process have not had any pay increase during 
their respective tenures.
    Treasury recognizes the importance of diligent oversight 
and has benefited from SIGTARP's review of its work. I 
understand that in its 2012 report, SIGTARP made three 
recommendations and that OSM implemented two of those 
recommendations and was in the process of implementing the 
third when SIGTARP's 2013 report was published. With respect to 
SIGTARP's most recent recommendations, Treasury responded in 
writing stating that it will consider these recommendations.

Q.2. It has been more than 4 years since policy makers began 
focusing on how to fix the ``too big to fail'' problem and 
eliminate the implicit guarantee that, in a time of crisis, the 
Federal Government would bail out large financial institutions 
instead of letting them fail and pose a systemic threat to the 
economy. Nonetheless, the big banks now are even bigger than 
they were in the run-up to the crisis and appear to have 
retained their ``too big to fail'' status and the accompanying 
implicit guarantee. In addition to morale hazard that results 
from ``too big to fail'' status, the implicit guarantee also 
has market distorting effects. As columnist George Will 
recently wrote, large financial institutions still have ``a 
silent subsidy--an unfair competitive advantage relative to 
community banks--inherent in being deemed by the Government, 
implicitly but clearly, too big to fail.'' \1\
---------------------------------------------------------------------------
     \1\ http://articles.washingtonpost.com/2012-10-12/opinions/
35501753_1_banks-andrew-haldane-systemically-important-financial-
institutions
---------------------------------------------------------------------------
    Do you believe that the Financial Stability Oversight 
Council (FSOC) has the necessary authorities--for example, 
under Section 121 of the Dodd-Frank Act--to block expansion and 
in some cases mandate divestiture of large financial 
institutions to ward against the ``too big to fail'' problem?
    Do you believe that FSOC should use its authorities to 
order divestiture only in cases of active crisis, or are there 
situations in which FSOC's authority to break up large banks 
could be done to mitigate against future risks associated with 
the ``too big to fail'' problem?
    Do you believe there are further steps Congress should take 
to fix the ``too big to fail problem?''

A.2. The Dodd-Frank Act provides the U.S. financial authorities 
with a wide range of tools to mitigate risks to the U.S. 
financial system. One such tool is the authority of the Board 
of Governors of the Federal Reserve System under Section 121 to 
take remedial measures with respect to certain financial firms 
that the Federal Reserve determines pose a grave threat to the 
stability of the U.S. financial system. Section 121 provides 
that, if the Federal Reserve Board determines that a large bank 
holding company or a nonbank financial company supervised by 
the Federal Reserve Board poses a grave threat to U.S. 
financial stability, then the Federal Reserve Board, upon the 
affirmative vote of at least two-thirds of the voting members 
of the Council then serving, must take at least one of several 
actions, including potentially forbidding the company from 
making further acquisitions or requiring the company to sell or 
otherwise dispose of assets. While any potential use of this 
authority would need to be evaluated on a company-specific 
basis, the Dodd-Frank Act does not limit the exercise of 
authority under Section 121 of the Dodd-Frank Act to specified 
economic conditions.
    The reforms put in place by the Dodd-Frank Act provide 
regulators with critical tools and authorities that we lacked 
before the crisis to resolve large financial firms whose 
failure would have serious adverse effects on financial 
stability without requiring taxpayer assistance. The emergency 
resolution authority for failing firms created under Title II 
expressly prohibits any bailout by taxpayers. For any financial 
firm that is placed into receivership under this Dodd-Frank 
emergency resolution authority, management and directors 
responsible for the failed condition of the firm will be 
removed and shareholders will be wiped out. In addition, the 
law requires the largest bank holding companies to prepare 
``living wills'' that provide a roadmap for facilitating a 
rapid and orderly bankruptcy.
    Financial reform has also required U.S. financial 
institutions to become more resilient. Large, interconnected 
financial institutions will now be required to hold 
significantly higher levels of capital and liquidity. Leverage 
is significantly lower, reliance on short-term funding is 
lower, and liquidity positions have already improved such that 
large firms are less vulnerable in the event of a downturn.

Q.3. In her written testimony to the hearing, the Special 
Inspector General for TARP (SIGTARP) Christy Romero discussed 
the ``threat of contagion'' to our financial system caused by 
the interconnectedness of the largest institutions that existed 
in the run-up to the financial crisis.
    Do you believe the financial system remains vulnerable to 
the interconnectedness of the largest institutions?
    What is the Department of the Treasury doing to address 
risks that the interconnectedness of large financial 
institutions pose to our financial system?
    Can you describe the metrics the Department of the Treasury 
uses to monitor an institution's interconnectedness and risk 
that it may pose to the financial system?

A.3. The financial crisis demonstrated the risks that can arise 
when large financial institutions are too interconnected, and 
showed that stress can cascade from institution to institution, 
placing the entire financial system at risk. The Treasury 
Department has been consulting with the financial regulators as 
they implement new protections against risks of contagion.
    An important area of reform here is Title VII of the Dodd-
Frank Act, which embodies comprehensive reform of derivatives. 
For example, the law requires that standardized derivatives 
contracts be cleared through a well-regulated central 
counterparty, thereby reducing risk to the system. If a 
derivatives counterparty fails, its failure is absorbed by the 
clearinghouse, which requires appropriate margin for all 
cleared derivatives, rather than this risk cascading to other 
firms.
    The Dodd-Frank Act also limits interconnections among firms 
by imposing single-counterparty credit limits for the largest 
bank holding companies and nonbank financial companies that are 
designated for Federal Reserve Board supervision and enhanced 
prudential standards. These rules, when finalized, will 
restrict how much credit exposure, including exposure from 
derivatives, any one of these financial companies can have to 
any other unaffiliated firm. In addition, the Office of the 
Comptroller of the Currency (OCC) has acted to limit the impact 
of interconnectedness among certain financial institutions 
through the enforcement of its lending limits. These limits 
were recently strengthened by section 610 of the Dodd-Frank Act 
to include derivatives in the calculation.

Q.4. Christy Romero also provided testimony about the need for 
large institutions to engage in effective risk management 
practices and for regulators to supervise this risk management.
    Do you believe the risk management practices at the largest 
financial institutions are adequate?
    Can you describe what the Department of the Treasury is 
doing to supervise the risk management at the largest 
institutions?

A.4. I strongly believe in the importance of robust risk 
management at all financial companies. The Federal banking 
regulators have oversight over risk management as part of their 
supervisory authority over financial institutions under their 
jurisdiction. Public statements and reported regulatory actions 
of the agencies indicate that risk management practices at 
large financial institutions is a priority for the agencies.
    Further, the Dodd-Frank Act contains important measures to 
help safeguard overall financial stability through stronger 
risk management practices at financial firms. The law requires 
bank holding companies with $50 billion or more in assets and 
nonbank financial companies supervised by the Federal Reserve 
Board to comply with enhanced prudential standards. These 
enhanced prudential standards require large publicly traded 
bank holding companies to establish a board-level risk 
management committee as part of more stringent enterprise-wide 
risk management.
    Ultimately, financial institutions make errors of risk and 
judgment all the time, and some companies fail because of them. 
The test of reform is not whether it can protect banks from 
losses, but whether it can prevent broader damage to the 
economy and taxpayers.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS
                      FROM MARY J. MILLER

Q.1. To the extent practicable, please update us as to the 
below concerns on how Treasury and the Financial Stability 
Oversight Council (FSOC) are approaching the analysis of firms 
being considered for nonbank SIFI designation.
    Are different metrics being applied in the evaluation of 
different business models? For example, are different metrics 
being used to evaluate asset managers than those being used to 
evaluate insurance companies? To that end, can you assure us 
that similarly rigorous standards are being used across all 
nonbank business models?

A.1. The Council recognizes that a thorough evaluation of 
different types of nonbank financial companies must rely on 
different quantitative and qualitative considerations. The 
Council has been using a broad range of quantitative and 
qualitative information to evaluate nonbank financial 
companies, and takes into account company-specific and 
industry-specific information as appropriate. For example, the 
Council's interpretive guidance notes that financial 
guarantors, asset management companies, private equity firms, 
and hedge funds may pose risks that are not well-measured by 
the same quantitative thresholds as insurance companies or 
other entities.

Q.2. Can you estimate the time frame for the first nonbank SIFI 
designations to be made public? Do you anticipate them being 
made before prudential standards are finalized? If so, why 
would you not wait for the rules to be in place before 
designations are made?

A.2. I expect that Council will vote on an initial set of 
nonbank financial companies for potential designation in the 
near term. This may occur before the finalization of relevant 
enhanced prudential standards. The specifics of such standards, 
however, are not necessary to the Council's consideration, 
governed by the criteria set forth in the Dodd-Frank Act, of 
whether a nonbank financial company could pose a threat to U.S. 
financial stability.

Q.3. In September of last year, the GAO issued a report 
containing specific recommendations to strengthen the 
accountability and transparency of the FSOC's activities, as 
well as to enhance collaboration both amongst FSOC members 
themselves and between the council and outside stakeholders. I 
am particularly concerned about the recommendation to establish 
a collaborative and comprehensive framework for assessing the 
impact the designation of nonbank SIFIs will have on not only 
the impacted firms, but also the greater economy as a whole. 
Has anything been done since this report was issued to address 
this particular concern?

A.3. The Council, as described in its final rule regarding 
nonbank financial company designations, will annually reassess 
whether each designated nonbank financial company continues to 
satisfy the statutory standards established by the Dodd-Frank 
Act. Additionally, the Council intends to review, at least 
every 5 years, the uniform, quantitative thresholds it applies 
initially to identify nonbank financial companies for further 
evaluation. Moreover, we will review the results of the GAO's 
work to assess some of the impacts articulated in their 
recommendation and evaluate how these impacts may be relevant 
to the statutory criteria that the Council is required to 
consider when evaluating nonbank financial companies for 
designation.

Q.4. To a similar end, the GAO report also suggested working to 
better rationalize rulemakings by using professional and 
technical advisors such as State regulators, industry experts, 
and academics to assist FSOC in its decision-making process. 
What has been done in this regard to ensure that issues 
relating to nonbank supervision are being appropriately 
reviewed by subject-matter experts in the relevant nonbank 
business model?

A.4. Throughout the nonbank financial company designations 
process, the Council has engaged with relevant experts and 
stakeholders with regard to the business models of firms under 
consideration for potential designation. Council members and 
their staffs have substantial expertise regarding a broad range 
of financial companies and activities. With respect to State 
regulators in particular, State banking, State insurance, and 
State securities regulators are Council members and participate 
actively in the discussions of the Council and its committees. 
In addition, the Council is coordinating and consulting with 
the relevant primary financial regulators, which, in the case 
of insurers, includes the appropriate State insurance 
supervisors. Similarly, the Council and OFR have engaged with 
market participants in undertaking the analysis of asset 
management.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                      FROM MARY J. MILLER

Q.1. In a September 2012 report discussing the Financial 
Stability Oversight Council (FSOC), the GAO criticizes the 
Council's lack of transparency regarding its deliberations on 
money market fund regulation and concludes, among other things, 
that the Council's minutes from a closed meeting in which the 
issue was discussed ``lacked any content of the discussion.''
    What steps will you take to make these policy discussions 
more transparent to the public?

A.1. The Council appreciates the work of the GAO and the 
important oversight function that it provides, and has taken or 
plans to take a number of actions in response to the 
recommendations made in its September report. Specifically, 
with regard to potential money market mutual fund (MMF) 
reforms, the Council recently issued proposed recommendations 
under Section 120 of the Dodd-Frank Act for public comment. The 
proposed recommendations' discussion of the risks posed by 
MMFs, and the questions they ask about the proposed reforms, 
reflect the Council's deliberations. The initial 60-day comment 
period was extended by 1 month to February 15, 2013, and 
approximately 150 comments were received on the proposed 
reforms.
    The Council is firmly committed to transparency and to 
holding open meetings, and it closes meetings only when 
appropriate. The Council's transparency policy commits the 
Council to hold two open meetings each year, and the Council 
has held ten open meetings in its first 2\1/2\ years. However, 
the Council must continue to balance its responsibility to be 
transparent with its central mission to monitor emerging 
threats to financial stability. This frequently requires 
discussion of supervisory and other market-sensitive data 
during Council meetings, including information about individual 
firms, transactions, and markets that may only be obtained if 
maintained on a confidential basis. Continued protection of 
this information is necessary in order to prevent destabilizing 
market speculation that could occur if that information were to 
be disclosed.

Q.2. What do you generally believe the time frame is for the 
first nonbank SIFI designations to occur?
    I understand that a few nonbank companies are now in 
``Stage 3'' of the review process, but when do you think one or 
more of those designations will become final and will be 
publicly announced?

A.2. I expect that the Council will vote on an initial set of 
nonbank financial companies for potential designation in the 
near term. The names of any firms that are designated will be 
made public after a final designation.

Q.3. Will nonbank SIFI designations occur before prudential 
standards are established for nonbank SIFIs?
    If so, designated firms would face uncertainty; why not 
wait for rules to be in place before designations are made?

A.3. The first designations may occur before the enhanced 
prudential standards are finalized. The Council does not 
believe it is necessary or appropriate to postpone the 
evaluation of nonbank financial companies pending finalization 
of these rules, which are not essential to the Council's 
consideration of whether a nonbank financial company could pose 
a threat to U.S. financial stability.

Q.4. Section 120 of the Dodd-Frank Act states that ``[t]he 
Council shall consult with the primary financial regulatory 
agencies [ . . . ] for any proposed recommendation that the 
primary financial regulatory agencies apply new or heightened 
standards and safeguards for a financial activity or 
practice.'' In its November 2012 release on money market fund 
regulatory proposals, FSOC states that ``in accordance with 
Section 120 of the Dodd-Frank Act, the Council has consulted 
with the SEC staff.'' It is my understanding that FSOC did not 
consult with any of the SEC Commissioners serving at the time.
    Given that the SEC is solely governed by the commissioners, 
and especially considering that SEC staff serves at the will of 
the SEC Chairman rather than all Commissioners, how would such 
consultations with staff fulfill this statutory obligation 
going forward?

A.4. In developing its proposed recommendations for money 
market mutual fund reform, the Council consulted with the SEC 
staff. The Council takes seriously its obligation to consult 
with financial regulatory agencies under statutory provisions 
such as Section 120 of the Dodd-Frank Act, and the Council 
regularly does so. These consultations have been discussions 
and coordination with staff, including senior staff, of the 
relevant agencies, which is consistent with the traditional way 
that agencies Government-wide have performed interagency 
consultations under numerous statutes. In addition, the Council 
may consult with individuals who lead agencies, whether 
individually or as members of an agency board or commission. 
Certain of these individuals, including the Chairman of the 
SEC, are members of the Council and participate in Council 
deliberations. In all cases, the Council welcomes the input of 
such individuals.

Q.5. What research has FSOC done to determine the reduction in 
assets held in money market funds that could result from the 
proposed section 120 recommendations?
    Have you done anything to quantify the economic effect of a 
substantial shift in assets from prime money market funds to 
Treasury money market funds, banks, or unregulated investment 
funds?

A.5. Under Section 120 of the Dodd-Frank Act, the Council is 
required to ``take costs to long-term economic growth into 
account'' when recommending new or heightened standards and 
safeguards for a financial activity or practice. If the SEC 
accepts a final recommendation issued by the Council regarding 
money market mutual fund reform, it is expected that the SEC 
would implement the recommendation through a rulemaking, 
subject to public comment, that would consider the economic 
consequences of the implementing rule as informed by the SEC 
staff's own economic study and analysis.
    Section VI of the FSOC's proposed recommendations outlines 
the Council's preliminary analysis regarding the potential 
impact of the proposed reforms on long-term economic growth and 
requested comment from the public on that analysis. In that 
section, the Council stated that it expects that the proposed 
recommendations would significantly reduce the risk of runs on 
MMFs and, accordingly, lower the risk of a significant long-
term cost to economic growth. In addition, the Council 
recognizes that regulated and unregulated or less-regulated 
cash management products other than MMFs may pose risks that 
are similar to those posed by MMFs, and that further MMF 
reforms could increase demand for non-MMF cash management 
products. The Council sought comment on this issue and other 
possible reforms that would address risks that might arise from 
a migration to non-MMF cash management products.
    The Council requested comment on its proposed analysis, 
including what, if any, impact the proposed recommendations 
could have on investor demand for MMFs. We are in the process 
of evaluating the comments the Council received on its proposed 
recommendations and will evaluate the costs to long-term 
economic growth in light of these comments when formulating a 
final recommendation.

Q.6. Regarding the Volcker Rule, some have suggested that the 
banking agencies should just go ahead and issue their final 
rule without waiting to reach agreement with the Securities and 
Exchange Commission and Commodities Futures Trading Commission, 
which have to issue their own rules. This scenario could result 
in there being more than one Volcker Rule, which would create 
significant confusion about which agency's rule would apply to 
which covered activity.
    Given the statutory directive in Dodd-Frank that Treasury 
serve as chief coordinator of this ``coordinated rulemaking,'' 
can you comment on the current status of these interagency 
discussions as well as your thoughts on the possibility of 
multiple Volcker Rules?

A.6. Since the issuance of the Council's study on the Volcker 
Rule in January 2011, Treasury has been working hard to fulfill 
the statutory mandate to coordinate the regulations issued 
under the Volcker Rule. To meet this obligation, Treasury staff 
actively participate with the three Federal banking agencies 
and the SEC and CFTC in the interagency process working to 
develop these rules. This process includes regular meetings 
which serve as constructive forums for the agencies to 
deliberate on key aspects of the rules. This process resulted 
in the issuance of proposed regulations that were substantively 
identical, demonstrating a substantial commitment among the 
agencies to a coordinated approach, and continues as regulators 
work to finalize the rules. We take Treasury's role as 
coordinator very seriously and remain committed to working with 
the rulemaking agencies towards a substantively identical final 
rule.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM DANIEL K. TARULLO

Q.1. Given how complex it is to determine whether a trade is a 
hedge or a proprietary trade, it appears the real issue is 
whether a trade threatens the safety and soundness of the bank. 
What benchmark does your agency use to determine whether a 
particular activity is or is not ``hedging''? How does your 
agency determine whether the trade presents risks to the safety 
and soundness of a financial institution?

A.1. Section 619 generally prohibits banking entities from 
engaging in proprietary trading for the purpose of profiting 
from short-term price movements, and from acquiring or 
retaining interests in, or having certain relationships with, 
hedge funds and private equity funds. In each case the statute 
explicitly provides certain exemptions from these prohibitions, 
as well as limitations on permitted activities. Among the 
exceptions is an exception for risk-mitigating hedging 
activities.
    To implement the exception for risk-mitigating hedging 
activities, the Federal Reserve Board, the Office of the 
Comptroller of the Currency, the Federal Deposit Insurance 
Corporation, the Securities and Exchange Commission, and the 
Commodity Futures Trading Commission, (the Agencies) proposed 
requirements designed to enhance the risk-monitoring and 
management of hedging activities and to ensure that these 
activities are risk-mitigating. Among the requirements the 
Agencies proposed included a requirement that the banking 
entity establish and follow formal policies and procedures 
governing hedging activities and defining the instruments and 
strategies that could be used for hedging, documentation 
requirements explaining the hedging strategy, an internal 
compliance audit requirement, and requirements that incentive 
compensation paid to traders engaged in hedging not reward 
proprietary trading. This multifaceted approach was intended to 
limit potential abuse of the hedging exemption while not unduly 
constraining the important risk management function that is 
served by a bank entity's hedging activities.
    Determining whether any trading activity represents a risk 
to safety and soundness is typically made in connection with 
the supervisory process and depends on the specific facts and 
circumstances. In accordance with supervisory guidance on risk 
management, banks are generally required to have internal 
controls and written policies and procedures regarding how 
their trading and hedging strategies ensure that all risks are 
effectively managed and subject to limits, that risk measures 
and prices are independently validated, and that risks are 
reported to management as appropriate. The agencies then use 
the examination process to review these policies and procedures 
as they are applied to the trading and hedging activities of 
the firm.

Q.2. Federal Reserve, FDIC, and OCC have issued proposed rules 
to implement Dodd-Frank and Basel III capital requirements for 
U.S. institutions. Late last year, your agencies pushed back 
the effective date of the proposed Basel III rules beyond 
January 1, 2013. Given the concerns that substantially higher 
capital requirements will have a negative impact on lending, 
are your agencies using this extra time to conduct a cost-
benefit analysis about the impact of the proposed rules on the 
U.S. economy, availability, and cost of credit, cost of 
insurance, and the regulatory burden on institutions, before 
implementing the final rules?

A.2. In developing the Basel III-based capital requirements, 
the Board and the other Federal banking agencies conducted an 
impact analysis based on regulatory reporting data to estimate 
the change in capital that banking organizations would be 
required to hold to meet the proposed minimum capital 
requirements. Based on the agencies' analysis, the vast 
majority of banking organizations currently would meet the 
fully phased-in minimum capital requirements. The agencies 
proposed a transition period that would allow those 
organizations that would not meet the proposed minimum 
requirements to adjust their capital levels. In addition, 
quantitative analysis by the Macroeconomic Assessment Group, a 
working group of the Basel Committee on Banking Supervision, 
found that the stronger Basel III capital requirements would 
lower the probability of banking crises and their associated 
economic output losses while having only a modest negative 
impact on gross domestic product and lending costs, and that 
the potential negative impact could be mitigated by phasing in 
the requirements over time.
    The agencies received over 2,500 comment letters regarding 
the proposals. The original comment period was extended to 
allow interested persons more time to understand, evaluate, and 
prepare comments on the proposals. The Board explicitly sought 
comment on significant alternatives to the proposed 
requirements applicable to covered small banking organizations 
that would minimize their impact on those entities, as well as 
on all other aspects of its analysis. The Board is carefully 
considering the commenters' views on and concerns about the 
effects of the notices of proposed rulemaking on the U.S. 
economy and on banking organizations. Prior to adopting any 
final rule, the Board will conduct a final regulatory 
flexibility analysis under the Regulatory Flexibility Act. \1\
---------------------------------------------------------------------------
     \1\ 5 U.S.C.  601, et seq.
---------------------------------------------------------------------------
    Before issuing any final rule, the Board will also prepare 
an analysis under the Congressional Review Act (CRA). \2\ As 
part of this analysis, the Board will assess whether the final 
rule is a ``major rule,'' meaning the rule could (1) have an 
annual effect on the economy of $100 million or more; (2) 
increase significantly costs or prices for consumers, 
individual industries, Federal, State, or local government 
agencies, or geographic regions; or (3) have significant 
adverse effects on competition, employment, investment, 
productivity, or innovation. Consistent with the CRA, any such 
analysis will be provided to Congress and the Government 
Accountability Office.
---------------------------------------------------------------------------
     \2\ 5 U.S.C.  801-808.

Q.3. Given the impact that the Qualified Mortgages (QM) rules, 
the proposed Qualified Residential Mortgages (QRM) rules, the 
Basel III risk-weights for mortgages, servicing, escrow, and 
appraisal rules will have on the mortgage market and the 
housing recovery, it is crucial that these rules work in 
concert. What analysis has your agency conducted to assess how 
these rules work together? What is the aggregate impact of 
those three rules, as proposed and finalized, on the overall 
---------------------------------------------------------------------------
mortgage market as well as on market participants?

A.3. The Dodd-Frank Act requires the Federal banking agencies 
and other agencies to implement a number of requirements that 
relate to mortgages and the mortgage market, such as those you 
note in your question. The agencies are mindful of the 
interaction and interrelationship of these requirements as we 
develop rules to implement these statutory provisions.
    For example, the Board is required under section 941 of the 
Dodd-Frank Act, along with six other agencies (including the 
Federal banking agencies), to implement risk retention 
requirements and define QRM as an exemption to those 
requirements. By statute, all entities that meet the statutory 
definition of ``securitizer'' must meet the risk retention 
requirements. Under section 941, the definition of QM serves as 
the outer limit of the definition of QRM. The Board and the 
other agencies that must implement section 941 are currently 
discussing how to define QRM in light of the CFPB's recent 
determination of the final definition of QM.
    In the proposed rulemakings to revise regulatory capital 
requirements released in June 2012, the Board and the other 
Federal banking agencies proposed to revise the risk weighting 
for residential mortgages based on loan characteristics and 
loan-to-value ratio. These requirements would apply to banks, 
bank holding companies, and savings and loan holding companies. 
The Board and the other banking agencies have received many 
comments on the proposed risk weights for mortgages and the 
Board is carefully taking into consideration the concerns 
raised in those comments, including concerns regarding 
compliance burden from various mortgage-related regulations, 
and the effect of these proposals on the availability of 
mortgage credit, in its discussions with the other agencies on 
how to move the proposed rulemakings forward.
    The Board has long been committed to considering the costs 
and benefits of its rulemaking efforts and takes into account 
all comments and views from the public on the costs and 
benefits of a proposed rulemaking. The Board is sensitive to 
concerns that various regulatory changes could lead to more 
expensive mortgages and reduce access to credit, and will 
carefully consider all comments on rulemakings in which it 
participates.

Q.4. Under the Basel III proposals, mortgages will be assigned 
to two risk categories and several subcategories, but in their 
proposals the agencies did not explain how risk weights for 
those subcategories are determined and why they are 
appropriate. How did your agency determine the appropriate 
range for those subcategories?

A.4. During the recent market turmoil, the U.S. housing market 
experienced significant deterioration and unprecedented levels 
of mortgage loan defaults and home foreclosures. The causes for 
the significant increase in loan defaults and home foreclosures 
included inadequate underwriting standards, the proliferation 
of high-risk mortgage products, expansion of the practice of 
issuing mortgage loans to borrowers with undocumented income, 
and a precipitous decline in housing prices coupled with a rise 
in unemployment.
    In the capital proposal, the agencies sought to improve the 
risk sensitivity of the regulatory capital rules for mortgages 
by raising capital requirements for risker mortgages, including 
nontraditional product types, while lowering requirements on 
traditional residential mortgage loans with lower credit risk. 
The ranges of the factors were developed on an interagency 
basis utilizing expert supervisory judgments including policy 
experts and bank examiners. The agencies also considered 
supervisory and mortgage market data in the formulation of 
these risk weights, which are generally comparable to the risk 
weights assigned to mortgage exposures by banking organizations 
that use the internal ratings based methodology.
    The Board and the other agencies have received many 
comments on the mortgage proposals and the Board is carefully 
taking these comments into consideration in determining capital 
requirements for mortgages.

Q.5. The Senate Banking Committee Report on Dodd-Frank made it 
clear that the law did not mandate insurers use GAAP 
accounting. However, the proposed Basel III rules would require 
insurance enterprises to switch to GAAP. How will this change 
impact insurance companies, both practically and financially?

A.5. The proposed capital requirements would apply on a 
consolidated basis to bank holding companies and savings and 
loan holding companies (SLHCs), some of which are primarily 
engaged in the insurance business. Currently, capital 
requirements for insurance companies are imposed by State 
insurance laws on a legal entity basis and there are no State-
based, consolidated capital requirements that cover holding 
companies for insurance firms.
    In the proposals, the Board sought to meet the legal 
requirements of section 171 of the Dodd-Frank Act while 
incorporating flexibility for depository institution holding 
companies significantly engaged in the insurance business. 
Section 171 of the Dodd-Frank Act requires the agencies to 
apply consolidated minimum risk-based and leverage capital 
requirements for depository institution holding companies, 
including SLHCs, that are no less than the generally applicable 
capital requirements that apply to insured depository 
institutions under the prompt corrective action framework. The 
``generally applicable'' rules use generally accepted 
accounting principles (GAAP) as the basis for regulatory 
capital calculations.
    The proposed requirement that SLHCs calculate their capital 
standards on a consolidated basis using a framework that is 
based on GAAP standards is consistent with section 171 of the 
Dodd-Frank Act and would facilitate comparability across 
institutions. In contrast, the statutory accounting principles 
(SAP) framework for insurance companies is a legal entity-based 
framework and does not provide consolidated financial 
statements.
    The Board received many comments on the proposed 
application of consolidated capital requirements to savings and 
loan holding companies, including on cost and burden 
considerations for those firms that currently prepare financial 
statements based solely on SAP. The Board will consider these 
comments carefully in determining how to apply regulatory 
capital requirements to bank holding companies and SLHCs with 
insurance operations consistent with section 171 of the Dodd-
Frank Act.

Q.6. Pursuant to Dodd-Frank, FSOC can designate as Systemically 
Important Financial Institution (SIFI) certain nonbank 
financial companies that are ``predominately engaged in 
financial activities,'' resulting in extra scrutiny for that 
company. There were considerable concerns during the Dodd-Frank 
debate that a broad definition would encompass too many 
entities. In April of last year those concerns were reaffirmed 
when the Federal Reserve's proposed definition captured many 
activities not traditionally viewed as financial or 
systemically risky. Does the Federal Reserve intend to 
reconsider its proposed definition of ``predominately engaged 
in financial activities'' to address concerns raised in public 
comment letters?

A.6. The Dodd-Frank Act defines the type of firm that is 
eligible to be designated by the Financial Stability Oversight 
Council (FSOC) for enhanced supervision by the Board. These 
provisions apply only to firms that derive 85 percent or more 
of their annual gross revenues from financial activities or 
have 85 percent or more of the firm's consolidated assets in 
assets related to financial activities. \3\ For purposes of 
these provisions, financial activities are defined by reference 
to section 4(k) of the Bank Holding Company Act (BHC Act). \4\
---------------------------------------------------------------------------
     \3\ Section 102(a)(6) of the Dodd-Frank Act; 12 U.S.C. 
5311(a)(6).
     \4\ Id.
---------------------------------------------------------------------------
    In April 2012, the Board invited public comment on a 
proposed rule implementing these provisions (the April 2012 
proposal). The April 2012 proposal noted that the list of 
financial activities published by the Board in its Regulation Y 
incorporates various conditions that the Board has imposed on 
bank holding companies to ensure that they engage in these 
financial activities in a safe and sound manner. Other 
conditions were imposed by the Board because they were required 
by other provisions of law, such as the Glass-Steagall Act. The 
April 2012 proposal sought comment on whether any of these 
conditions were essential to the definition of an activity as 
financial. As you note, the public provided a number of 
comments on the Board's proposal, including with respect to the 
scope of the proposed definitions and the treatment of 
physically settled derivatives transactions. The Board 
carefully considered these comments in formulating the final 
rule, which the Board approved on April 3, 2013. The final rule 
made a number of modifications to address concerns raised by 
commenters, including changes that reduced the scope of the 
original proposal. It is important to note that the Board's 
regulation defining activities that are ``financial'' is based 
on the list of financial activities referenced by Congress in 
the Dodd-Frank Act, and that the conduct of these financial 
activities does not itself create any burden or obligation on 
any entity until and unless the FSOC determines, in accordance 
with the standards and procedures set forth in the Dodd-Frank 
Act, that the entity could pose a threat to the financial 
stability of the United States.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                     FROM DANIEL K. TARULLO

Q.1. As you know, a number of people including Sheila Bair have 
been advocates of using a simple leverage ratio as the primary 
measure of banks' capital strength. Would focusing on a simple 
leverage ratio, using the Basel III definition of leverage 
which includes key off balance sheet exposures, help cut 
through the noise of risk weighting and models and cross border 
differences, and give us all greater confidence that large 
banks are holding a good amount of high quality capital?

A.1. Strong capital regulation is central to an effective 
prudential regulatory regime for financial institutions. 
Experience has shown that no single form of capital requirement 
captures all relevant risks and, standing alone, any capital 
requirement is subject to sometimes extensive regulatory 
arbitrage. Consequently, banking regulation evolved 
historically from a primary reliance on simple leverage ratios 
to a dual focus on both leverage and risk-weighted capital 
requirements. These requirements must be complementary and 
mutually reinforcing. This relationship has obviously been 
changed by the substantial increase in the risk-based ratio 
resulting from the new minimum and conservation buffer 
requirements of Basel III. The existing U.S. leverage ratio 
does not take account of off-balance-sheet assets, which are 
significant for many of the largest firms. The new Basel III 
leverage ratio does include off-balance-sheet assets, but it 
may have been set too low. Thus, the traditional 
complementarity of the capital ratios might be maintained by 
using Section 165 to set a higher leverage ratio for the 
largest firms. Additionally, it is important to note that the 
stress testing regime for large banks established by the 
Federal Reserve, consistent with its mandate under Dodd-Frank, 
provides an important additional capital measure--one that is 
both risk-sensitive and, unlike traditional capital measures, 
forward looking.

Q.2. The FDIC and Fed have joint jurisdiction over the 
completion of living wills from large firms. Now, I don't think 
anyone expected the first year of plans to be perfect, but can 
you remind everyone, for the FDIC and Fed to approve the plans, 
isn't the standard that they have to show how normal 
liquidation like bankruptcy or FDIC resolution could work under 
reasonable circumstances? And what progress have the plans made 
in getting firms to think through their structure, better 
inform you as regulators, and lead to simplification and 
rationalization?

A.2. The Dodd-Frank Act requires the Federal Deposit Insurance 
Corporation and the Federal Reserve Board (the ``agencies'') to 
review the resolution plans, or ``living wills,'' filed by the 
firms and to notify a firm that its plan is deficient if the 
agencies jointly determine that the plan is not credible or 
would not facilitate an orderly liquidation of the firm under 
Title 11 of the U.S. bankruptcy code. The agencies issued a 
joint final rule implementing the living wills requirement in 
November 2011.
    The agencies have received resolution plans from 11 of the 
largest and most complex firms. These plans constitute the 
first step in an iterative process and will provide the 
foundation for developing increasingly robust annual resolution 
plans. The initial submissions focused on the key elements set 
out in the joint rule, including identifying critical 
operations and core business lines, developing a robust 
strategic analysis, and identifying and describing the 
interconnections and interdependencies among the firm's 
material entities.
    The economic circumstances that could accompany the 
financial distress or failure of a firm in the future are not 
knowable in advance. Nonetheless, a resolution plan should be 
sensitive to the economic conditions surrounding the financial 
distress or failure of a firm. To assist in establishing 
assumptions for economic conditions surrounding a firm's 
financial distress or failure, filers are required to take into 
account that the firm's material financial distress or failure 
could occur under the ``baseline,'' ``adverse,'' and ``severely 
adverse'' economic conditions developed by the Federal Reserve 
Board pursuant to stress test requirements of section 
165(i)(1)(B) of the Dodd-Frank Act. Firms were permitted to 
assume that failure would occur only under the baseline 
scenario for their initial submission with the expectation that 
subsequent iterations of the resolution plans would begin to 
address the other scenarios. As part of the iterative planning 
process, the agencies expect to evaluate the effectiveness of 
the scenarios in calibrating plan sensitivity to economic 
conditions surrounding the financial distress or failure of a 
firm.
    The firms devoted a significant amount of time and 
resources in developing their initial resolution plans as well 
as in establishing the processes, procedures, and systems 
necessary for annual updates. Moreover, the agencies have been 
engaged in an ongoing dialogue with these firms to develop, 
focus, and clarify their plans. Our initial interactions with 
the firms demonstrate clearly that preparing resolution plans 
is helping the firms and the supervisors learn a great deal 
about the organizational structure, inter-relationships, and 
exposures of these firms.

Q.3. I believe that the Basel III accords are an important tool 
for reducing risks within the financial system and ensuring 
level playing fields in international markets. However, I am 
concerned that there are a number of areas where the agreements 
and the Federal Reserve's proposals for implementing them have 
not been adequately tailored to recognize differences in 
accounting standards in the U.S. and other jurisdictions and 
the variety of business models in the U.S. Can you describe 
what steps the Federal Reserve is taking to tailor the 
proposals to the insurance business model?

A.3. Section 171 of the Dodd-Frank Act requires that the 
Federal Reserve Board (the ``Board'') establish minimum 
leverage capital requirements and minimum risk-based capital 
requirements for depository institution holding companies and 
for financial companies designated by the Financial Stability 
Oversight Council that are not less than the leverage and risk-
based capital requirements that were generally applicable to 
banks and savings associations on July 21, 2010. In developing 
these capital requirements, the Board sought to meet the 
requirements of the Dodd-Frank Act, to promote capital adequacy 
at all depository institution holding companies, and, to the 
extent permitted by section 171, to incorporate adjustments for 
depository institution holding companies significantly engaged 
in the insurance business. In that regard, the Board invited 
public comment on proposals to address the unique character of 
insurance companies through specific risk weights for policy 
loans and nonguaranteed separate accounts, which are typically 
held by insurance companies, but not banks. The proposals also 
would allow the inclusion of surplus notes, a type of financial 
instrument issued primarily by insurance companies, in tier 2 
capital, provided that the notes meet the relevant eligibility 
criteria.
    The Board received numerous comments on the capital 
requirements proposed last year as they would apply to 
insurance companies and is carefully considering information 
provided and the concerns raised by commenters.

Q.4. Can you describe the steps the Federal Reserve is taking 
to ensure that community and midsize banks are not forced to 
comply with complex standards better suited to larger and more 
complex institutions?

A.4. In developing safety and soundness rules, the Federal 
Reserve Board and the other Federal banking agencies must 
strike the right balance between safety and soundness concerns 
and the costs associated with implementation, including the 
impact on community banking. It is important to note that 
numerous items in the Basel III proposal, and in other recent 
regulatory reforms, are focused on larger institutions and 
would not be applicable to community banking organizations. 
These items include the countercyclical capital buffer, the 
supplementary leverage ratio, enhanced disclosure requirements, 
the advanced approaches risk-based capital framework, stress 
testing requirements, the systemically important financial 
institution capital surcharge, and market risk capital reforms. 
This targeted approach should improve the competitive balance 
between large and small banks, while improving the overall 
resiliency of the financial sector.
    Midsize banking organizations are also exempt from most of 
the requirements referred to above, including the 
countercyclical capital buffer, the supplementary leverage 
ratio, and the advanced-approaches risk-based capital 
framework. However, they would need to meet basic stress 
testing requirements that have been specifically tailored as 
required by the Dodd-Frank Act, for the midsize banking 
business model, as finalized in October 2012. These 
requirements are less stringent than the stress testing 
framework applied to banking organizations with more than $50 
billion in assets. Additionally, midsize banks have been given 
a longer time frame to meet these requirements than their 
larger counterparts.

Q.5. What steps is the Federal Reserve taking to examine the 
appropriateness and impact of the risk weights for mortgage-
backed securities including those that contain nonrecourse 
loans?

A.5. During the recent market turmoil, the U.S. housing market 
experienced significant deterioration and unprecedented levels 
of mortgage loan defaults and home foreclosures, which, in 
turn, caused mortgage-backed securities (MBS) to incur 
unprecedented losses. The causes for the significant increase 
in loan defaults and home foreclosures included inadequate 
underwriting standards, the proliferation of high-risk mortgage 
products, the practice of issuing mortgage loans to borrowers 
with undocumented income and a precipitous decline in housing 
prices coupled with a rise in unemployment.
    In the capital proposal, the Federal Reserve Board and the 
other Federal banking agencies (the ``agencies'') sought to 
improve the risk sensitivity of the regulatory capital rules 
for mortgages by raising capital requirements for risker 
mortgages, including nontraditional product types, while 
lowering requirements on traditional residential mortgage loans 
with lower credit risk. The ranges of the factors were 
developed on an interagency basis utilizing expert supervisory 
judgments including policy experts and bank examiners. The 
agencies also considered supervisory and mortgage market data 
in the formulation of these risk weights, which are generally 
comparable to the risk weights assigned to mortgage exposures 
by banking organizations that use the internal ratings based 
methodology.
    The agencies received numerous comment letters on the 
proposals for risk weighting mortgages. The Federal Reserve 
Board is carefully considering the commenters' views on and 
concerns about the effects of the proposed mortgage treatment 
on the U.S. economy and on banking organizations.

Q.6. What progress is being made to ensure that Basel III is 
implemented with a reasonable degree of uniformity and 
transparency across jurisdictions?

A.6. The Federal Reserve Board has consistently favored a 
uniform and transparent implementation of the Basel III reforms 
across jurisdictions. To this end, staff has contributed to 
international assessments organized by the Basel Committee of 
the participating financial jurisdictions and highlighted any 
divergences they encountered in their assessments. Similarly, 
our international colleagues are tracking progress by the 
United States to meet the reforms. We remain committed to 
ensuring consistent implementation, as this decreases 
opportunities for cross-border regulatory arbitrage and keeps 
U.S. banks on equal footing with their foreign competitors.

Q.7. The statutory language for funds defined under the Volcker 
Rule pointedly did not include venture funds, however the 
definition in the proposed rule seemed to indicate that venture 
funds would be covered. In addition to exceeding the statutory 
intent of Congress, this has created uncertainty in the market 
as firms await a final rule and refrain from making commitments 
which might be swept up in the final version of the Volcker 
Rule. Can you clarify whether venture funds are covered by the 
Volcker Rule?

A.7. One of the restrictions in section 619 applies to hedge 
and private equity funds and prohibits a banking entity from 
acquiring or retaining an interest in, or having certain 
relationships with, hedge funds and private equity funds, 
subject to certain exemptions. Section 619 specifically defines 
the terms ``hedge fund'' and ``private equity fund'' to mean an 
issuer that would be an investment company as defined in the 
Investment Company Act of 1940, but for section 3(c)(1) or 
3(c)(7) of that Act, or such similar funds as the Federal 
Reserve Board, the Office of the Comptroller of the Currency, 
the Federal Depository Insurance Corporation, the Securities 
and Exchange Commission, and the Commodity Futures Trading 
Commission (the ``agencies'') may, by rule, determine.
    See 12 U.S.C. 1851(h)(2). The statutory language contains 
no reference to venture capital funds. The agencies requested 
comment on whether venture capital funds should be excluded 
from the definition of covered fund, and, if so, what scope of 
authority the agencies have under the statute to exempt venture 
capital funds, and how to define venture capital fund. The 
agencies received over 18,000 comments regarding the proposed 
implementing rules, including comments that specifically 
addressed the issues of venture capital funds and venture 
capital investments. The agencies are currently considering 
these comments as we work to finalize implementing rules.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                     FROM DANIEL K. TARULLO

Q.1. As you know, the Federal Reserve and the Office of the 
Comptroller of the Currency (OCC) recently announced 
settlements with mortgage servicers subject to consent orders 
issued by the Federal Reserve and the OCC in April 2011 
regarding unsafe and unsound practices related to residential 
mortgage loan servicing and foreclosure processing. The terms 
of the settlement include $3.6 billion in cash payments to more 
than 4 million borrowers and $5.7 billion in additional 
assistance.
    Can you explain in what situations the Board of Governors 
of the Federal Reserve votes on whether to accept a settlement?

A.1. Under the Federal Reserve Board's (the Board) Rules 
Regarding Delegation of Authority, there is delegated authority 
for Board staff to enter into or approve modifications to 
consent cease-and-desist orders, such as the recently announced 
agreements with mortgage servicers (12 CFR 265.6(e)(1) and 
(e)(2)). Any Board member may request review of any delegated 
action (12 CFR 265.3(a)). In many cases, including matters 
involving significant enforcement actions, such as the mortgage 
servicer agreements, staff with delegated approval authority 
consult with members of the Board prior to exercising that 
authority to obtain their views on whether consideration by the 
Board is appropriate.

Q.2. When no vote occurs, can you indicate what official at the 
Federal Reserve has decision-making authority over whether to 
accept a settlement?

A.2. The Board's general counsel (or his delegee), with the 
concurrence of the director of the Board's Division of Banking 
Supervision and Regulation (or his delegee), has delegated 
authority to approve consent cease-and-desist orders as well as 
modifications to consent cease-and-desist orders, such as the 
recently announced agreements with mortgage servicers (12 CFR 
265.6(e)(1) and (e)(2)).

Q.3. Did a vote occur with this particular settlement?

A.3. Board staff frequently consulted with Board members before 
exercising delegated authority to approve the amendments to the 
foreclosure consent orders. A vote did not occur.

Q.4. It has been more than 4 years since policy makers began 
focusing on how to fix the ``too big to fail'' problem and 
eliminate the implicit guarantee that, in a time of crisis, the 
Federal Government would bail out large financial institutions 
instead of letting them fail and pose a systemic threat to the 
economy. Nonetheless, the big banks now are even bigger than 
they were in the run-up to the crisis and appear to have 
retained their ``too big to fail'' status and the accompanying 
implicit guarantee. In addition to morale hazard that results 
from ``too big to fail'' status, the implicit guarantee also 
has market distorting effects. As columnist George Will 
recently wrote, large financial institutions still have ``a 
silent subsidy--an unfair competitive advantage relative to 
community banks--inherent in being deemed by the Government, 
implicitly but clearly, too big to fail.''
    Do you believe that the Financial Stability Oversight 
Council (FSOC) has the necessary authorities--for example, 
under Section 121 of the Dodd-Frank Act--to block expansion and 
in some cases mandate divestiture of large financial 
institutions to ward against the ``too big to fail'' problem?

A.4. The Dodd-Frank Act contains a number of provisions that 
are intended to address potential threats to U.S. financial 
stability and address the ``too big to fail'' problem. Of 
course, the Financial Stability Oversight Council (FSOC) has 
the authority under section 113 to subject a nonbank financial 
company to supervision by the Federal Reserve Board (Board) if 
the FSOC determines that the company's material financial 
distress or its activities could pose a threat to U.S. 
financial stability. The FSOC has implemented a robust process 
for assessing threats posed by nonbank financial companies and 
is actively reviewing companies pursuant to that process.
    The Dodd-Frank Act also has a variety of provisions that 
address the growth of large financial companies. Section 622 
imposes a concentration limit on large financial companies, 
including banks, bank holding companies, savings and loan 
holding companies, companies that control an insured depository 
institution, nonbank financial companies designated by the FSOC 
for supervision by the Board, and foreign banks treated as bank 
holding companies. Under this statutory limit, a large 
financial company may not merge, consolidate with, or acquire 
all or substantially all of the assets or control of another 
company, if the total consolidated liabilities of the resulting 
company would exceed 10 percent of the liabilities of all large 
financial companies.
    In addition, the Dodd-Frank Act revised various provisions 
of the banking laws to require the Federal banking agencies to 
consider the risk that acquisitions of insured depository 
institutions and large nonbanking entities pose to the 
stability of the U.S. banking or financial system. For example, 
section 163 of the Dodd-Frank Act requires large bank holding 
companies and nonbank financial companies supervised by the 
Board to provide prior notice to the Board of a proposed 
acquisition of ownership or control of any voting shares of a 
financial company with assets of $10 billion or more, so that 
the Board may consider the extent to which the proposed 
acquisition would result in greater or more concentrated risks 
to global or U.S. financial stability or the U.S. economy.
    Section 121 authorizes the Board, with consent of two-
thirds of the voting members of the FSOC, to take certain steps 
if the Board determines that a large bank holding company or a 
nonbank financial company supervised by the Board poses a grave 
threat to the financial stability of the United States. These 
steps include limiting the ability of the company to grow 
through mergers or acquisitions, restricting the ability of the 
company to offer financial products, requiring the termination 
of certain activities, or imposing conditions on the manner in 
which the company conducts one or more activities. If the Board 
determines that these actions are inadequate to mitigate a 
threat to U.S. financial stability, the Board, with the consent 
of the FSOC, may require the company to sell or otherwise 
transfer assets to unaffiliated entities.
    These provisions of the Dodd-Frank Act, in combination with 
other provisions that establish an orderly liquidation 
mechanism and enhanced prudential standards for large financial 
institutions, represent important developments in addressing 
threats posed by large financial companies to U.S. financial 
stability. As implementation of the Dodd-Frank Act currently 
remains underway, the Board believes that it is too early to 
determine whether further legislative action is necessary.

Q.5. Do you believe that FSOC should use its authorities to 
order divestiture only in cases of active crisis, or are there 
situations in which FSOC's authority to break up large banks 
could be done to mitigate against future risks associated with 
the ``too big to fail'' problem?

A.5. As described previously, section 121 of the Dodd-Frank Act 
authorizes the Board to take certain actions, with the approval 
of two-thirds of the FSOC, to restrict an institution's 
activities if the company poses a grave threat to U.S. 
financial stability. The Board may require the institution to 
divest assets if such action is necessary to mitigate the grave 
threat posed by the company. This authority requires a finding 
that the firm poses a grave threat to U.S. financial stability, 
and does not require a finding that the financial system is in 
active crisis.

Q.6. Do you believe there are further steps Congress should 
take to fix the ``too big to fail problem''?

A.6. The Dodd-Frank Act and Basel III provide a number of 
important tools for addressing the ``too big to fail'' problem, 
including enhanced prudential standards and higher capital 
requirements for bank holding companies with total consolidated 
assets of $50 billion or more and nonbank financial companies 
designated by the FSOC for Board supervision, an orderly 
resolution authority for large financial firms, living wills, 
stress testing, and central clearing and margin requirements 
for derivatives, among other provisions. The Board and other 
U.S. regulators are now in the process of implementing these 
reforms.
    In addition, as described previously, section 622 of the 
Dodd-Frank Act imposes a concentration limit on large financial 
companies that provides that a large financial company may not 
merge, consolidate with, or acquire all or substantially all of 
the assets or control of another company, if the total 
consolidated liabilities of the resulting company would exceed 
10 percent of the liabilities of all large financial companies. 
In addition, the Board and the other Federal banking agencies 
are required to consider the risk to the stability of the U.S. 
banking or financial system of a proposed merger or acquisition 
involving bank holding companies and insured depository 
institutions.
    Completion of this agenda will be very significant. Still, 
I believe that more is needed, particularly in addressing the 
risks posed by short-term wholesale funding markets. We should 
be considering ways to use our existing authority in pursuit of 
three complementary ends: (1) ensuring the loss absorbency 
needed for a credible and effective resolution process, (2) 
augmenting the going-concern capital of the largest firms, and 
(3) addressing the systemic risks associated with the use of 
wholesale funding.

Q.7. In her written testimony to the hearing, the Special 
Inspector General for TARP (SIGTARP) Christy Romero discussed 
the ``threat of contagion'' to our financial system caused by 
the interconnectedness of the largest institutions that existed 
in the run-up to the financial crisis.
    Do you believe the financial system remains vulnerable to 
the interconnectedness of the largest institutions?

A.7. As demonstrated in the 2007-2008 financial crisis, 
interconnectedness among large financial institutions poses 
risks to financial stability. The effects of one large 
financial institution's failure or near collapse may be 
transmitted and amplified by bilateral credit exposures between 
large, systemically important companies. And even in the 
absence of direct bilateral relationships, the failure of a 
large financial institution can place other financial 
institutions under stress because of indirect relationships. 
For example, following the failure of a large financial 
institution, short-term creditors may try to reduce their 
exposure to other firms, depriving those firms of liquidity. 
While there are a number of efforts underway to improve the 
stability and resiliency of our financial system (see below), 
interconnectedness among large financial institutions still 
poses risk to the financial system.
    As we implement financial reform, however, it is important 
to note that interconnectedness is also a means by which 
financial and economic activity is intermediated throughout the 
financial system. Accordingly, efforts to address risks posed 
by interconnectedness must strike a balance between the goals 
of reducing systemic risk and preserving the ability of the 
financial sector to provide credit to households and 
businesses.

Q.8. What is the Department of the Treasury doing to address 
risks that the interconnectedness of large financial 
institutions pose to our financial system?

A.8. A number of regulatory initiatives are underway to limit 
the risks that interconnectedness poses to the financial 
system.
    First, more robust prudential standards for financial 
institutions will likely mitigate risks associated with 
interconnectedness, both by (a) reducing the probability that 
any given financial institution will fail and (b) increasing 
the ability of other financial institutions to absorb the 
knock-on effects of such failure. Thus, Basel III capital and 
liquidity standards should reduce the chances of the kind of 
financial distress among large financial institutions observed 
in 2008. The Basel III reforms, in particular, will increase 
the amount of capital banks are required to hold against 
exposures to other financial firms and against over-the-counter 
derivatives exposures. The single-counterparty concentration 
limits required under section 165(e) of the Dodd-Frank Act will 
also serve as a check on interconnectedness. Under the Board's 
proposal to implement that section, exposures between major 
covered companies and major counterparties would be subject to 
a tighter limit than other exposures, reducing the risks that 
arise from interconnectedness among the largest firms.
    Certain market reforms that are underway will also limit 
interconnectedness. Among these, derivative market reforms, 
including clearing requirements and margin requirements on 
uncleared derivatives, will reduce the direct credit exposure 
that large financial institutions have with each other through 
derivative transactions.
    Finally, the supervisory process has changed since 2008 to 
more closely monitor and evaluate the connections that large 
financial institutions maintain with each other, putting 
supervisors in a better position to respond to 
interconnectedness.

Q.9. Can you describe the metrics the Department of the 
Treasury uses to monitor an institution's interconnectedness 
and risk that it may pose to the financial system?

A.9. Interconnectedness among financial institutions arises 
from a number of distinct sources, including connections 
through asset markets and funding channels. As a result, the 
interconnectedness and risk of a financial institution must be 
characterized using an approach that is both holistic and 
systemic, but that also adapts to changing conditions and 
market practices.
    The Board is now engaged in a number of information 
collections that are aimed at better assessing the risk and 
interconnectedness of large financial institutions. For 
example, the supervisory stress tests that inform the 
comprehensive capital plan and review inform our view on the 
risk profile of large banks. The stress tests can be useful for 
identifying banks that are interconnected through common asset 
exposures that are revealed during periods of financial stress, 
which is when interconnectedness presents the greatest risk to 
the financial system.
    As another example, the Board, along with other supervisors 
from other jurisdictions, has begun to collect data on the 
activities of large banks to help calibrate a capital surcharge 
for systemically important banks. These data include data on 
interconnectedness, which will play an important role in 
determining the overall capital surcharge.

Q.10. Christy Romero also provided testimony about the need for 
large institutions to engage in effective risk management 
practices and for regulators to supervise this risk management.
    Do you believe the risk management practices at the largest 
financial institutions are adequate?

A.10. In general, risk management practices and risk governance 
at the largest financial institutions have improved 
significantly since the crisis. They must constantly evolve, 
however, to keep pace with a complex and highly dynamic 
financial system. Our annual review of the capital planning 
processes of the largest firms provides us a regular occasion 
for assessing many of these practices, and, where appropriate, 
requiring improvements.

Q.11. Can you describe what the Department of the Treasury is 
doing to supervise the risk management at the largest 
institutions?

A.11. Risk management is a key focus of the Board's supervision 
of the largest bank holding companies. This is evidenced in 
several ways, including but not limited to:

    Risk management is one of the key criteria by which 
        large bank holding companies are rated for supervisory 
        purposes.

    The importance of robust risk management is 
        highlighted throughout the recently revised guidance on 
        consolidated supervision of large bank holding 
        companies (SR 12-17).

    Supervisors routinely review and assess aspects and 
        components of risk management when conducting exams, 
        which are conducted at the largest bank holding 
        companies on a near continual basis throughout the 
        year.

    The qualitative assessment component of the 
        Comprehensive Capital Assessment and Review (CCAR) 
        focuses significantly on firms' risk management 
        practices, including with respect to stress testing.

    Of course, the Board's supervision of firms' risk 
management is not and cannot be a substitute for firms' own 
risk management practices and governance.
                                ------                                


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

Q.1. In response to concerns that the bank-centric Basel III 
capital standards are unworkable for insurers, the Fed has 
indicated that it would perform some tailoring of those 
standards. However, there is continuing concern among the life 
insurance industry that the proposed tailoring is inadequate 
and does not properly acknowledge the wide differences between 
banking and insurance.
    What kinds of more substantive changes will the Fed 
consider to the Basel III rulemaking to prevent negative 
impacts to insurers and the policyholders, savers, and retirees 
that are their customers?

A.1. Section 171 of the Dodd-Frank Act requires that the 
Federal Reserve Board (the Board) establish minimum leverage 
capital requirements and minimum risk-based capital 
requirements for depository institution holding companies and 
for financial companies designated by the Financial Stability 
Oversight Council that are not ``less than'' the minimum 
capital requirements for insured depository institutions. On 
June 7, 2012, the Board and the other Federal banking agencies 
proposed to revise their risk-based and leverage capital 
requirements in three notices of proposed rulemaking (NPRs), 
consistent with this statutory requirement.
    The NPRs proposed flexibility to address the unique 
character of insurance companies through specific risk weights 
for policy loans and nonguaranteed separate accounts, which are 
typically held by insurance companies, but not banks. These 
specific risk weights were designed to apply appropriate 
capital treatments to assets particular to the insurance 
industry while complying with the requirements of section 171 
of the Dodd-Frank Act.
    The Board is carefully considering the comments it has 
received regarding the application of section 171 of the Dodd-
Frank Act to savings and loan holding companies and bank 
holding companies that are significantly engaged in the 
insurance business. We will continue to consider these issues 
seriously, as well as the potential implementation challenges 
for depository institution holding companies with insurance 
operations, as we determine how to move forward with respect to 
the proposed capital requirements.

Q.2. There is also a concern that the bank standards are a 
dramatic departure from the duration matching framework common 
to insurance supervision.
    What is your response to that concern and would the Fed 
consider doing more than just tailoring bank standards?
    Do you believe that, from an insurance perspective, Basel 
III bank standards are an incremental or dramatic departure 
from current insurance standards?

A.2. As discussed in the above answer, the Board developed the 
proposed capital requirements to meet the requirements of the 
Dodd-Frank Act, to promote capital adequacy at all depository 
institution holding companies, and, to the extent permitted by 
section 171, to incorporate adjustments for depository 
institution holding companies significantly engaged in the 
insurance business. The Board has received numerous comments on 
the proposals with respect to insurance companies. Many of 
these comments discuss suggestions for other approaches to 
applying regulatory capital standards to depository institution 
holding companies that have significant insurance operations. 
The Board is carefully considering all of these comments.

Q.3. Regarding the Volcker Rule, some have suggested that the 
banking agencies should just go ahead and issue their final 
rule without waiting to reach agreement with the Securities and 
Exchange Commission and Commodities Futures Trading Commission, 
which have to issue their own rules. This scenario could result 
in there being more than one Volcker Rule, which would create 
significant confusion about which agency's rule would apply to 
which covered activity.
    Do you agree that there should be only one Volcker Rule?

A.3. While section 619(b)(2) of the Dodd-Frank Act divides 
authority for developing and adopting regulations to implement 
its prohibitions and restrictions between the Federal Reserve 
Board, the Office of the Comptroller of the Currency, the 
Federal Deposit Insurance Corporation, the Securities and 
Exchange Commission, and the Commodity Futures Trading 
Commission, (the Agencies) based on the type of entities for 
which each agency is explicitly charged or is the primary 
financial regulatory agency, the rule proposed by the Agencies 
to implement section 619 contemplates that firms will develop 
and adopt a single, enterprise-wide compliance program and that 
the Agencies would strive for uniform enforcement of section 
619. To enhance uniformity in both the rules that implement 
section 619 and administration of the requirements of section 
619, the Agencies have been regularly consulting with each 
other in the development of rules and policies that implement 
section 619.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                    FROM MARTIN J. GRUENBERG

Q.1. Given how complex it is to determine whether a trade is a 
hedge or a proprietary trade, it appears the real issue is 
whether a trade threatens the safety and soundness of the bank. 
What benchmark does your agency use to determine whether a 
particular activity is or is not ``hedging''? How does your 
agency determine whether the trade presents risks to the safety 
and soundness of a financial institution?

A.1. The FDIC does not have a single benchmark that it uses to 
determine whether a particular activity constitutes hedging as 
distinguished from proprietary trading. We do have certain 
standards that are used to determine whether activities 
constitute a hedge for purposes of financial reporting or, in 
certain instances, as an input into the bank's regulatory 
capital calculations. However, these standards vary based upon 
the purpose for which an exposure serves as a hedge. For 
example, in the context of financial reporting, banks use the 
strict hedge accounting requirements set forth by the Financial 
Accounting Standards Board; but, for calculating market risk 
capital requirements, banks can rely on their own models for 
determining whether an exposure provides hedging benefits. The 
hedging requirements in the proposed Volcker Rule are important 
steps forward in promoting a general standard that can be used 
by the banking agencies to determine whether any particular 
activity is legitimate hedging as opposed to proprietary 
trading, which introduces additional risk. While our examiners 
routinely review the activities of a financial institution to 
determine consistency with safety and soundness standards, we 
view the Volcker Rule as providing the FDIC with important 
additional tools to help determine whether an activity poses 
additional risk to a financial institution.

Q.2. Federal Reserve, FDIC, and OCC have issued proposed rules 
to implement Dodd-Frank and Basel III capital requirements for 
U.S. institutions. Late last year, your agencies pushed back 
the effective date of the proposed Basel III rules beyond 
January 1, 2013. Given the concerns that substantially higher 
capital requirements will have a negative impact on lending, 
are your agencies using this extra time to conduct a cost-
benefit analysis about the impact of the proposed rules on the 
U.S. economy, availability, and cost of credit, cost of 
insurance, and the regulatory burden on institutions, before 
implementing the final rules?

A.2. In June 2012, the FDIC along with the other banking 
agencies approved for public comment three notices of proposed 
rulemaking that collectively would implement the Basel III 
framework, the Basel II standardized approach, and other recent 
enhancements to the international capital framework adopted by 
the Basel Committee, as well as certain provisions of the Dodd-
Frank Act (the NPRs). \1\ For purposes of the NPRs, the 
agencies conducted the cost and burden analyses required by the 
Regulatory Flexibility Act, the Paperwork Reduction Act, and 
the Unfunded Mandates Reform Act of 1995, all of which are 
further detailed in the NPRs. \2\ The agencies have invited 
public comment on these analyses.
---------------------------------------------------------------------------
     \1\ See, 77 Fed. Reg. 52792 (Aug. 30, 2012); 77 Fed. Reg. 52888 
(Aug. 30, 2012); and 77 Fed. Reg. 52978 (Aug. 30, 2012).
     \2\ See, e.g., the Initial Regulatory Flexibility Analysis for the 
Basel III NPR, 77 Fed. Reg. 52792, 52833 (Aug. 30, 2012).
---------------------------------------------------------------------------
    The agencies also participated in the development of a 
number of studies to assess the potential impact of the revised 
capital requirements, including participating in the Basel 
Committee's Macroeconomic Assessment Group (MAG) as well as its 
Quantitative Impact Study, the results of which were made 
publicly available by the Basel Committee on Banking 
Supervision upon their completion. \3\ Basel Committee analysis 
has suggested that stronger capital requirements could help 
reduce the likelihood of banking crises while yielding positive 
net economic benefits. \4\ Specifically, a better capitalized 
banking system should be less vulnerable to banking crises, 
which have historically been extremely harmful to economic 
growth. Moreover, the MAG analysis found that the requirements 
would only have a modest negative impact on the gross domestic 
product of member countries, and that any such negative impact 
could be significantly mitigated by phasing in the proposed 
requirements over time. \5\ Taken together, these studies 
suggest that a better capitalized banking system will better 
support economic growth sustainably over time.
---------------------------------------------------------------------------
     \3\ See, ``Assessing the Macroeconomic Impact of the Transition to 
Stronger Capital and Liquidity Requirements'' (MAG Analysis), also 
available at: http://www.bis.org/publ/othpl2.pdf; see also, ``Results 
of the Comprehensive Quantitative Impact Study'', also available at: 
http://www.bis.org/publ/bcbsl86.pdf.
     \4\ See, ``An Assessment of the Long-Term Economic Impact of 
Stronger Capital and Liquidity Requirements'', Executive Summary, p. 1.
     \5\ See, MAG Analysis, Conclusions and open issues, pp. 9-10.
---------------------------------------------------------------------------
    The agencies also sought public comment on the proposed 
requirements in the NPRs to better understand their potential 
costs and benefits. The agencies asked several specific 
questions in the NPRs about potential costs related to the 
proposals and are considering all comments carefully. During 
the comment period, the agencies also participated in various 
outreach efforts, such as engaging community banking 
organizations and trade associations, among others, to better 
understand industry participants' concerns about the NPRs and 
to gather information on their potential effects. In addition, 
to facilitate public comment, the agencies developed and 
provided to the industry an estimation tool that would allow an 
institution to estimate the regulatory capital impact of the 
NPRs. These efforts have provided valuable additional 
information to assist the agencies as we determine how to 
proceed with the proposed rulemakings.

Q.3. Given the impact that the Qualified Mortgages (QM) rules, 
the proposed Qualified Residential Mortgages (QRM) rules, the 
Basel III risk-weights for mortgages, servicing, escrow and 
appraisal rules will have on the mortgage market and the 
housing recovery, it is crucial that these rules work in 
concert. What analysis has your agency conducted to assess how 
these rules work together? What is the aggregate impact of 
those three rules, as proposed and finalized, on the overall 
mortgage market as well as on market participants?

A.3. At the time of the release of the regulatory capital NPRs, 
the QM and QRM rules had not been released in final form. 
Accordingly, in connection with the proposed treatment for 1-4 
family residential mortgage loans, the agencies solicited 
comment on alternative criteria or approaches for 
differentiating among the levels of risk inherent in different 
mortgage exposures. Specifically, the agencies invited comment 
on whether ``all residential mortgage loans that meet the 
`qualified mortgage' criteria to be established for purposes of 
the Truth in Lending Act pursuant to section 1412 of the Dodd-
Frank Act [should] be included in category 1.'' \6\ The 
agencies are considering the comments received in connection 
with the proposed treatment for 1-4 family residential mortgage 
exposures, as well as comments received in response to the NPR 
relating to Credit Risk Retention, which included proposed QRM 
standards. \7\ Now that we have the benefit of the final QM 
rule, the agencies can consider QRM and Basel III in light of 
the QM standards. All three rules--QM, QRM, and Basel III--
could impact the mortgage market. In the FDIC's view, it is 
important that the agencies endeavor in the final rulemaking on 
QRM and Basel III to take into consideration the cumulative 
impact of the rules on the mortgage market, including the 
availability of credit.
---------------------------------------------------------------------------
     \6\ 77 Fed. Reg. 52888, 52899 (Aug. 30, 2012).
     \7\ 76 Fed. Reg. 24090 (April 29, 2011).

Q.4. Under the Basel III proposals mortgages will be assigned 
to two risk categories and several subcategories, but in their 
proposals the agencies did not explain how risk weights for 
those subcategories are determined and why they are 
appropriate. How did your agency determine the appropriate 
---------------------------------------------------------------------------
range for those subcategories?

A.4. The agencies currently are reviewing the numerous comment 
letters from banking organizations on whether the proposed 
methodology and risk weights for category 1 and 2 residential 
mortgages are appropriate. As stated in the preamble to the 
Standardized Approach NPR, the U.S. housing market experienced 
unprecedented levels of defaults and foreclosures due in part 
to qualitative factors such as inadequate underwriting 
standards, high risk mortgage products such as so-called 
payment-option adjustable rate mortgages, negatively amortizing 
loans, and the issuance of loans to borrowers with undocumented 
and unverified income. In addition, the agencies noted that the 
amount of equity a borrower has in a home is highly correlated 
with default risk. Therefore, the agencies proposed to assign 
higher risk weights to loans that have higher credit risk while 
assigning lower risk weights to loans with lower credit risk.
    The agencies also recognize that the use of loan-to-value 
(LTV) ratios to assign risk weights to residential mortgage 
exposures is not a substitute for and does not otherwise 
release a banking organization from its responsibility to have 
prudent loan underwriting and risk management practices 
consistent with the size, type, and risk of its mortgage 
business. In deliberations on the final rule, the agencies also 
are reviewing the interagency supervisory guidance documents on 
risk management involving residential mortgages, including the 
Interagency Guidance on Nontraditional Mortgage Product Risks 
(October 4, 2006); the interagency Statement on Subprime 
Mortgage Lending (July 10, 2007), and the Appendix A to Subpart 
A of Part 365 of the FDIC Rules and Regulations-Interagency 
Guidelines for Real Estate Lending (December 31, 1992).

Q.5. In a speech last year you stated that the failure of a 
systemically important financial institution will likely have 
significant international operations and that this will create 
a number of challenges. What specific steps have been taken to 
improve the cross-border resolution of a SIFI? What additional 
steps must be taken with respect to the cross-border resolution 
of a SIFI?

A.5. As I stated in my testimony, the experience of the 
financial crisis highlighted the importance of coordinating 
resolution strategies across national jurisdictions. Section 
210 of the Dodd-Frank Act expressly requires the FDIC to 
``coordinate, to the maximum extent possible'' with appropriate 
foreign regulatory authorities in the event of the resolution 
of a covered financial company with cross-border operations. As 
we plan internally for such a resolution, the FDIC has 
continued to work on both multilateral and bilateral bases with 
our foreign counterparts in supervision and resolution. The aim 
is to promote cross-border cooperation and coordination 
associated with planning for an orderly resolution of a 
globally active, systemically important financial institution 
(G-SIFIs).
    As part of our bilateral efforts, the FDIC and the Bank of 
England, in conjunction with the prudential regulators in our 
jurisdictions, have been working to develop contingency plans 
for the failure of G-SIFIs that have operations in both the 
U.S. and the U.K. Of the 28 G-SIFIs designated by the Financial 
Stability Board of the G20 countries, four are headquartered in 
the U.K., and another eight are headquartered in the U.S. 
Moreover, around two-thirds of the reported foreign activities 
of the eight U.S. SIFTs emanate from the U.K. \8\ The magnitude 
of these financial relationships makes the U.S.-U.K. bilateral 
relationship by far the most important with regard to global 
financial stability. As a result, our two countries have a 
strong mutual interest in ensuring that, if such an institution 
should fail, it can be resolved at no cost to taxpayers and 
without placing the financial system at risk. An indication of 
the close working relationship between the FDIC and U.K. 
authorities is the joint paper on resolution strategies that we 
released in December. \9\
---------------------------------------------------------------------------
     \8\ Reported foreign activities encompass sum of assets, the 
notional value of off-balance-sheet derivatives, and other off-balance-
sheet items of foreign subsidiaries and branches.
     \9\ ``Resolving Globally Active, Systemically Important, Financial 
Institutions'', http://www.fdic.gov/about/srac/2012/gsifi.pdf.
---------------------------------------------------------------------------
    In addition to the close working relationship with the 
U.K., the FDIC and the European Commission (E.C.) have agreed 
to establish a joint Working Group comprised of senior staff to 
discuss resolution and deposit guarantee issues common to our 
respective jurisdictions. The Working Group will convene twice 
a year, once in Washington, once in Brussels, with less formal 
communications continuing in between. The first of these 
meetings will take place later this month. We expect that these 
meetings will enhance close coordination on resolution related 
matters between the FDIC and the E.C., as well as European 
Union Member States.
    The FDIC also has engaged with Swiss regulatory authorities 
on a bilateral and trilateral (including the U.K.) basis. 
Through these meetings, the FDIC has further developed its 
understanding of the Swiss resolution regime for G-SIFIs, 
including an in-depth examination of the two Swiss-based G-
SIFIs with significant operations in the U.S. In part based on 
the work of the FDIC, the Swiss regulatory authorities have 
embraced a single point of entry approach for the Swiss based 
G-SIFIs.
    The FDIC also has had bilateral meetings with Japanese 
authorities. FDIC staff attended meetings hosted by the Deposit 
Insurance Corporation of Japan and the FDIC hosted a meeting 
with representatives of the Japan Financial Services Agency to 
discuss our respective resolution regimes. The Government of 
Japan has proposed legislation to expand resolution authorities 
for the responsible Japanese agencies. These bilateral 
meetings, including an expected principal level meeting later 
this year, are part of our continued effort to work with 
Japanese authorities to develop a solid framework for 
coordination and information-sharing with respect to 
resolution, including through the identification of potential 
impediments to the resolution of G-SIFIs with significant 
operations in both jurisdictions.
    These developments mark significant progress in fulfilling 
the mandate of section 210 of the Dodd-Frank Act and achieving 
the type of international coordination that would be needed to 
effectively resolve a G-SIFI in some future crisis situation. 
The FDIC is continuing efforts to engage our counterparts in 
other countries in greater coordination to improve the ability 
to achieve an orderly liquidation in the event of the failure 
of a large, internationally active financial institution. We 
will continue to pursue these efforts through both bilateral 
and multilateral approaches.

Q.6. In June of last year, the FDIC proposed a rule that 
mirrored the Federal Reserve's proposed definition of 
``predominantly engaged in financial activity.'' Since this 
definition triggers FDIC's ability to exercise its orderly 
liquidation authority, the proposed rule has generated a 
considerable amount of concern. Does the FDIC intend to 
reconsider its proposed definition of ``predominately engaged 
in financial activities'' to address concerns raised in public 
comment letters?

A.6. Section 201(b) of the Dodd-Frank Act requires the FDIC in 
consultation with the Secretary of the Treasury to establish 
certain definitional criteria for determining if a company is 
predominantly engaged in activities that the Board of Governors 
has determined are financial in nature or incidental thereto 
for purposes of section 4(k) of the Bank Holding Company Act. A 
company that is predominantly engaged in such activities would 
be considered a ``financial company'' for purposes of Title II 
of the Act.
    On March 23, 2011, the FDIC published in the Federal 
Register a notice of proposed rulemaking titled ``Orderly 
Liquidation Authority'' (March 2011 NPR) that proposed, among 
other things, definitional criteria for determining if a 
company is predominantly engaged in activities that are 
financial in nature or incidental thereto for purposes of Title 
II. On June 18, 2012, the FDIC published for comment a 
supplemental notice of proposed rulemaking, which proposed to 
clarify the scope of activities that would be considered 
financial in nature or incidental thereto for purposes of the 
March 2011 NPR (June 2012 NPR).
    The FDIC received eight comments responding to the March 
2011 NPR and seven comments responding to the June 2012 NPR. 
The FDIC is currently in the process of reviewing these 
comments and will consider them carefully in developing its 
final rule.





        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                    FROM MARTIN J. GRUENBERG

Q.1. As you know, a number of people including Sheila Bair have 
been advocates of using a simple leverage ratio as the primary 
measure of banks' capital strength. Would focusing on a simple 
leverage ratio, using the Basel III definition of leverage 
which includes key off balance sheet exposures, help cut 
through the noise of risk weighting and models and cross border 
differences, and give us all greater confidence that large 
banks are holding a good amount of high quality capital?

A.1. Maintaining a minimum ratio of capital to assets has been 
a regulatory requirement for U.S. banking organizations since 
the early 1980s, and a benchmark for supervisors' evaluation of 
capital adequacy long before that time. Leverage ratio 
requirements were part of the statutory framework of the Prompt 
Corrective Action requirements introduced in the FDIC 
Improvement Act of 1991. \1\ Leverage ratio requirements in the 
United States exist side-by-side with risk-based capital 
requirements, and each banking organization must have 
sufficient capital to satisfy whichever requirement is more 
stringent.
---------------------------------------------------------------------------
     \1\ Pub. L. 102-242, 105 Stat. 2236. The PCA requirements were 
enacted in section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 
1831o.
---------------------------------------------------------------------------
    Over time, as risk-based capital requirements have 
attempted to provide greater differentiation among types and 
degrees of risk, they also have become increasingly complex, 
particularly for advanced approaches banking organizations and 
those subject to the market risk rule. \2\ Risk-based capital 
requirements for these institutions depend largely on the 
output of internal risk models and have been criticized for 
being overly complex, opaque, and difficult to supervise 
consistently. With only risk-based requirements, a banking 
organization can increase its permissible use of leverage by 
concentrating in exposures that receive favorable risk weights. 
Exposures with favorable risk weights, however, can still 
experience high losses.
---------------------------------------------------------------------------
     \2\ Currently, the market risk capital rule is codified in 12 CFR 
part 325, appendix C. As of the effective date of the Basel III 
consolidated final rule, the citation for the market risk rule will be: 
12 CFR part 324, subpart F.
---------------------------------------------------------------------------
    Leverage ratio requirements, in contrast, directly 
constrain bank leverage and thereby offset potential weaknesses 
in the risk-based ratios and generate a baseline amount of 
capital in a way that is readily determinable and enforceable. 
The introduction of a leverage ratio in the international Basel 
III capital framework is an important step that we strongly 
support. It is well established that banks with higher capital 
as measured by the leverage ratio are less likely to fail or 
experience financial problems. Avoiding capital shortfalls at 
large institutions is particularly important in containing 
risks to the financial system and reducing the likelihood of 
economic disruption associated with problems at these 
institutions. It is therefore important and appropriate to have 
a strong leverage capital framework to complement the risk-
based capital regulations. This is needed to ensure an adequate 
base of capital exists in the event the risk-based ratios 
either underestimate risk or do not inspire confidence among 
market participants.

Q.2. The FDIC and Fed have joint jurisdiction over the 
completion of living wills from large firms. Now, I don't think 
anyone expected the first year of plans to be perfect, but can 
you remind everyone, for the FDIC and Fed to approve the plans, 
isn't the standard that they have to show how normal 
liquidation like bankruptcy or FDIC resolution could work under 
reasonable circumstances? And what progress have the plans made 
in getting firms to think through their structure, better 
inform you as regulators, and lead to simplification and 
rationalization?

A.2. On July 1, 2012, the first group of living wills, 
generally involving bank holding companies and foreign banking 
organizations with $250 billion or more in nonbank assets, were 
received. In 2013, the firms that submitted initial plans in 
2012 will be expected to refine and clarify their submissions. 
The Dodd-Frank Act requires that at the end of this process 
these plans be credible and facilitate an orderly resolution of 
these firms under the Bankruptcy Code. Four additional firms 
are expected to submit plans on July 1, 2013, and approximately 
115 firms are expected to file on December 31, 2013.
    Last year (2012) was the first time any firms had ever 
created or submitted resolution plans. There were a number of 
key objectives of this initial submission including:

    Identify each firm's critical operations and its 
        strategy to maintain them in a crisis situation;

    Map critical operations and core business lines to 
        material legal entities;

    Map cross-guarantees, service level agreements, 
        shared employees, intellectual property, and vendor 
        contracts across material legal entities;

    Identify and improve understanding of the 
        resolution regimes for material legal entities;

    Identify key obstacles to rapid and orderly 
        resolution; and

    Use plan information to aid in Title II resolution 
        planning and to enhance ongoing firm supervision.

    Each plan was reviewed for informational completeness to 
ensure that all regulatory requirements were addressed in the 
plans, and the Federal Reserve and the FDIC have been 
evaluating each plan's content and analysis.
    Following the review of the initial resolution plans, the 
agencies developed instructions for the firms to detail what 
information should be included in their 2013 resolution plan 
submissions. The agencies identified an initial set of 
significant obstacles to rapid and orderly resolution that 
covered companies are expected to address in the plans, 
including the actions or steps the company has taken or 
proposes to take to remediate or otherwise mitigate each 
obstacle and a timeline for any proposed actions. The agencies 
extended the filing date to October 1, 2013, to give firms 
additional time to develop resolution plan submissions that 
address the instructions.
    Resolution plans submitted in 2013 will be subject to 
informational completeness reviews and reviews for 
resolvability under the Bankruptcy Code. The agencies 
established a set of benchmarks for assessing a resolution 
under bankruptcy, including a benchmark for cross-border 
cooperation to minimize the risk of ring-fencing or other 
precipitous actions. Firms will need to provide a jurisdiction-
by-jurisdiction analysis of the actions each would need to take 
in a resolution, as well as the actions to be taken by host 
authorities, including supervisory and resolution authorities. 
Other benchmarks expected to be addressed in the plans include: 
the risk of multiple, competing insolvency proceedings; the 
continuity of critical operations--particularly maintaining 
access to shared services and payment and clearing systems; the 
potential systemic consequences of counterparty actions; and 
global liquidity and funding with an emphasis on providing a 
detailed understanding of the firm's funding operations and 
cash flows.
    Through this process, firms will need to think through and 
implement structural changes in order to meet the Dodd-Frank 
Act objectives of resolvability through the Bankruptcy Code.

Q.3. Are you confident that Title II can work for even the 
largest and most complex firms? What are the areas where we can 
still make improvement, and how are we progressing on improving 
the cross border issues?

A.3. We believe that Title II can work for even the largest and 
most complex firms.
    The FDIC has largely completed the rulemaking necessary to 
carry out its systemic resolution responsibilities under Title 
II of the Dodd-Frank Act. In July 2011, the FDIC Board approved 
a final rule implementing the Title II Orderly Liquidation 
Authority. This rulemaking addressed, among other things, the 
priority of claims and the treatment of similarly situated 
creditors.
    The FDIC now has the legal authority, technical expertise, 
and operational capability to resolve a failing systemic 
resolution. The FDIC introduced its ``single entry'' strategy 
for the resolution of a U.S. G-SIFI using the Order Liquidation 
Authority under Title II of the Dodd Frank Act. Since then the 
FDIC has been working to operationalize the strategy and 
enhance FDIC preparedness.
    Key activities to operationalize the strategy include:

    Addressing vital issues, including valuation, 
        recapitalization, payments, accounting, and governance, 
        through ongoing internal FDIC projects.

    Developing and refining Title II resolution 
        strategies that consider the specific characteristics 
        of each of the largest U.S. domiciled SIFIs. Summaries 
        of these plans have been shared with domestic and 
        international regulators.

    Actively communicating this approach with key 
        stakeholders to ensure that the market understands what 
        actions the FDIC may take ahead of the failure to 
        minimize irrational or unnecessarily disruptive 
        behavior. In 2012, the FDIC participated in over 20 
        outreach events with academics and other thought 
        leaders, industry groups, rating agencies, and 
        financial market utilities in order to expand 
        (domestic) communications/outreach efforts regarding 
        Title II OLA.

    The FDIC has made great strides in developing cooperation 
with host supervisors and resolution authorities in the most 
significant foreign jurisdictions for U.S. G-SIFIs to allow for 
a successful implementation of the Orderly Liquidation 
Authority. These dialogues with host supervisors and resolution 
authorities occur at both the bilateral and multilateral level.
    As part of our bilateral efforts, the FDIC and the Bank of 
England, in conjunction with the prudential regulators in our 
respective jurisdictions, have been working to develop 
contingency plans for the failure of G-SIFIs that have 
operations in both the U.S. and the U.K. Approximately 70 
percent of the reported foreign activities of the eight U.S. G-
SIFIs emanates from the U.K. An indication of the close working 
relationship between the FDIC and U.K. authorities is the joint 
paper on resolution strategies that the FDIC and the Bank of 
England released in December 2012. This joint paper focuses on 
the application of ``top-down'' resolution strategies for a 
U.S. or a U.K. financial group in a cross-border context and 
addressed several common considerations to these resolution 
strategies.
    In addition to the close working relationship with the 
U.K., the FDIC and the European Commission (E.C.) have agreed 
to establish a joint Working Group comprised of senior staff to 
discuss resolution and deposit guarantee issues common to our 
respective jurisdictions. The Working Group will convene twice 
a year, once in Washington, once in Brussels, with less formal 
communications continuing in between. The first of these 
meetings will take place later this month. We expect that these 
meetings will enhance close coordination on resolution related 
matters between the FDIC and the E.C., as well as European 
Union Member States.
    The FDIC also has engaged with Swiss regulatory authorities 
on a bilateral and trilateral (including the U.K.) basis. 
Through these meetings, the FDIC has further developed its 
understanding of the Swiss resolution regime for G-SIFIs, 
including an in-depth examination of the two Swiss-based G-
SIFIs with significant operations in the U.S. In part based on 
the work of the FDIC, the Swiss regulatory authorities have 
embraced a single point of entry approach for the Swiss based 
U-SIFIs.
    The FDIC also has had bilateral meetings with Japanese 
authorities. FDIC staff attended meetings hosted by the Deposit 
Insurance Corporation of Japan and the FDIC hosted a meeting 
with representatives of the Japan Financial Services Agency, to 
discuss our respective resolution regimes. The Government of 
Japan has proposed legislation to expand resolution authorities 
for the responsible Japanese Agencies. These bilateral 
meetings, including an expected principal level meeting later 
this year, are part of our continued effort to work with 
Japanese authorities to develop a solid framework for 
coordination and information-sharing with respect to 
resolution, including through the identification of potential 
impediments to the resolution of G-SIFIs with significant 
operations in both jurisdictions.

Q.4. The statutory language for funds defined under the Volcker 
Rule pointedly did not include venture funds, however the 
definition in the proposed rule seemed to indicate that venture 
funds would be covered. In addition to exceeding the statutory 
intent of Congress, this has created uncertainty in the market 
as firms await a final rule and refrain from making commitments 
which might be swept up in the final version of the Volcker 
Rule. Can you clarify whether venture funds are covered by the 
Volcker Rule?

A.4. Section 619(h)(2) of the Dodd-Frank Act defines the terms 
``hedge fund'' and ``private equity fund'' as ``an issuer that 
would be an investment company, as defined in the Investment 
Company Act of 1940 (15 U.S.C. 80a-1, et seq.), but for section 
3(c)(1) or 3(c)(7) of that Act, or such similar funds as the 
appropriate Federal banking agencies, the Securities and 
Exchange Commission, and the Commodity Futures Trading 
Commission may, by rule, as provided in subsection (b)(2), 
determine.'' This definition, as written, would cover the 
majority of venture capital funds.
    As part of the NPR, the agencies sought public comment on 
whether venture capital funds should be excluded from the 
definition of ``hedge fund'' and ``private equity fund'' for 
purposes of the Volcker Rule. In the NPR, the agencies asked:

        Should venture capital funds be excluded from the 
        definition of ``covered fund''? Why or why not? If so, 
        should the definition contained in rule 203(l)-(1) 
        under the [Investment] Advisers Act be used? Should any 
        modifications to that definition of venture capital 
        fund be made? How would permitting a banking entity to 
        invest in such a fund meet the standards contained in 
        section 13(d)(1)(J) of the [Bank Holding Company Act]?

    In conjunction with the development of the final rule, the 
agencies are reviewing public comments responding to the NPR, 
including comments on this question related to venture capital 
funds. The agencies will give careful consideration to these 
comments in the development of the final rule.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
                    FROM MARTIN J. GRUENBERG

Q.1. Chairman Gruenberg, I thank you for understanding that as 
relationship lenders in local communities, community banks are 
able to provide much needed financing to both residential and 
commercial borrowers in rural and underserved areas where 
larger banks are unable or unwilling to participate. Have you 
thoroughly considered the impact of higher risk weights from 
Basel III on community banks, as well as on the local 
communities where they serve?

A.1. The FDIC recognizes the important role that community 
banks play in the financial system, which includes providing 
credit to small businesses and homeowners throughout the 
country. During the comment period, the agencies participated 
in various outreach efforts, such as engaging community banking 
organizations and trade associations, among others, to better 
understand industry participants' concerns about the proposed 
revisions to the general risk-based capital rules and to gather 
information on their potential effects. To facilitate comment 
on the NPRs, the agencies developed and provided to the 
industry an estimation tool that would allow an institution to 
estimate the regulatory capital impact of the proposals. The 
FDIC conducted roundtables in each of our regional offices and 
hosted a nationwide Web cast to explain the components of the 
rules and answer banker questions. Lastly we developed 
instructional videos on the two rulemakings applicable to 
community banks. These videos received more than 7,000 full 
views in the first 3 months of availability. We believe these 
efforts contributed to the more than 2,500 comments we 
received, which have provided valuable additional information 
to assist the agencies as we determine how to proceed with the 
NPRs. Particular attention is being given to the comments on 
the impact of the proposed rules on community banks.

Q.2. Chairman Gruenberg, first, I'd like to thank you and the 
FDIC for making the community bank industry a priority for your 
agency. After conducting your study and hosting regional 
roundtables, what were the most significant problems you found 
on the ground? What did your agency do to address them?

A.2. Community banks play a critical role in the national and 
local economies by extending credit to consumers and 
businesses. As you indicate, the FDIC has launched several 
initiatives to further the understanding of how community banks 
have evolved during the past 25 years, current opportunities 
and challenges facing community bankers, and what lies ahead. 
The FDIC launched the Community Banking Initiative in February 
2012 with a national conference on community banking. 
Roundtable discussions were then held in the FDIC's six 
regions, and the FDIC Community Banking Study was released in 
December 2012. We also conducted comprehensive reviews of our 
examination and rulemaking processes. Overall, the findings 
from these initiatives indicate the community banking model 
remains viable and that community banks will be an important 
part of the financial landscape for years to come. The findings 
also identified financial and operational challenges facing 
community banks as well as opportunities for the FDIC to 
strengthen the efficiency and effectiveness of its examination 
and rulemaking processes.
    The FDIC Community Banking Study is a data-driven effort to 
identify and explore community bank issues. The first chapter 
develops a research definition for the community bank that is 
used throughout the study. Subsequent chapters address 
structural change, the geography of community banking, 
comparative financial performance, community bank balance sheet 
strategies, and capital formation at community banks. This 
study is intended to be a platform for future research and 
analysis by the FDIC and other interested parties.
    Community bankers identified a number of financial 
challenges during the roundtable discussions, especially that 
there is an insufficient volume of quality loans available in 
many markets. They also stated that capital raises are 
increasingly difficult in the current banking environment and 
the low-rate environment is leading to a build-up of interest 
rate risk. Community bankers also expressed concern about the 
ability to retain quality staff and how to satisfy customers' 
demands for greater availability of mobile banking 
technologies. Although the vast majority of banker comments 
regarding their experience with the examination process were 
favorable, a general perception exists that new regulations and 
heightened scrutiny of existing regulations are adding to the 
cost of doing business. Community bankers also note there are 
opportunities to enhance communication with examination staff 
and expand and strengthen technical assistance provided by the 
FDIC.
    The FDIC has undertaken initiatives to address comments 
received from bankers during the roundtable discussions. To 
enhance our examination processes, the FDIC developed a tool 
that generates pre-examination request documents tailored to a 
bank's specific operations and business lines. The FDIC is 
improving how information is shared electronically between 
bankers and examiners through its secure Internet channel, 
FDICconnect, which will ensure better access for bankers and 
examiners. We also revised the classification system for citing 
violations identified during compliance examinations to better 
communicate to institutions the severity of violations and to 
provide more consistency in the classification of violations 
cited in Reports of Examination.
    The FDIC also issued a Financial Institution Letter, 
entitled ``Reminder on FDIC Examination Findings'' (FIL-13-2011 
dated March 1, 2011), encouraging banks to provide feedback 
about the supervisory process. Since then, we continue to 
conduct outreach sessions and hold training workshops and 
symposiums, and have created the Director's Resource Center Web 
page to enhance technical assistance provided to bankers on a 
range of bank regulatory issues. Also, the FDIC has developed 
and posted a Regulatory Calendar on www.fdic.gov to keep 
bankers current on the issuance of rules, regulations, and 
guidance; and we are holding industry calls to communicate 
critical information to bankers about pending regulatory 
changes.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                    FROM MARTIN J. GRUENBERG

Q.1. In response to concerns that the bank-centric Basel III 
capital standards are unworkable for insurers, the Fed has 
indicated that it would perform some tailoring of those 
standards. However, there is continuing concern among the life 
insurance industry that the proposed tailoring is inadequate 
and does not properly acknowledge the wide differences between 
banking and insurance.
    What kinds of more substantive changes will the Fed 
consider to the Basel III rulemaking to prevent negative 
impacts to insurers and the policyholders, savers, and retirees 
that are their customers?
    There is also a concern that the bank standards are a 
dramatic departure from the duration matching framework common 
to insurance supervision.
    What is your response to that concern and would the Fed 
consider doing more than just tailoring bank standards?
    Do you believe that, from an insurance perspective, Basel 
III bank standards are an incremental or dramatic departure 
from current insurance standards?

A.1. Section 171 of the Dodd-Frank Act requires the 
establishment of minimum consolidated leverage and risk-based 
capital requirements for savings and loan holding companies, a 
number of which have significant insurance activities. The FDIC 
recognizes the distinctions between banking and insurance and 
the authorities given to the States. In 2011, we amended our 
general risk-based capital requirements to provide flexibility 
in addressing consolidated capital requirements for low-risk 
nonbank activities, including certain insurance-related 
activities. We will continue to bear in mind these distinctions 
as we work with our fellow regulators to ensure that the final 
rule provides for an adequate transition period that is 
consistent with Section 171.

Q.2. Regarding the Volcker Rule, some have suggested that the 
banking agencies should just go ahead and issue their final 
rule without waiting to reach agreement with the Securities and 
Exchange Commission and Commodities Futures Trading Commission, 
which have to issue their own rules. This scenario could result 
in there being more than one Volcker Rule, which would create 
significant confusion about which agency's rule would apply to 
which covered activity. Do you agree that there should be only 
one Volcker Rule?

A.2. All entities affected by the Volcker Rule should be 
operating under similar requirements. Section 619(b)(2) of the 
Dodd-Frank Act contains specific coordinated rulemaking 
requirements that serve to help clarify the application of 
individual agency rules, to ensure that agency regulations are 
comparable, and to require coordination and consistency in the 
application of the Volcker Rule. To that end, the Federal 
banking agencies, the SEC, and the CFTC are currently working 
together in the process of developing a final Volcker Rule.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM THOMAS J. CURRY

Q.1. Given how complex it is to determine whether a trade is a 
hedge or a proprietary trade, it appears the real issue is 
whether a trade threatens the safety and soundness of the bank. 
What benchmark does your agency use to determine whether a 
particular activity is or is not ``hedging''? How does your 
agency determine whether the trade presents risks to the safety 
and soundness of a financial institution?

A.1. Our agency evaluates whether particular activities are 
hedging based on their effectiveness in managing risks arising 
from banking activities and their conformance with the bank's 
hedging policies and procedures. OCC Banking Circular 277 
discusses appropriate risk management of financial derivatives.
    The OCC expects banks to establish hedging policies and 
procedures that clearly specify risk appetite, hedging 
strategies, including the types of hedge instruments permitted, 
and to document hedge positions. Documentation should include 
identification of the assets or liabilities or positions being 
hedged, how the hedge manages the risk associated with those 
assets or liabilities or positions, and how and when the hedge 
will be tested for effectiveness. As an additional control, a 
bank's risk management systems should facilitate stress testing 
and enable management and the OCC to assess the potential 
impact of various changes in market factors on earnings and 
capital. We also expect banks to establish prudent limits and 
sub-limits on hedging instruments to protect against 
concentrations in any particular instruments.
    We expect banks to produce periodic risk, as well as 
hedging profit and loss (P&L) reports, and we use those reports 
to identify hedging activities that show an increase in risks 
and produce material amounts of continuing profits or losses 
and may warrant further review. As with any other significant 
positions on or off-balance sheet, the institution's internal 
risk management function should review material hedged 
positions, resulting material profits or losses, and material 
risk measures (e.g., stress, value-at-risk, and relevant 
nonstatistical risk measures) to evaluate whether activities 
are effectively mitigating risk and whether the hedging 
activities present risks to the safety and soundness of the 
bank.
    The OCC recognizes that controls at smaller banks with 
simpler hedging activity need not be as complex and 
sophisticated as at larger banks. Nevertheless, at a minimum, 
these banks' risk management systems should evaluate the 
possible impact of hedges on earnings and capital that may 
result from adverse changes in interest rates and other 
relevant market conditions. We expect these banks to 
periodically review the effectiveness of their hedges as a part 
of the bank's overall risk management; including, where 
appropriate, back testing. In addition, examiners review large 
holdings in the investment and derivatives portfolios, as well 
as material changes that have occurred between examinations.
    We also note that the Volcker Rule provisions of the Dodd-
Frank Act prohibit proprietary trading except for certain 
permitted activities, including risk-mitigating hedging. The 
proposed implementing regulations issued by the agencies, 
including the OCC, contain a number of requirements designed to 
ensure that a banking entity's hedging activities reduce 
specific risks in connection with the entity's individual or 
aggregate holdings and do not give rise to new exposures that 
are not simultaneously hedged. For example, the proposed 
regulations require banking entities to engage in permitted 
hedging activities in accordance with written policies and 
procedures, subject to continuing review, monitoring and 
management, and only if compensation arrangements of persons 
performing hedging activities are designed not to reward 
proprietary risk-taking. The interagency Volcker regulations, 
when finalized, will provide standards for distinguishing a 
hedge from a proprietary trade, in addition to the supervisory 
standards described above.

Q.2. Federal Reserve, FDIC, and OCC have issued proposed rules 
to implement Dodd-Frank and Basel III capital requirements for 
U.S. institutions. Late last year, your agencies pushed back 
the effective date of the proposed Basel III rules beyond 
January 1, 2013. Given the concerns that substantially higher 
capital requirements will have a negative impact on lending, 
are your agencies using this extra time to conduct a cost-
benefit analysis about the impact of the proposed rules on the 
U.S. economy, availability, and cost of credit, cost of 
insurance, and the regulatory burden on institutions, before 
implementing the final rules?

A.2. In response to the three notices of proposed rulemaking, 
the Federal banking agencies received more than 4,000 total 
comments, many of which expressed concern about the potential 
impact of the rulemaking on U.S. banking organizations and, in 
particular, their ability to serve as financial intermediaries. 
Late last year, the ace and the other Federal banking agencies 
determined that, rather than rushing to implement a final rule, 
it would be prudent to delay the final rulemaking in order to 
review all the comments carefully and ensure that the final 
rulemaking appropriately addresses the commenters' concerns 
without sacrificing the goal of implementing substantial 
improvements to the agencies' respective regulatory capital 
frameworks. The agencies now are working to complete the final 
rule and to update and revise their analyses, as appropriate.
    For the proposals, the OCC conducted those cost and burden 
analyses required by the Regulatory Flexibility Act, the 
Paperwork Reduction Act, and the Unfunded Mandates Reform Act 
of 1995, among others, the results of which were detailed in 
the proposals. For the final rulemaking, the OCC and the other 
Federal banking agencies are working to update those analyses. 
Additionally, the agencies must determine whether the rule is 
likely to be a ``major rule'' for the purposes of the 
Congressional Review Act, which is defined, in part, as any 
rule that results in or is likely to result in an annual effect 
on the economy of $100 million or more.
    In response to several specific questions in the proposals 
about potential costs related to the proposals, a substantial 
number of commenters provided a great deal of feedback both on 
the potential impact of specific provisions, and on the 
proposed framework in its entirety. During the comment period, 
the agencies also participated in various outreach efforts, 
such as engaging community banking organizations and trade 
associations, among others, to better understand industry 
participants' concerns about the proposals and to gather 
information on their potential effects. These efforts have 
provided valuable additional information that the OCC and the 
other Federal banking agencies are considering as we develop 
the final rule and analyze its potential impact.
    The CCC continues to believe that all banking organizations 
need a strong capital base to enable them to withstand periods 
of economic adversity and continue to fulfill their role as a 
source of credit to the economy. Therefore, the CCC is working 
diligently with the other Federal banking agencies to complete 
the rulemaking process and develop a final rule as 
expeditiously as possible.

Q.3. Given the impact that the Qualified Mortgages (QM) rules, 
the proposed Qualified Residential Mortgages (QRM) rules, the 
Basel III risk-weights for mortgages, servicing, escrow, and 
appraisal rules will have on the mortgage market and the 
housing recovery, it is crucial that these rules work in 
concert. What analysis has your agency conducted to assess how 
these rules work together? What is the aggregate impact of 
those three rules, as proposed and finalized, on the overall 
mortgage market as well as on market participants?

A.3. This body of rules, covering securitization risk 
retention, risk-based capital, and consumer protection in the 
origination and servicing of mortgages, are all part of the 
Government's response to fundamentally unsound mortgage market 
practices that were the eventual triggering mechanism for the 
financial crisis. They address different aspects of the 
interlinked market mechanisms through which mortgages are 
created, funded, and administered. Several agencies are 
involved in fashioning these rules, including the banking 
agencies and the CFPB, the SEC, the FHFA, and HUD.
    The OCC has not been part of the rulemaking group for all 
these rules, but it has been involved in the rulemakings for 
securitization risk retention, Basel III, and appraisals for 
higher-risk mortgages. For each of these regulatory proposals, 
the OCC and the other agencies participating in the rulemakings 
have designed the proposed rules to impose new market 
protections in a fashion that appropriately preserves the 
availability of mortgages to creditworthy consumers at 
reasonable prices. In addition, the OCC conducted cost and 
burden analyses of the impact of the proposed rules on mortgage 
market participants that will be subject to the new rules, as 
required by the Regulatory Flexibility Act, the Paperwork 
Reduction Act, and the Unfunded Mandates Reform Act of 1995. 
For the final rulemaking, the OCC must determine whether the 
rule is likely to be a ``major rule'' for the purposes of the 
Congressional Review Act, which is defined, in part, as any 
rule that results in or is likely to result in an annual effect 
on the economy of $100 million or more.
    In addition, in response to the agencies' request for 
public comments on these proposed rules, commenters have 
expressed concern to the agencies about the potential impact on 
mortgage availability and prices, and in certain instances 
provided quantitative analysis to support their views. We are 
considering these views and information as we go forward with 
the rulemakings.

Q.4. Under the Basel III proposals mortgages will be assigned 
to two risk categories and several subcategories, but in their 
proposals the agencies did not explain how risk weights for 
those subcategories are determined and why they are 
appropriate. How did your agency determine the appropriate 
range for those subcategories?

A.4. An overarching concern from the many comment letters the 
agencies received was the proposed treatment of residential 
mortgages in the Standardized Approach NPR. As stated in the 
proposal, residential mortgages would be separated into two 
risk categories based on product and underwriting 
characteristics and then, within each category, assigned risk 
weights based on loan-to-value ratios (LTVs).
    During the market turmoil, the U.S. housing market 
experienced significant deterioration and unprecedented levels 
of mortgage loan defaults and home foreclosures. The causes for 
the significant increase in loan defaults and home foreclosures 
included inadequate underwriting standards, the proliferation 
of high-risk mortgage products, the practice of issuing 
mortgage loans to borrowers with undocumented income, as well 
as a precipitous decline in housing prices and a rise in 
unemployment.
    The NPR proposed to increase the risk sensitivity of the 
regulatory capital rules by raising the capital requirements 
for the riskiest, nontraditional mortgages while actually 
lowering the requirements for relatively safer, traditional 
residential mortgage loans with low LTVs. These provisions in 
the Standardized Approach NPR were designed to address some of 
the causes of the crisis attributed to mortgages as well as to 
provide greater risk sensitivity in banks, capital 
requirements.
    Given the characteristics of the U.S. residential mortgage 
market, the agencies believed that a wider range of risk 
weights based on key risk factors including product and 
underwriting characteristics and LTVs were more appropriate. 
The proposed ranges and key risk factors were developed on an 
interagency basis with the expert supervisory input of policy 
experts and bank examiners.
    The OCC recognizes that some aspects of the proposed 
treatment for residential mortgages could impose a burden on 
community banks and thrifts. We are considering all the issues 
raised by the commenters as we develop the final rule in 
conjunction with the other banking agencies.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                      FROM THOMAS J. CURRY

Q.1. Can you provide a list of OCC consent orders with the top 
five national banks by asset size over the past 20 years?

A.1. Attached is a list of the top five national banks by asset 
size over a 20-year period [OCC Large Banks] as well as a list 
that contains all public formal enforcement actions against 
those banks [Selected OCC Enforcement Actions Against Large 
Banks].

Q.2. Can you also describe the process by which OCC tracks 
consent orders and verifies bank compliance with the terms?

A.2. Large Bank Supervision (LBS) teams provide ongoing 
supervisory oversight to ensure banks comply with Consent 
Orders and implement timely corrective action. They enter 
Consent Orders into LBS information systems. This includes LB-
ID, which provides a high level record of the outstanding 
Consent Order. The enforcement document is housed in WISDM, 
which contains all documents of record for a particular 
institution. WISDM allows the examination team to create 
folders that contain the full document and bank responses, 
correspondence, and supporting information for each Article. 
Examination teams may also use official OCC shared sites (e.g., 
Sharepoint) as a working repository in conjunction with WISDM. 
Teams monitor compliance with each article of the Consent Order 
through regular discussions with bank management and internal 
audit, and confirm compliance through testing during the 
ongoing supervisory process and/or targeted reviews. The 
examiner-in-charge may assign individual examiners reporting 
through the team lead the responsibility for tracking and 
follow-up on particular Articles.
    LBS teams formally communicate the status of corrective 
actions and compliance with Articles in the Consent Order 
through Supervisory Letters. An LBS team generally requires the 
bank's internal audit to test for compliance and correction of 
the identified weakness before the OCC will render judgment of 
the adequacy of the actions. LBS teams utilize the internal 
audit's findings and recommendations and also perform testing 
and sampling to ensure proper remediation and sustainability of 
corrective actions. If satisfactory, the examiner will provide 
documentation to the examiner-in-charge to support a decision 
on compliance.
    Midsize and Community Bank Supervision (MCBS) examination 
teams continuously track Consent Order compliance through on-
site examinations; off-site monitoring, and regular 
correspondence with banks. They maintain a detailed inventory 
of the individual actionable Articles within each Consent Order 
under a designated file structure on Examiner View (EV). EV 
allows examiners to identify and track due dates for each 
Article, the documentation the bank provides in response to 
each requirement, the examiners' notes on the bank's progress 
in achieving compliance, and ultimately whether the bank has 
achieved compliance. EV also ties each Article in an 
enforcement document to the relevant Matter Requiring 
Attention. if applicable. Because each Article has different 
requirements for the bank to submit information, EV also 
includes an inventoried location for storing all enforcement 
action related follow-up documentation.
    MCBS teams use EV to establish the supervisory strategy and 
develop examination resource requirements for each FDICIA 
cycle. Each full scope and interim examination will include an 
assessment and detailed description of enforcement action 
compliance. Occasionally, MCBS teams will conduct other 
targeted reviews or off-site reviews that focus on a discrete 
area of the enforcement action to supplement the supervisory 
cycle. Generally, MCBS teams communicate their conclusions 
regarding Consent Order compliance to the bank twice a year 
within examination reports; however, they often will send 
Supervisory Letters in response to individual bank submissions.

Q.3. Has the OCC conducted any internal research or analysis on 
trade-offs to the public between settling an enforcement action 
without admission of guilt and going forward with litigation as 
necessary to obtain such admission?
    If so, can you provide that analysis to the Committee?

A.3. The OCC does not have any internal research or analysis on 
the trade-offs of settling without an admission of liability.







       RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
                      FROM THOMAS J. CURRY

Q.1. Comptroller Curry, I thank you for understanding that as 
relationship lenders in local communities, community banks are 
able to provide much needed financing to both residential and 
commercial borrowers in rural and underserved areas where 
larger banks are unable or unwilling to participate. Have you 
thoroughly considered the impact of higher risk weights from 
Basel III on community banks, as well as on the local 
communities where they serve?

A.1. The OCC is very much aware of the special role that 
smaller banks play in our communities in providing financing of 
our country's small businesses and families. Given the vital 
role that banks serve in our national economy and local 
communities, we are committed to helping ensure that the 
business model of banks, both large and small, remains vibrant 
and viable.
    As noted in the preambles to the proposals, the agencies 
assessed the potential effects of the proposed rules on banks 
by using regulatory reporting data and making certain key 
assumptions. The agencies' assessments indicated that most 
community banks hold capital well above both the existing and 
the proposed regulatory minimums. Therefore, the proposed 
requirements are not expected to impact significantly the 
capital structure of most banks.
    One of the key purposes of the notice and comment process 
is to gain a better understanding of the potential impact of a 
proposal on banks of all sizes. To foster feedback from 
community banks on potential effects of the proposals, the 
agencies developed and posted on their respective Web sites an 
estimator tool that allowed a smaller bank to use bank-specific 
information to assess the likely impact on the individual 
institution.
    The OCC remains committed to reviewing and evaluating the 
issues and the comments received as we move toward a final 
rule.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                      FROM THOMAS J. CURRY

Q.1. In response to concerns that the bank-centric Basel III 
capital standards are unworkable for insurers, the Fed has 
indicated that it would perform some tailoring of those 
standards. However, there is continuing concern among the life 
insurance industry that the proposed tailoring is inadequate 
and does not properly acknowledge the wide differences between 
banking and insurance.
    What kinds of more substantive changes will the Fed 
consider to the Basel III rulemaking to prevent negative 
impacts to insurers and the policyholders, savers, and retirees 
that are their customers?

A.1. The Federal Reserve Board is the primary regulator of bank 
and savings and loan holding companies (SLHCs), including SLHCs 
that have insurance companies in their corporate structures. We 
therefore defer to the Federal Reserve Board to respond to this 
question.

Q.2. There is also a concern that the bank standards are a 
dramatic departure from the duration matching framework common 
to insurance supervision.
    What is your response to that concern and would the Fed 
consider doing more than just tailoring bank standards?
    Do you believe that, from an insurance perspective, Basel 
III bank standards are an incremental or dramatic departure 
from current insurance standards?

A.2. We defer to the Federal Reserve Board to respond to these 
questions.

Q.3. Regarding the Volcker Rule, some have suggested that the 
banking agencies should just go ahead and issue their final 
rule without waiting to reach agreement with the Securities and 
Exchange Commission and Commodities Futures Trading Commission, 
which have to issue their own rules. This scenario could result 
in there being more than one Volcker Rule, which would create 
significant confusion about which agency's rule would apply to 
which covered activity.
    Do you agree that there should be only one Volcker Rule?

A.3. The Dodd-Frank Act envisions a coordinated effort among 
the Volcker Rule rulewriting agencies. It requires the Federal 
banking agencies to issue a joint regulation; it further 
requires the banking agencies and the Securities and Exchange 
Commission and Commodity Futures Trading Commission to consult 
and coordinate with one another for the purpose of assuring 
that their rules are comparable and provide for consistent 
application. The agencies have been regularly consulting with 
each other and will continue to do so to achieve the 
consistency that Congress clearly intended.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                      FROM RICHARD CORDRAY

Q.1. I am concerned that in Virginia we have a number of low-
density areas that may not qualify for the rural or underserved 
category within Qualified Mortgages based on their Urban 
Influence Codes, lenders' volume, or other reasons. However, 
these areas may still have high-acreage properties and 
nonstandard loans that will have a hard time refinancing in the 
short-term and finding new originators in the long-term. Can 
you address these concerns, describe why the CFPB chose to use 
UICs, and respond to whether the Bureau would consider using 
borrower profiles in addition to geographical classifications?
A.1. The Bureau followed the structure of the Federal Reserve 
Board's proposal to use a county-based metric based on the 
Department of Agriculture's ``urban influence codes'' which 
place every county in the United States into a category based 
upon size and proximity to a metropolitan or micropolitan area. 
This county-based definition was chosen in part because 
implementing it should be fairly straightforward; by contrast, 
we received some input indicating that definitions that split 
counties to isolate rural areas can create greater compliance 
burdens for small banks. The Bureau has expanded the list of 
eligible codes to include counties in which about 9 percent of 
the Nation's population lives, up from about 3 percent as 
originally proposed. We expect that the vast majority of 
community banks and credit unions operating predominantly in 
those areas meet the definition of small creditor--
approximately 2,700 institutions in total.
    The Bureau wants to preserve access to credit for small 
creditors operating responsibly in rural and underserved areas. 
So under the Ability-to-Repay rule, we extended Qualified 
Mortgage status to certain balloon loans held in portfolio by 
small creditors operating predominantly in rural or underserved 
areas. We also proposed amendments to the Ability-to-Repay rule 
to accommodate mortgage lending by smaller institutions, 
including those operating outside of what are designated as 
rural and underserved areas. Our proposal would treat loans 
made by smaller lenders and held in portfolio at certain small 
institutions as Qualified Mortgages even if the loans exceed 43 
percent debt-to-income ratio, as long as the lender considered 
debt-to-income or residual income before making the loan, and 
as long as the loans meet the product feature and other 
requirements for Qualified Mortgages. This proposed exemption 
would cover institutions that hold less than $2 billion in 
assets and, with affiliates, extend 500 or fewer first lien 
mortgages per year. The Bureau estimates that approximately 
9,200 community banks and credit unions would be affected by 
the proposed exemption. Under the proposal, these portfolio 
loans made by small creditors that are Qualified Mortgages 
would have a safe harbor from Ability-to-Repay liability if the 
interest rate is within 3.5 percent over the average prime 
offer rate. The Bureau also proposed to extend the same 
increase in the safe harbor threshold for Qualified Mortgage 
balloon loans made by small institutions predominantly serving 
rural and underserved areas. The comment period for our 
proposal recently ended, and we are now assessing the comments 
we received before finalizing this measure.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP
                      FROM RICHARD CORDRAY

Q.1. Director Cordray, as the President stated in the State of 
the Union address, overlapping regulations of our mortgage 
markets have the potential to constrain credit and cause 
otherwise worthy borrowers from qualifying for mortgages. I'm 
especially concerned about the impact that these new rules will 
have on smaller institutions that serve States like North 
Dakota. What will the Bureau be doing to ensure those 
institutions have clear, written guidance to clarify these new 
regulations and to make sure lenders have the time to comply 
with them?
A.1. The Bureau recognizes that the model of relationship 
lending and customer service for which small lenders such as 
community banks and credit unions are known was not a driver of 
the excesses in the mortgage market leading up to the financial 
crisis. And we want to preserve access to credit for small 
creditors operating responsibly in rural and underserved areas. 
So under the Ability-to-Repay rule, we extended Qualified 
Mortgage status to certain balloon loans held in portfolio by 
small creditors operating predominantly in rural or underserved 
areas.
    The Bureau also proposed amendments to the Ability-to-Repay 
rule to accommodate mortgage lending by smaller institutions--
particularly for portfolio loans made by small lenders--
including those operating outside of what are designated as 
rural or underserved areas. Our proposal would treat these as 
Qualified Mortgages even if the loans exceed 43 percent debt-
to-income ratio, as long as the lender considered debt-to-
income or residual income before making the loan, and as long 
as the loans meet the product feature and other requirements 
for Qualified Mortgages. This proposed exemption would cover 
institutions that hold less than $2 billion in assets and, with 
affiliates, extend 500 or fewer first lien mortgages per year. 
The Bureau estimates that approximately 9,200 community banks 
and credit unions would be affected by the proposed exemption. 
Under the proposal, loans made by small creditors that are 
Qualified Mortgages would have a safe harbor from Ability-to-
Repay liability if the interest rate is within 3.5 percent over 
the average prime offer rate. The comment period for our 
proposal recently ended, and we are now assessing the comments 
we received before finalizing this measure.
    In addition, our escrow rule includes an exemption for 
small creditors in rural or underserved areas that have less 
than $2 billion in assets and that, with affiliates, originate 
500 or fewer mortgages a year. Small creditors that meet these 
criteria and do not generally have escrow accounts for their 
current mortgage customers will be exempt from the escrow 
requirements with regard to loans that are not subject to a 
forward commitment at origination.
    Likewise, for the servicing rules, we recognize that 
smaller servicers typically operate according to a business 
model that is based on high-touch customer service, and that 
they typically make extensive efforts to avoid foreclosures. So 
smaller institutions that service 5,000 or fewer mortgage loans 
originated or owned by the servicer itself, or its affiliates, 
are exempted from large pieces of our servicing rules. This 
exempts many small servicers from, among other provisions, the 
periodic statement requirement, the general servicing policies 
and procedures, and most of the loss mitigation provisions.
    We are committed to doing everything we can to help achieve 
effective, efficient, and comprehensive implementation by 
engaging with industry stakeholders in the coming year. To this 
end, we have announced an implementation plan to prepare 
mortgage businesses for the new rules. We will publish plain-
English rule summaries, which should be especially helpful to 
smaller institutions. Over the course of the year, we will 
address questions, as appropriate, about the rules which are 
raised by industry, consumer groups, or other agencies. Any 
inquiries from your constituents in North Dakota about the 
meaning or intent of these regulations may be directed to 
[email protected] or 202-435-7700. We will also 
publish readiness guides to give industry a broad checklist of 
things to do to prepare for the rules taking effect--like 
updating policies and procedures and providing training for 
staff. And we are working with our fellow regulators to help 
ensure consistency in our examinations of mortgage lenders 
under the new rules and to clarify issues as needed.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM ELISSE B. WALTER

Q.1. Given how complex it is to determine whether a trade is a 
hedge or a proprietary trade, it appears the real issue is 
whether a trade threatens the safety and soundness of the bank. 
What benchmark does your agency use to determine whether a 
particular activity is or is not ``hedging''? How does your 
agency determine whether the trade presents risks to the safety 
and soundness of a financial institution?

A.1. In the proposed rules to implement Section 619 of the 
Dodd-Frank Act, commonly referred to as the ``Volcker Rule'', 
the SEC, the Federal banking agencies, and the CFTC set forth 
certain criteria intended to differentiate between permitted 
risk-mitigating hedging activities and prohibited proprietary 
trading. In particular, the proposed risk-mitigating hedging 
exemption required, among other things, that a banking entity's 
hedging activities: (i) hedge or otherwise mitigate one or more 
specific risks arising in connection with and related to 
individual or aggregated positions, contracts, or other 
holdings of the banking entity; (ii) be reasonably correlated 
to the risk(s) that are intended to be hedged or otherwise 
mitigated; and (iii) be subject to continuing review, 
monitoring, and management. Moreover, a banking entity would be 
required to establish an internal compliance program, including 
reasonably designed written policies and procedures regarding 
the instruments, techniques, and strategies that may be used 
for hedging, internal controls and monitoring procedures, and 
independent testing. Similar procedures and controls are 
currently used by large firms to manage their risk and by 
regulators who assess the risk of those firms. The proposed 
rules also required the use of particular metrics to help 
assess compliance with the Volcker Rule. Similar questions 
arise when determining whether hedging activity is being 
conducted in connection with market making activity in 
compliance with the market making exemption under the statute. 
Further, as specified in the statute, the proposed rules 
included a provision that would disallow a permissible 
activity, including risk-mitigating hedging, if the activity 
threatens the safety or soundness of the financial institution. 
We received a number of comments regarding these proposed 
rules. At this time, we are working with our fellow regulators 
to refine the proposed rules in response to comments.

Q.2. The SEC has not yet proposed its extraterritoriality rule 
for security-based swaps. Why has there been a delay and when 
do you intend to issue the proposed rules?

A.2. Since the time of this hearing, the Commission approved 
publication of its cross-border proposal on May 1, 2013. With 
very limited exception, the Commission had previously not 
addressed the regulation of cross-border security-based swap 
activities in our proposed or final rules because we believed 
these issues should be addressed holistically, rather than in a 
piecemeal fashion. In the Commission's view, a single proposal 
would allow investors, market participants, foreign regulators, 
and other interested parties with an opportunity to consider, 
as an integrated whole, the Commission's proposed approach.
    Doing so, however, was a time-consuming process for two 
main reasons. First, we believed that the cross-border release 
should involve notice-and-comment rulemaking, not only 
interpretive guidance, and, as such, we needed to incorporate 
an economic analysis that reflected our consideration of the 
effects of the proposal on efficiency, competition, and capital 
formation. Although the rulemaking approach takes more time, we 
believe that this approach was worth the effort: a full 
articulation of the rationales for--and consideration of any 
reasonable alternative to--particular approaches should enable 
the public to better understand our proposed approach and 
clarify how we see the trade-offs inherent in these choices as 
we continue to consult with the CFTC and our colleagues in 
other jurisdictions regarding how best to regulate this global 
market.
    Second, the scope of the proposal is broad and addresses 
the application of Title VII in the cross-border context with 
respect to each of the major registration categories covered by 
Title VII for security-based swaps: security-based swap 
dealers; major security-based swap participants; security-based 
swap clearing agencies; security-based swap data repositories; 
and security-based swap execution facilities. It also addresses 
the application of Title VII in connection with reporting and 
dissemination, clearing, and trade execution, as well as the 
sharing of information with regulators and related preservation 
of confidentiality with respect to data collected and 
maintained by security-based swap data repositories.
    We believe that the proposal that the Commission approved 
in May reflects the effort that the Commission and its staff 
gave to fully considering the complex issues that invariably 
arise in any attempt to regulate a complex market that spans 
the globe.

Q.3. When will the SEC propose rules to implement the 
provisions of the JOBS Act concerning general solicitation for 
Regulation D, Rule 506 offerings? When will the SEC issue other 
rule proposals to implement the law?

A.3. Section 201(a) of the JOBS Act directs the Commission to 
amend Securities Act Rules 506 and 144A to eliminate, as a 
condition to both safe harbors, the ban against general 
solicitation. The Commission issued the rule proposal on August 
29, 2012, and we received numerous comment letters with widely 
divergent views from commentators on this rulemaking. The staff 
has been working through the comments and developing 
recommendations for the Commission on how to move forward with 
this rulemaking as soon as possible. Completing this 
rulemaking, along with the other rulemaking required under the 
Dodd-Frank Act and the JOBS Act, is a priority for me.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
                     FROM ELISSE B. WALTER

Q.1. The statutory language for funds defined under the Volcker 
Rule pointedly did not include venture funds, however the 
definition in the proposed rule seemed to indicate that venture 
funds would be covered. In addition to exceeding the statutory 
intent of Congress, this has created uncertainty in the market 
as firms await a final rule and refrain from making commitments 
which might be swept up in the final version of the Volcker 
Rule. Can you clarify whether venture funds are covered by the 
Volcker Rule?

A.1. The treatment of venture capital funds in the proposed 
rule implementing Section 619 of the Dodd-Frank Act (the 
Volcker Rule) is an issue that has been raised by several 
commenters.
    The issue arises because Section 619 of the Dodd-Frank Act 
provides that a banking entity may not sponsor or invest in, or 
have certain other business relationships with, a hedge fund or 
private equity fund. However, Section 619 specifically defines 
hedge funds and private equity funds as issuers that would be 
investment companies under the Investment Company Act of 1940, 
but for Section 3(c)(1) or 3(c)(7). Sections 3(c)(1) and 
3(c)(7) are statutory exemptions from the definition of 
investment company that are commonly used by hedge funds and 
private equity funds, but also are routinely used by venture 
capital funds and other entities. In addition, in Title IV of 
the Dodd-Frank Act, Congress referred to venture capital as a 
``subset'' of private equity when it provided venture capital 
advisers (and not private equity advisers) with an exemption 
from registration as investment advisers with the SEC.
    The proposed rule to implement Section 619 adhered closely 
to the language of the Dodd-Frank Act and defined hedge funds 
and private equity funds as issuers relying on the exemption in 
Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Many 
commenters have noted that this language would pick up many 
more types of vehicles than the hedge funds and private equity 
funds that are specifically referenced in the statute and that 
many commenters believe should be the main focus of the Volcker 
Rule prohibitions. In particular, many commenters have 
recommended that the SEC and other regulators implementing 
Section 619 revise the rule to exempt venture capital funds 
from Section 619's prohibitions, in part in light of the impact 
that venture capital funds can have on U.S. economic growth and 
job creation.
    Our staff continues to work closely with staff from the 
bank regulatory agencies and the CFTC to determine whether the 
proposed definition can be refined and whether it would be 
appropriate to exempt any entities or funds in light of the 
statute and its goals, including Section 619's provision that 
the agencies may exempt any activity from the implementing rule 
upon a finding that such activity would promote and protect the 
safety and soundness of banking entities.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                     FROM ELISSE B. WALTER

Q.1. As you know, the SEC has faced repeated attempts from 
Congress over the years to significantly cut its funding. Two 
years ago, as one example, Republicans in the House of 
Representatives sought to cut the President's proposed budget 
for the Commission by $222.5 million--or about 15 percent. I am 
interested, given the repeated assaults on SEC's funding, to 
learn more about the impact this sort of cut would have on the 
Commission's functioning.
    Can you describe in particular what impact a cut of that 
magnitude would have on the SEC's enforcement capacity and the 
Commission's ability to hold those who break the law 
accountable?

A.1. Reducing the SEC's budget at this critical juncture--in 
the aftermath of the fiscal crisis and after the SEC has been 
granted significant new responsibilities--would diminish both 
our ability to police rapidly changing markets and the faith of 
the investing public. The Commission's Enforcement program, 
which is charged with investigating and prosecuting violations 
of the Federal securities laws, has sought to maximize limited 
resources to address ever-more complex and sophisticated 
fraudulent schemes. Three years ago, the Enforcement Division 
undertook a historic restructuring that, among other things, 
streamlined its management and created specialized units to 
pursue priority areas. As a result, the Commission has been 
better able to identify, investigate, and punish wrongdoing 
quickly and effectively. Our success in pursuing misconduct 
during the financial crisis, hedge fund and expert network 
insider trading, market structure deficiencies, and Ponzi and 
other offering frauds is a testament to the effectiveness of 
these efforts.
    A budget cut would only serve to magnify and accentuate the 
challenges brought on by the increase in the number of 
individuals and entities falling within our jurisdiction, the 
growing number of complex securities offered to the public, and 
the accelerating pace of financial innovation that has already 
fundamentally changed our markets.
    Currently, the SEC oversees approximately 25,000 entities, 
including about 11,000 registered investment advisers, 9,700 
mutual funds and exchange traded funds, and 4,600 broker-
dealers with more than 160,000 branch offices. The SEC also has 
responsibility for reviewing the disclosures and financial 
statements of approximately 9,000 reporting companies. In 
addition, the SEC oversees approximately 460 transfer agents, 
17 national securities exchanges, 8 active clearing agencies, 
and 10 nationally recognized statistical rating organizations 
(NRSROs), as well as the Public Company Accounting Oversight 
Board (PCAOB), Financial Industry Regulatory Authority (FINRA), 
Municipal Securities Rulemaking Board (MSRB), and the 
Securities Investor Protection Corporation (SIPC). The agency 
also has new or expanded responsibilities over the derivatives 
markets, hedge fund and other private fund advisers, municipal 
advisors, credit rating agencies, and clearing agencies.
    Enforcement is expected to shoulder additional work as a 
result of our expanded authority under the Dodd-Frank Act. For 
example, the Enforcement program is responsible for triaging 
and investigating additional tips and complaints received under 
the whistleblower program mandated by the Dodd-Frank Act. 
Although several thousand smaller advisers are transitioning to 
State registration due to the Dodd-Frank, the addition of 
entities such as municipal advisors, securities-based swap 
entities, and hedge fund and other private fund advisers to the 
Commission's jurisdiction has resulted in an increase in the 
number of referrals to the Enforcement program.
    The sheer number of persons and entities falling within the 
Commission's jurisdiction reflects only part of the challenge. 
These registrants offer ever-changing products in the market, 
from traditional bonds and stocks to structured financial 
instruments to derivatives, such as credit default swaps, that 
require expertise in understanding of the products, the trading 
methods, and the inherent risks. In addition, markets and 
companies also are becoming increasingly global, creating a new 
set of complexities, including the comparability of information 
from different countries and cross-border enforcement. As 
product offerings and fraudsters become more sophisticated, the 
complexity of enforcement cases increases and requires more 
resources dedicated to achieving a successful resolution.
    Furthermore, the Enforcement program must confront the 
risks to a fair securities marketplace posed by increasingly 
complex and fragmented market structures, alternative trading 
systems, and high-speed electronic trading. These innovations, 
fueled by technological advances, have resulted in a 
fundamental shift in market process and behavior. We must 
ensure that these innovations do not outpace our efforts to 
guard against illegal behavior masked by opaque trading 
platforms or the millions of bids, offers, buys, or sells that 
can be generated in milliseconds by automated computer 
algorithms.
    Amidst these challenges, we are under-resourced and lack 
sufficient human capital, expertise, and technology to address 
the ever more multifaceted and difficult-to-detect misconduct 
that threatens investors and the markets. In both FY2013 and 
FY2014, the SEC is requesting funds to hire additional 
attorneys, trial lawyers, industry experts, forensic 
accountants, and paraprofessionals for the Enforcement program, 
to maintain the momentum of our recent enforcement activities 
and strive to keep pace with markets of growing size and 
complexity. Our inability to hire additional staff and augment 
our capabilities will weaken the our investigative and 
litigation functions; reduce our ability to obtain, process, 
and analyze critical market intelligence; inhibit the adoption 
of valuable information technology and state-of-the-art 
investigative tools; and further reduce our ability to collect 
on ordered disgorgement and penalties, and distribute monies 
back to harmed investors. Further, our ability to proactively 
identify hidden or emerging threats to the markets to halt 
misconduct and minimize investor harm, adequately address 
complex financial products and transactions, handle the 
increasing size and complexity of the securities markets, 
identify emerging threats and take prompt action to halt 
violations, and recover funds for the benefit of harmed 
investors would be severely hindered.

Q.2. Has the SEC conducted any internal research or analysis on 
trade-offs to the public between settling an enforcement action 
without admission of guilt and going forward with litigation as 
necessary to obtain such admission?
    If so, can you provide that analysis to the Committee?

A.2. The Commission is rigorous and methodical in analyzing 
each offer to settle an enforcement action. While we have not 
conducted a macro-analysis of the trade-offs to the public 
between settling an enforcement action without an admission of 
guilt or wrongdoing and going forward with litigation, every 
settlement offer is analyzed on a case-by-case basis in light 
of the unique facts and circumstances of that specific case.
    Recently, we reviewed our approach to ensure we make full 
and appropriate use of our leverage in the settlement process, 
including a discussion of the neither-admit-nor-deny approach. 
While the no admit/deny language is a powerful tool, there may 
be situations where we determine that a different approach is 
appropriate.
    We currently do not enter no-admit-no-deny settlements in 
cases in which the defendant admitted certain facts as part of 
a guilty plea or other criminal or regulatory agreement. Beyond 
this category of cases, there may be other situations that 
justify requiring the defendant's admission of allegations in 
our complaint or other acknowledgment of the alleged misconduct 
as part of any settlement. In particular, there may be certain 
cases where heightened accountability or acceptance of 
responsibility through the defendant's admission of misconduct 
may be appropriate, even if it does not allow us to achieve a 
prompt resolution. Staff from the Division of Enforcement have 
been in discussions with Chair White and each of the 
Commissioners about the types of cases where requiring 
admissions could be in the public interest. These may include 
misconduct that harmed large numbers of investors or placed 
investors or the market at risk of potentially serious harm; 
where admissions might safeguard against risks posed by the 
defendant to the investing public, particularly when the 
defendant engaged in egregious intentional misconduct; or when 
the defendant engaged in unlawful obstruction of the 
Commission's investigative processes. In such cases, should we 
determine that admissions or other acknowledgement of 
misconduct are critical, we would require such admissions or 
acknowledgement, or, if the defendants refuse, litigate the 
case.
    Of course, we recognize that insisting upon admissions in 
certain cases could delay the resolution of cases, and that 
many cases will not fit the criteria for admissions. For these 
reasons, no-admit-no-deny settlements will continue to serve an 
important role in our mission and most cases will continue to 
be resolved on that basis. No-admit-no-deny settlements achieve 
a significant measure of accountability and deterrence because 
of the detailed factual allegations and findings contained in 
our complaints, orders instituting proceedings, and settlement 
documents--factual allegations or findings that present a 
virtual road map of the wrongdoing that the Commission contends 
violated the Federal securities laws. In addition, the very 
public nature of our settlements enhances their deterrent 
impact--our settlements frequently are accompanied by press 
releases, dissected by the media, analyzed in detail by the 
financial industry and the defense bar in various public 
forums, and are the subject of speeches and other public 
statements by the Chair, the Commissioners, and other SEC 
officials.
    There is, in fact, economic research that indicates that 
SEC settlements have consequences for firms as well as 
management and directors. For instance, a group of economists 
found that the reputational penalties to a firm of an SEC 
enforcement action for financial fraud are highly significant: 
for each dollar that a firm misleadingly inflates its market 
value, on average, it loses both this dollar plus an additional 
$3.08 when its misconducts is revealed (Jonathan M. Karpoff, D. 
Scott Lee, and Gerald S. Martin, ``The Cost to Firms of Cooking 
the Books'', 43 Journal of Financial and Quantitative Analysis, 
2008). The same economists studied 2,206 individuals identified 
as responsible parties for 788 SEC and Department of Justice 
enforcement actions for financial misrepresentation from 1978 
through mid-2006. They found that 93 percent of the individuals 
lose their jobs by the end of the regulatory enforcement 
period, with the majority being explicitly fired (Karpoff, Lee, 
and Martin, ``The Consequences to Managers for Financial 
Misrepresentation'', 88 Journal of Financial Economics, 2008). 
In addition, economists have found that when the SEC settles a 
case, outside directors experience a decline in the number of 
other board positions held (Eliezer Fich and Anil Shivdasani, 
``Financial Fraud, Director Reputation, and Shareholder 
Wealth'', 86 Journal of Financial Economics, 2007, and Eric 
Helland, ``Reputational Penalties and the Merits of Class-
Action Securities Litigation'', 49 Journal of Law and 
Economics, 2006).

Q.3. In Section 953(b) of the Dodd-Frank Act, Congress required 
the SEC to issue a regulation mandating that companies disclose 
the ratio of pay between the company's CEO and the company's 
median employee. This disclosure requirement is intended to 
help investors evaluate total levels of CEO pay relative to 
other company employees. Many investors want to know about 
these pay ratios because high pay disparities between the CEO 
and other employees--particularly in a time of economic belt 
tightening--can result in lower employee morale, reduced 
productivity, and higher turnover, thereby signaling economic 
trouble for the company. It has now been more than 2 years 
since the SEC issued its rule implementing the Dodd-Frank 
``say-on-pay'' vote requirement, but the SEC has not yet issued 
a rule implementing Section 953(b).
    Why hasn't the SEC issued rules implementing Section 
953(b)?
    When will these rules be issued?

A.3. As I noted in my testimony, the Commission has made 
substantial progress in writing the huge volume of new rules 
the Dodd-Frank Act directs, but I recognize there is more work 
to do. The Commission and the staff are continuing to work 
diligently to implement the provisions of the Dodd-Frank Act, 
including Section 953(b), while balancing that work our other 
responsibilities, including the implementation of the 
provisions of the JOBS Act. The staff is actively working on 
developing recommendations for the Commission concerning the 
implementation of Section 953(b), which requires the Commission 
to implement rules requiring disclosure of the CEO's annual 
total compensation, the median of the annual total compensation 
paid to all employees other than the CEO and the ratio between 
the two numbers.
    This rulemaking raises a number of new issues for the 
Commission and registrants that require careful consideration. 
As evidenced in the public comment file on the Commission's Web 
site, which includes more than 20,000 comment letters relating 
to this rulemaking, the comments reflect a wide range of views 
concerning the implementation of the provision and the 
potential costs and benefits associated with the requirements. 
The staff is carefully reviewing and analyzing these comments 
as it develops recommendations for the Commission.

Q.4. [Response to question during the hearing from Senator 
Warren]: ``When was the last time you took a big Wall Street 
bank to trial?''

A.4. We are fully prepared to go to trial every time we bring 
an enforcement action, but we believe there is no reason to 
delay justice and relief for investors when we can obtain 
through a settlement the relief that we could reasonably expect 
to receive at trial, without the delay of a lengthy and 
protracted litigation. We also believe that SEC settlements 
achieve a significant measure of accountability and deterrence 
because of the detailed factual allegations contained in our 
complaints and settlement documents--factual allegations that 
present a virtual road map of the wrongdoing that we contend 
violated the Federal securities laws. In addition, the very 
public nature of our settlements enhances their deterrent 
impact--our settlements often are accompanied by press 
releases, dissected by the media, analyzed in detail by the 
financial industry and the defense bar in various public 
forums, and are the subject of speeches and other public 
statements by the Chairman, the Commissioners, and other SEC 
officials.
    The reality is, as trial-ready as we may be, Wall Street 
banks and other large public companies often weigh the risks of 
litigating to trial against the SEC--including the risk of 
loss, litigation costs, reputational damage and other factors--
and choose instead to offer a proposed settlement. On the other 
hand, individuals may weigh the risks of litigating against the 
SEC differently than do large banks and public companies, 
particularly given that our settlements often include remedies 
such as industry bars that restrict an individual's ability to 
earn a living in the financial industry.
    While the SEC will continue to settle many of the cases 
that it files, the calculus for whether we settle or litigate a 
case will change under a new shift in approach to our 
traditional settlement policy. Recently, the Enforcement 
Division, in consultation with the Chair White and the other 
Commissioners, reviewed the SEC's settlement policy and 
provided guidance to Enforcement staff about the types of cases 
where requiring a defendant, as part of a settlement, to admit 
the SEC's allegations could be in the public interest. These 
cases may include those where the misconduct harmed large 
numbers of investors or placed investors or the market at risk 
of potentially serious harm; where admissions might safeguard 
against risks posed by the defendant to the investing public, 
particularly when the defendant engaged in egregious 
intentional misconduct; or when the defendant engaged in 
unlawful obstruction of the Commission's investigative 
processes. In such cases, should we determine that admissions 
or other acknowledgement of misconduct are critical, we would 
require such admissions or acknowledgement, or, if the 
defendant refuses, litigate the case. Even under this shift in 
approach, many cases will not fit the criteria for admissions. 
Accordingly, no-admit-no-deny settlements will continue to 
serve an important role in the SEC's mission and most cases 
will continue to be resolved on that basis.
    Regarding your particular question about litigating with 
large financial institutions, we have filed a significant 
number of litigated actions--actions where we stood ready to go 
to trial--in our financial crisis-related cases against 
individuals, many of whom were CEOs, CFOs, or other senior 
executives at major Wall Street banks or financial 
institutions. In total, we have filed crisis-related actions 
against 105 individuals--70 percent of which were filed as 
contested actions--employed by Goldman Sachs, J.P. Morgan, 
Citigroup, Wells Fargo, Bear Stearns, Bank of America, Fannie 
Mae, Freddie Mac, Countrywide, New Century, and other large 
financial firms.
    As to actions against particular Wall Street banks, our 
April 2012 financial crisis-related case against Goldman Sachs 
arising from the Abacus CDO transaction was a contested 
litigated action before resolving in a landmark $550 million 
settlement that also required Goldman Sachs to make various 
compliance reforms. We continue to actively litigate towards an 
upcoming trial against Fabrice Tourre, the Goldman Sachs Vice 
President primarily responsible for structuring and marketing 
the transaction.
    A major firm, if not a major bank, we litigated to trial 
against the Reserve Fund Management Co., the investment firm 
running the $62 billion Reserve Primary Fund money-market fund 
that fell below $1 per share--breaking the buck, in Wall Street 
vernacular--when its $785 million in Lehman debt was rendered 
worthless in bankruptcy. We also litigated to trial against 
Bruce Bent, Sr., and his son, Bruce Bent II, for their conduct 
in allegedly deceiving investors about the risks facing the 
Reserve Fund after Lehman's September 2008 collapse. The jury 
found that Reserve Management and a related brokerage 
operation, Resrv Partners Inc., violated antifraud provisions 
of the Federal securities laws and also found Bruce Bent II 
liable for one negligence claim.
    We also engaged in extended litigation against Brookstreet 
Securities Corporation, a California-based broker-dealer, along 
with its CEO, and several registered representatives for 
systemically selling risky mortgage-backed securities to 
retirees and other customers with conservative investment goals 
as the housing market was collapsing during the financial 
crisis. After nearly 3 years of litigation first initiated in 
December 2009, we won summary judgment--just before trial--
against Brookstreet Securities and its CEO and both were 
ordered to pay a maximum penalty of $10 million, plus 
disgorgement. The Brookstreet registered representatives went 
to trial and we are still awaiting a final decision.
    In sum, we think that our policy of obtaining settlements 
where they reasonably approximate what we could achieve at 
trial is an effective way to hold accountable those entities 
and individuals whom we believe to have violated the Federal 
securities laws far sooner than through protracted litigation. 
Although we believe our settlement policy is in the public 
interest we certainly stand ready and able to litigate to 
trial--a willingness that only strengthens our negotiation 
position when crafting a settlement that benefits and protects 
investors.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                     FROM ELISSE B. WALTER

Q.1. Section 120 of the Dodd-Frank Act states that ``[t]he 
Council shall consult with the primary financial regulatory 
agencies [ . . . ] for any proposed recommendation that the 
primary financial regulatory agencies apply new or heightened 
standards and safeguards for a financial activity or 
practice.'' In its November 2012 release on money market fund 
regulatory proposals, FSOC states that ``in accordance with 
Section 120 of the Dodd-Frank Act, the Council has consulted 
with the SEC staff.'' It is my understanding that FSOC did not 
consult with any of the SEC Commissioners serving at the time.
    Given that the SEC is solely governed by the commissioners, 
and especially considering that SEC staff serves at the will of 
the SEC Chairman rather than all Commissioners, how would such 
consultations with staff fulfill this statutory obligation 
going forward?

A.1. The Dodd-Frank Act contains numerous consultation 
requirements applicable to the SEC, including requirements for 
the SEC to consult with other agencies, or for other agencies 
to consult with the SEC, in connection with rulemaking and 
other actions. These consultations typically involve 
discussions and coordination with staff, including senior 
staff, of the relevant agencies, which is consistent with the 
traditional way that agencies Government-wide have performed 
interagency consultations under numerous statutes. In 
developing its proposed recommendations for money market mutual 
fund reform, and consistent with the traditional manner of 
consultation, the FSOC consulted with the SEC staff.

Q.2. What research has FSOC done to determine the reduction in 
assets held in money market funds that could result from the 
proposed section 120 recommendations?
    Have you done anything to quantify the economic effect of a 
substantial shift in assets from prime money market funds to 
Treasury money market funds, banks, or unregulated investment 
funds?

A.2. I cannot speak to what research the FSOC did prior to 
issuing its Section 120 report, beyond what may be in those 
recommendations. The SEC's recent rule proposal addressing 
potential money market fund reform generally tackled the 
difficult questions regarding the potential economic impacts of 
various reform alternatives and specifically addressed the 
question of whether there will be a reduction in assets held by 
money market funds and if so, where those assets may go. The 
proposing release explicitly acknowledges that investors may 
withdraw some of their assets from affected money market funds. 
At the same time, however, the proposal makes clear that the 
SEC cannot make reliable estimates of the amount of dollars 
that will leave the industry or where those dollars will likely 
go.
    The release provides information regarding the holdings of 
money market funds, including the fraction of various types of 
securities that have been held by the money market fund 
industry (for example, Treasury securities, commercial paper, 
and certificates of deposit). This information demonstrates 
that money market funds are important players in certain asset 
classes. The release does not, however, directly estimate what 
might happen were money market funds to withdraw from certain 
asset classes. Quantifying the effects of movements from money 
market funds to other investment alternatives is challenging 
because the SEC is unable to estimate how the investment 
alternatives would invest the new monies. For example, if 
institutional investors moved their monies from prime money 
market funds to unregulated investment funds, it is possible 
that the unregulated investment funds would ultimately choose 
to invest in the same assets that were held previously by the 
prime money market funds. If this were to happen, the effects 
on issuers and the short-term financing markets would be 
negligible. However, there could be substantive effects if the 
unregulated investment funds invested in substantively 
different assets. Given the uncertainty, it is difficult to 
quantify those effects.
    The release contains questions on this issue and we look 
forward to receiving comments from the public. Moreover, the 
SEC's proposal includes an expansion of the data required to be 
filed with the SEC regarding unregistered investment funds, 
known as ``liquidity funds,'' that potentially could serve as 
an alternative to registered money market funds. Such data 
would enable the SEC and the FSOC to monitor any growth in such 
funds as well as identify the asset classes in which those 
funds invest.

Q.3. Under Title V--Private Company Flexibility and Growth, 
Section 501 Threshold for Registration will the Securities and 
Exchange Commission provide guidance as to the process for 
determining whether a shareholder meets the ``accredited 
investor'' definition for purposes of the JOBS Act?

A.3. As you know, under Title V of the JOBS Act, an issuer that 
is not a bank or bank holding company is required to register a 
class of equity securities within 120 days after its fiscal 
year end, if on the last day of its fiscal year it has total 
assets of more than $10 million and a class of equity 
securities, other than an exempted security, held of record by 
either 2,000 persons or 500 persons who are not accredited 
investors.
    I understand that companies are uncertain about how to 
establish and track which shareholders qualify as accredited 
investors in order to be able to comply with this provision, 
particularly because investors, especially investors in 
secondary market transactions, do not have current or ongoing 
obligations to provide information to the issuer or the 
issuer's agent as to whether or not they are accredited 
investors. Although the changes to Section 12(g) of the 
Exchange Act were effective upon enactment, the Commission will 
need to amend certain rules to reflect these statutory changes. 
The issue of how a company would determine whether a 
shareholder qualifies as an accredited investor for purposes of 
determining the number of holders of record is one that the 
Commission's staff is aware of and is carefully considering as 
it prepares recommendations for the Commission.

Q.4. Under Title V--Private Company Flexibility and Growth, 
Section 502 Employees are family members (including heirs of 
the employee and trusts established by the employee) included 
in the definition of persons for purposes of the following: 
``securities held by persons who received the securities 
pursuant to an employee compensation plan in transactions 
exempted from the registration requirements of section 5 of the 
Securities Act of 1933''?

A.4. In addition to raising the total assets and shareholder 
thresholds that require registration of a class of security by 
companies other than banks and bank holding companies, Title V 
of the JOBS Act excludes shares held by those who received them 
pursuant to employee compensation plans from inclusion in the 
number of holders of record. Title V also requires the 
Commission to adopt a safe harbor for the determination of 
whether such a holder received the securities pursuant to an 
employee compensation plan that was exempt from the 
registration requirements of Securities Act Section 5. The 
issue of transfers among family members as it applies to the 
exclusion of employee compensation plan securities under 
Section 12(g) is one that the Commission's staff is aware of 
and is carefully considering as it prepares its recommendations 
for the Commission.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM GARY GENSLER

Q.1. Given how complex it is to determine whether a trade is a 
hedge or a proprietary trade, it appears the real issue is 
whether a trade threatens the safety and soundness of the bank. 
What benchmark does your agency use to determine whether a 
particular activity is or is not ``hedging''? How does your 
agency determine whether the trade presents risks to the safety 
and soundness of a financial institution?

A.1. The Dodd-Frank Act requires that the CFTC, the Federal 
Reserve Board, the Securities and Exchange Commission, the 
Office of the Comptroller Currency, and the Federal Deposit 
Insurance Corporation write regulations that implement the 
Volcker Rule. The CFTC's related Proposed Rule was published on 
February 14, 2012, along with request for public comment. The 
Proposed Rule describes seven criteria that a banking entity 
must meet in order to rely on the hedging exemption. Included 
is a condition that the transaction in question hedge or 
otherwise mitigate one or more specific risks, that the 
transaction be reasonably correlated to the risk or risks the 
transaction is intended to hedge, that the hedging transaction 
not give rise to significant exposures that are not themselves 
hedged in a contemporaneous transaction, and other related 
conditions. The CFTC and the other agencies are in the process 
of evaluating and reviewing each of the comments that were 
received on the proposed Volcker Rule and will address those 
comments in a Final Rule.

Q.2. Last year the CFTC issued proposed interpretive guidance 
on cross-border application of the swaps provisions of Dodd-
Frank, the so-called extraterritoriality guidance. This 
guidance received widespread criticism from foreign regulators 
across the globe for, among other things, not conforming to a 
G20 agreement, being too expansive in scope and confusing in 
application. Recently, the CFTC approved an exemptive order 
delaying the effective date for some of the provisions and 
issued further cross-border guidance in an attempt to clarify 
the scope and definition of ``U.S. person.'' However, at least 
one foreign regulator (The Financial Services Agency of the 
Government of Japan) sent you a letter stating that the further 
guidance made the definition even less clear. What steps is the 
CFTC taking to address those concerns?

A.2. The Commission is reviewing, summarizing, and considering 
all comments received as it works toward finalizing the cross-
border guidance. We are also working bilaterally with domestic 
and foreign regulators, including the Japanese Financial 
Services Authority (JFSA), to answer any questions and discuss 
any issues they have regarding the CFTC's proposals.

              Additional Material Supplied for the Record

HIGHLIGHTS OF GAO-13-180: FINANCIAL CRISIS LOSSES AND POTENTIAL IMPACTS 
                  OF THE DODD-FRANK ACT, JANUARY 2013



   SUBMITTED WRITTEN TESTIMONY OF CHRISTY ROMERO, SPECIAL INSPECTOR 
        GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM (SIGTARP)
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, I want to thank you for holding today's hearing on Wall 
Street reform and an oversight of our Nation's financial stability. The 
Office of the Special Inspector General for the Troubled Asset Relief 
Program (SIGTARP) serves as the watchdog over the Troubled Asset Relief 
Program (TARP), the Federal bailout resulting from the financial 
crisis. SIGTARP protects the interests of those who funded TARP 
programs--American taxpayers. Our mission is to promote economic 
stability through transparency, robust enforcement, and coordinated 
oversight.
    In order to determine where our Nation stands today in terms of 
Wall Street reforms and financial stability oversight, we must 
understand how our Nation found itself in a financial crisis and a 
bailout in 2008. SIGTARP has examined the past actions by Wall Street 
institutions that made them ``too big to fail'' and led to the TARP 
bailout. The issues that arose in the wake of the financial crisis, and 
our Government's response, have implications for the future. Indeed, 
the Congressional hearings on the Dodd-Frank Wall Street Reform and 
Consumer Protection Act are largely focused on the reasons why Treasury 
and the Federal banking regulators believed that these institutions 
were ``too big to fail'' requiring a TARP bailout, and the reforms that 
were needed to prevent future bailouts. Only by examining the past, can 
we take advantage of lessons learned to protect taxpayers better in the 
future.
    Four years after the passage of the TARP bailout, critical 
questions remain prevalent about financial stability and Wall Street 
reform. Does moral hazard still exist? Is our financial system still 
vulnerable to companies that were considered ``too big to fail?'' Do 
taxpayers have a stronger, more stable financial system that is less 
prone to crisis--one in which the U.S. Government need not intervene to 
rescue a failing institution--as an owner or a shareholder--or else 
risk financial collapse? Taxpayers need and deserve lasting change 
arising out of the 2008 financial crisis.
    While there have been significant reforms to our financial system 
over the past 4 years, more change is needed to address the root causes 
of the financial crisis and the resulting bailout, including 
vulnerabilities to highly interconnected institutions, and past 
failures in risk management. Financial institutions, regulators, and 
Treasury have a benefit that was missing during the financial crisis: 
the benefit of time . . . time to shore up existing strengths and to 
minimize vulnerabilities.
    There are lessons to be learned from the 2008 financial crisis and 
TARP. And as history has a way of repeating itself, we must take those 
lessons learned and put into place the changes that will bring a safer 
tomorrow--a future in which the flaws and excesses of corporate America 
do not create an undertow for families and small businesses.
Too Interconnected To Fail
    One of the most important lessons of TARP and the financial crisis 
is that our financial system remains vulnerable to companies that can 
be deemed ``too interconnected to fail.'' In 2008, we learned that our 
financial system was akin to a house of cards, with a foundation built 
on businesses that were ``too big to fail.'' But these businesses were 
not only too big to fail, in and of themselves, they also were highly 
interconnected. If one were to fall, the house of cards could collapse.
    When the crisis hit, regulators were ill-prepared to protect 
taxpayers because they had failed to appreciate the interconnected 
nature of our financial system, and the resulting threats to American 
jobs, retirement plans, mortgages, and loans. Thus, Treasury and 
regulators turned to TARP.
    These same financial institutions continue to form the foundation 
of our economy. They continue to be dangerously interconnected. And, in 
fact, they have only gotten bigger in the past 4 years. \1\ In 2012, 
the Federal Reserve Bank of Dallas reported that the biggest banks have 
grown larger still because of artificial advantages, particularly the 
widespread belief that the Government will step in to rescue the 
creditors of the biggest institutions if necessary--a belief 
underscored by TARP.
---------------------------------------------------------------------------
     \1\ According to Federal Reserve data, as of September 30, 2012, 
the top five banking institutions (all TARP recipients) held $8.7 
trillion in assets, equal to approximately 55 percent of our Nation's 
gross domestic product. By comparison, before the financial crisis, 
these institutions held $6.1 trillion in assets, equal to 43 percent of 
GDP.
---------------------------------------------------------------------------
    Whether Dodd-Frank's newly created resolution authority will 
ultimately be successful in ending ``too big to fail'' will depend on 
the actions taken by regulators and Treasury. Notwithstanding the 
passage of Dodd-Frank, the FRB Dallas reports that the sheer size of 
these institutions--and the presumed guarantee of Government support in 
time of crisis--have provided a ``significant edge--perhaps a 
percentage point or more--in the cost of raising funds.'' In other 
words, cheaper credit translates into greater profit.
    After Dodd-Frank, credit rating agencies began including the 
prospect of Government support in determining credit ratings. In 2011, 
Moody's downgraded three institutions citing a decrease in the 
probability that the Government would support them, while stating that 
the probability of support for highly interconnected institutions was 
very high. Recently, a Moody's official stated that Government support 
was receding.
    It is too early to tell whether full implementation of Dodd-Frank 
will ameliorate the need for taxpayers to bail out companies if there 
is a future crisis. Even without the failure of any one of these 
institutions, we have learned that their near failure or significant 
distress could cause ripple effects for families and businesses. 
Despite TARP and other Federal efforts preventing the failure of these 
institutions, much of Americans' household wealth evaporated. Treasury 
Secretary Timothy F. Geithner testified before Congress in a hearing on 
Dodd-Frank that there was a ``threat of contagion'' caused by the 
interconnectedness of major firms. Given this continued ``threat of 
contagion'' to our financial system, Treasury and regulators should 
take this opportunity to protect taxpayers from the possibility of any 
future financial crisis.
    Through Dodd-Frank, Congress significantly reformed the regulators' 
authority to hold ``systemically important'' institutions to higher 
standards. However, it remains unclear how regulators will use that 
authority, and to what degree. The determination of which nonbank 
institutions are considered systemic also remains unclear. In addition, 
companies previously described as systemic, such as AIG, have gone 
without financial regulation for years. Despite the fact that the 
identity of banks that will be subject to higher standards has been 
known for 2 years, the standards for these companies are far from 
final. Regulators have moved more slowly than expected, due in part to 
strong lobbying efforts against change.
    Treasury and regulators must provide incentives to the largest, 
most interconnected institutions to minimize both their complexity and 
their interconnectedness. Treasury and regulators should send clear 
signals to the financial industry about levels of complexity and 
interconnectedness that will not be accepted. Treasury and regulators 
must set the standards through increased capital and liquidity 
requirements to absorb losses, as well as tighter margin standards. 
Treasury and regulators should limit risk through constraints on 
leverage. And companies, in turn, must do their part.

Risk Management
    Companies must engage in effective risk management, and regulators 
must supervise this risk management. According to Treasury Secretary 
Geithner's Congressional testimony in support of Dodd-Frank, the 
biggest failure in our financial system was that it allowed large 
institutions to take on leverage without constraint. Leverage--debt or 
derivatives used to increase return--has risk because it can multiply 
gains and losses. Large interconnected financial institutions had 
woefully inadequate risk management policies, which allowed problems to 
intensify. \2\ Financial institutions made risky subprime mortgages, 
which they then sliced, diced, and repackaged into complex mortgage 
derivatives to be sold to each other and to other investors. These 
companies and investors were heavily dependent on inflated credit 
ratings. Institutions bought these long-term illiquid securities with 
short-term funding that froze in 2008, causing severe liquidity crises. 
Treasury asked Congress to approve TARP because these illiquid mortgage 
assets had, in essence, choked off credit.
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     \2\ Testimony of Treasury Secretary Henry Paulson, Financial 
Crisis Inquiry Commission, May 6, 2010.
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    Insufficient attention was placed on counterparty risk, with many 
of the companies believing they were ``fully hedged'' with zero risk 
exposure. Companies developed elaborate methods of hedging, including 
buying insurance-like protection against the default of these 
investments (called credit default swaps). Companies hedged through 
offsetting trades that bet on the increase and decrease in the value of 
the security. These hedges, many of which did not fully protect against 
exposure, provided a false sense of protection that led to decreased 
risk management and decreased market discipline.
    The financial system was opaque, impeding an understanding of the 
true exposure to risk by institutions, rating agencies, investors, 
creditors, and regulators. Products such as credit default swaps went 
unregulated. Offsetting trades occurred on the over-the-counter 
market--a market that, unlike the New York Stock Exchange or other 
exchanges, has no transparency. With no effective curbs on risk, 
executives often ignored risk, with many receiving extraordinary pay 
based on how many mortgages they created, while at the same time 
transferring their risk in the ultimate success of the mortgages. In 
short, Wall Street cared more about dollars than sense. And yet, we 
must ask ourselves: Has anything changed?
    In 2008, the U.S. Government assured the world that it would use 
TARP and access to the Federal Reserve's discount window to prevent the 
failure of any major financial institution. But in so doing, it 
encouraged future high-risk behavior by insulating the risk-takers from 
the consequences of failure. This concept--known as moral hazard--is 
alive and well. A 2012 study by Federal Reserve economists found that 
large TARP banks have actually increased the number of loans that could 
be considered ``risky,'' which ``may reflect the conflicting influences 
of Government ownership on bank behavior.'' Fannie Mae and Freddie Mac 
also operated with an implicit Government guarantee, which led to lower 
borrowing costs that enabled them to take on significant leverage. 
According to Treasury, these entities ``were a core part of what went 
wrong with our system.'' \3\ Dodd-Frank did not address Fannie Mae and 
Freddie Mac.
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     \3\ Testimony of Treasury Secretary Timothy F. Geithner, Senate 
Banking Committee, June 18, 2009.
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    Financial institutions must practice discipline and responsibility 
by reforming risk management and corporate governance. Companies cannot 
write off risk management believing that their exposure is removed by 
hedging. Companies must understand their exposure to risk, including 
conducting heightened reviews of counterparty risk.
    Recent scandals such as JPMorgan's ``London whale'' and LIBOR 
manipulation have shown that excessive risk-taking continues unchecked 
by executives and boards of directors. Companies should make a deeper 
assessment of their assets. Assets carry different amounts of risk; 
collateral for some loans may be stronger than others. In determining 
the amount of TARP funds to invest in a bank, Treasury used the total 
risk-weighted assets, rather than total assets. Executives and boards 
must better understand, monitor, and manage risk.
    We learned from the crisis that we cannot expect companies to 
constrain excess risk-taking on their own initiative. Regulators 
therefore must protect hardworking Americans by setting constraints on 
leverage. Given their interconnectedness, risk at one institution 
(Lehman Brothers, for example) can shock our entire system. Our 
regulators must require ``strong shock absorbers,'' as described by 
Treasury Secretary Geithner.
    Bank examiners must increase their supervision of risk management 
at all banks, and the supervision of companies that pose a risk to our 
financial system must be even stronger. Regulators can use information 
from on-site examiners, Federal Reserve stress tests, and plans called 
``living wills'' (submitted by these companies) to determine areas of 
risk. While regulators are still going through the process to write 
rules establishing these standards, other rules have not yet been 
written.
    Treasury and regulators should set strong capital requirements and 
liquidity cushions to absorb shock; longer-term funding to prevent a 
liquidity crisis; strong rules regarding leverage; and constraints on 
specific products or lines of business that hide true exposure to risk.
    In the wake of the 2008 financial crisis, we realized that change 
was necessary. There has been meaningful change to our financial 
system. But there is much more to be done. Americans need and deserve a 
financial system with regulation that encourages growth, but that 
minimizes susceptibility to current risks--and one that is flexible 
enough to protect against emerging risks. Treasury and regulators must 
have courage and steely resolve to enact change as they are up against 
Wall Street executives who simply wish to return to ``business as 
usual,'' with no public memory of the bailout or the lasting impact to 
the American taxpayer. Enduring progress will not be easy, but it can, 
and must, be achieved.
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