[Senate Hearing 113-566]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 113-566


 WALL STREET REFORM: ASSESSING AND ENHANCING THE FINANCIAL REGULATORY 
                                 SYSTEM

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

                                HEARING

                               before the

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

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                   ON

EXAMINING THE PROGRESS FINANCIAL REGULATORY AGENCIES ARE MAKING TOWARD 
 COMPLETING RULES THAT IMPLEMENT THE DODD-FRANK WALL STREET REFORM AND 
                        CONSUMER PROTECTION ACT

                               __________

                           SEPTEMBER 9, 2014

                               __________

  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
                   Glen Sears, Deputy Policy Director
                  Greg Dean, Republican Chief Counsel
              Jelena McWilliams, Republican Senior Counsel
                       Dawn Ratliff, Chief Clerk
                      Troy Cornell, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor

                                  (ii)





























                            C O N T E N T S

                              ----------                              

                       TUESDAY, SEPTEMBER 9, 2014

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2

                               WITNESSES

Daniel K. Tarullo, Governor, Board of Governors of the Federal 
  Reserve System.................................................     4
    Prepared statement...........................................    41
    Responses to written questions of:
        Chairman Johnson.........................................   101
        Senator Crapo............................................   101
        Senator Merkley..........................................   104
        Senator Toomey...........................................   110
        Senator Kirk.............................................   117
Martin J. Gruenberg, Chairman, Federal Deposit Insurance 
  Corporation....................................................     5
    Prepared statement...........................................    47
Thomas J. Curry, Comptroller of the Currency, Office of the 
  Comptroller of the Currency....................................     7
    Prepared statement...........................................    60
    Responses to written questions of:
        Senator Crapo............................................   119
        Senator Merkley..........................................   121
        Senator Hagan............................................   126
        Senator Toomey...........................................   127
        Senator Kirk.............................................   129
        Senator Heller...........................................   131
Richard Cordray, Director, Consumer Financial Protection Bureau..     8
    Prepared statement...........................................    69
    Responses to written questions of:
        Chairman Johnson.........................................   132
        Senator Crapo............................................   134
        Senator Toomey...........................................   137
        Senator Kirk.............................................   139
        Senator Heller...........................................   141
Mary Jo White, Chair, Securities and Exchange Commission.........    10
    Prepared statement...........................................    72
    Responses to written questions of:
        Senator Crapo............................................   141
        Senator Tester...........................................   146
        Senator Merkley..........................................   147
        Senator Warren...........................................   155
        Senator Kirk.............................................   162
        Senator Heller...........................................   164
Timothy G. Massad, Chairman, U.S. Commodity Futures Trading
  Commission.....................................................    12
    Prepared statement...........................................    95
    Responses to written questions of:
        Senator Crapo............................................   164
        Senator Merkley..........................................   168
        Senator Kirk.............................................   170
        Senator Moran............................................   171
        Senator Heller...........................................   172

                                 (iii)

 
 WALL STREET REFORM: ASSESSING AND ENHANCING THE FINANCIAL REGULATORY 
                                 SYSTEM

                              ----------                              


                       TUESDAY, SEPTEMBER 9, 2014

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:01 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. I call this hearing to order.
    Today, I welcome back the financial regulators for another 
one of our many Wall Street Reform oversight hearings in this 
Committee since the enactment of the law. You all have been 
busy over August as you continue to make progress in completing 
rulemakings to implement Wall Street Reform. I thank you and 
your staffs for your hard work.
    I strongly believe today, as I did in 2010, that Wall 
Street Reform was the appropriate response at the time to the 
financial crisis. We can already see the benefits. We have an 
enhanced system of regulation for our largest banks and nonbank 
financial companies. We have greater transparency and oversight 
for derivatives. We have a dedicated and accountable watchdog 
focused on better protecting consumers. We have strengthened 
coordination between regulators. And, we have new ways to 
monitor threats to financial stability.
    As we all know, the road to implementing Wall Street Reform 
has been long and it has not always been easy. This is 
especially true for regulators trying to work together to write 
effective rules for an increasingly complex and global 
financial system. For some, this work has been done while 
Congress has not provided adequate funding. Proposed rules have 
not always been met with open arms from Congress, industry, or 
consumer groups. However, through robust and constant 
oversight, Members of this Committee have had the opportunity 
to express their views, and each of you and your agencies have 
listened. Because of it, the finalized rules are stronger.
    Going forward, as we get farther away from the crisis and 
calls to water down Wall Street Reform grow louder, 
policymakers cannot forget the lessons from the crisis and how 
costly a weak regulatory system can be. Our financial system is 
strongest when we have tough, but fair, oversight to provide a 
level playing field for all financial firms to better serve 
their clients.
    Today, I look forward to hearing from the witnesses their 
next steps to complete the remaining Wall Street Reform 
rulemakings. Because of your diligent work, our financial 
institutions are stronger, our economy is more stable, and the 
rest of the world is looking to us when it comes to strong 
financial regulation. This is a vast improvement from where our 
country was before and during the financial crisis.
    I now turn to Senator Crapo for his opening statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman.
    Dodd-Frank requires about 400 new rules to be written and 
approved by the Federal financial regulators, and to date, 
slightly more than 50 percent of these rules have been 
finalized, and nearly 25 percent are still in the proposed 
stage. The remaining 25 percent are yet to be written.
    With some 220 rulemakings finalized, we still have no idea 
what the cumulative cost of Dodd-Frank is or will be. The 
Volcker Rule and the conflict minerals rule alone will add 
approximately 4.6 million paperwork burden hours and over one 
billion for services of outside professionals, according to the 
regulators' own Paperwork Reduction Act estimates, and that is 
just for 2 of the 220 rules finalized.
    We cannot pretend that these additional costs are not 
passed on to consumers. Without a cumulative analysis of the 
true costs and burdens of the rules, we cannot understand their 
overall impact on the regulated entities, consumers, and the 
markets.
    For example, while Dodd-Frank was intended to exempt small 
institutions from some regulations, what I hear back in Idaho 
is that regulatory demands are trickling down even to the 
smaller banks and entities. Community banks are 
disproportionately affected because they are less able to 
absorb additional costs. Out of concern about what new 
regulations may be imposed next, financial institutions keep 
money for compliance costs set aside rather than investing it 
in local communities.
    We can and should make commonsense changes to lessen the 
regulatory burden. In past hearings, the regulators have 
supported several Dodd-Frank fixes, including the end-user fix, 
the swaps push-out rule, and giving the Fed flexibility to 
tailor the capital standards it places on insurance companies. 
Regarding the latter, the Senate passed by unanimous consent a 
fix so that insurance companies are not subject to bank-like 
capital requirements contrary to their business model.
    I look forward to hearing from the witnesses what specific 
fixes should be made so that traditional banking services do 
not become so complicated or expensive that banks like those in 
Idaho and other rural communities can no longer offer such 
services.
    I appreciate that some of your agencies have commenced the 
statutorily mandated interagency review of existing regulations 
to identify outdated, unnecessary, or unduly burdensome 
regulations. A similar review led to the 2006 Regulatory Relief 
law, and I encourage the remaining agencies to join in this 
effort. I urge all of you to make this review a priority, to 
set up outreach meetings and with community banks and others, 
and to provide a list of recommendations to Congress. For 
example, several of our witnesses have discussed eliminating a 
paper version of the Annual Privacy Notice, a measure that has 
passed the House by a voice vote and currently has more than 70 
cosponsors in the Senate.
    In addition to Dodd-Frank regulatory mandates, the law also 
established the Financial Stability Oversight Council. At the 
July FSOC hearing, I reiterated my concerns to Secretary Lew 
about the lack of transparency of FSOC's designation process. 
Last week's action by FSOC on Met Life only reinforces those 
concerns and threatens to disrupt a carefully forged regulatory 
balance for an industry that has been traditionally under the 
purview of State regulators. The U.S. financial system and 
capital markets cannot remain the preferred destination for 
investors throughout the world if our regulators operate under 
a cloak of secrecy.
    Secretary Lew stated that each of the designated nonbank 
SIFIs was given detailed explanations as to why they were 
designated, but this information was provided only after the 
designations were made. This is not how our regulatory 
framework should operate. I urge you to publish indicator-based 
SIFI designation criteria in the Federal Register for public 
comment, and I urge you to impose a moratorium on new 
designations until there are objective metrics and increased 
transparency. Only then can we restore accountability to the 
FSOC designation process. All of your agencies should recognize 
the benefit in having an open and transparent regulatory 
process. Transparency does not weaken rulemakings, it gives 
them much-needed legitimacy.
    Mr. Chairman, the issues we are discussing today are very 
important, especially as they relate to our smaller financial 
institutions. I know that the Committee will be looking at the 
small business issues in the near future, and I thank you for 
that.
    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. Daniel 
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.
    Rich Cordray is the Director of the Consumer Financial 
Protection Bureau.
    Mary Jo White is the Chair of the Securities and Exchange 
Commission.
    Tim Massad is Chairman of the Commodities Futures Trading 
Commission. Tim, welcome back to the Committee.
    Mr. Massad. Thank you.
    Chairman Johnson. I thank you all 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.
    Governor Tarullo, you may begin your testimony.

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

    Mr. Tarullo. Thank you, Mr. Chairman and Senator Crapo and 
other Members of the Committee.
    Senator Johnson, I understand that this may be the last 
time that this group of six appears before you in your time as 
Chairman of the Committee, and I just want to say before I 
begin that I think everybody appreciates the care and even-
handedness with which you have approached the substance of 
these important issues of financial regulation. And, speaking 
as one who has testified before you over the years, I also want 
to thank you for the patience and courtesy that you have 
extended to all witnesses in your time as Chair. I think it is 
something that we have all appreciated and that people have 
broadly admired, and we obviously will miss your presence on 
this Committee.
    In appearing before this Committee in February, I noted my 
hope and expectation that this year would be the beginning of 
the end of our implementation of the major provisions of the 
Dodd-Frank Act. Seven years later, we are on track to fulfill 
that expectation, as detailed in my written testimony. To be 
clear, though, this is the beginning of the end, not the end 
itself. The agencies still have some work to do in adopting 
some regulations specifically required by Dodd-Frank. Moreover, 
the Fed has some additional work to do in filling out a regime 
of additional prudential requirements for systemically 
important financial firms.
    Let me mention here two priorities. First, we will be 
proposing capital surcharges for the eight U.S. banks that have 
been identified as of global systemic importance. By increasing 
above Basel III levels the amount of common equity required to 
be held by these firms, we look to improve their resiliency to 
take account of the impact their failure would have on the 
financial system. While we will use the risk-based capital 
surcharge framework developed by the Basel Committee as a 
starting point, we will strengthen that framework in two 
respects.
    First, the surcharge levels for the U.S. institutions will 
extend higher than the Basel Committee range, which will mean 
higher applicable surcharges for most U.S. firms--most of the 
eight U.S. firms, noticeably so in some cases.
    Second, the surcharge formula will directly take into 
account each U.S. G-SIB's reliance on short-term wholesale 
funding, which we believe to be a very important indicator of 
systemic importance because of the potential for funding runs 
and contagion under stress.
    I would note that while some other countries have also 
applied higher surcharges on their G-SIBs than required by the 
Basel Committee, none has explicitly taken account of short-
term wholesale funding vulnerabilities.
    Second, we are developing a proposal for these same eight 
banks to maintain a minimum amount of long-term unsecured debt. 
Should one of these firms ever go into resolution or 
bankruptcy, this structurally subordinated debt would have been 
previously identified as available for conversion into loss 
absorbing equity. The presence of a substantial tranche of such 
long-term unsecured debt should reduce run risk by clarifying 
the position of other creditors in an orderly liquidation or 
bankruptcy process. It should also have the benefit of 
improving market discipline, since the holders of that debt 
would know they face the prospect of loss should the firm 
become insolvent.
    You will note I mentioned short-term wholesale funding a 
couple of times in connection with the most systemically 
important institutions. We are also mindful of the risks that 
runnable funding can pose more generally. We have been working 
with our international counterparts on a proposal for minimum 
margins for security financing transactions, such as repos, 
that would extend to lending of this sort to all market actors.
    While there is more to be done with respect to the largest 
institutions and vulnerable wholesale funding markets, I would 
close by suggesting it may be time to consider raising some 
thresholds or eliminating altogether the application of some 
Dodd-Frank provisions to other banks. The three banking 
agencies before you today have all been working on ways to 
reduce regulatory and supervisory burdens on smaller- and mid-
sized banks. There would also be benefit, I think, from some 
statutory changes. One would be to raise the current $50 
billion asset threshold that determines which banks are in the 
systemic category.
    A second would be to exempt community banks entirely from 
provisions such as the Volcker Rule and the incentive 
compensation provision of Dodd-Frank, which are really both 
directed at practices in larger institutions.
    Thank you for your attention. I would be pleased to answer 
any questions you may have.
    Chairman Johnson. Thank you.
    Chairman Gruenberg, please proceed.

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

    Mr. Gruenberg. Thank you, Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee, for the opportunity to 
testify today on the FDIC's implementation of the Dodd-Frank 
Act.
    If I may, like Governor Tarullo, I would like to begin by 
thanking Chairman Johnson for his strong personal support and 
encouragement to me, both during my service on the staff of 
this Committee as well as since I have been at the FDIC. I am 
very grateful for the support and encouragement you have given 
me and will greatly miss your steady, thoughtful leadership of 
this Committee.
    The recent actions by the banking agencies to adopt a 
supplementary leverage capital ratio, a final rule on the 
liquidity coverage ratio, and a proposed rule on margin 
requirements for derivatives address three key areas of 
systemic risk that, taken together, are an important step 
forward in addressing the risks posed, particularly by the 
largest, most systemically important financial institutions.
    In April of this year, the banking agencies finalized an 
enhanced supplementary leverage ratio final rule for the eight 
largest and most systemically important bank holding companies 
and their insured banks. This rule strengthens the 
supplementary leverage capital requirements well beyond the 
levels required in the Basel III Accord. The enhanced 
supplementary leverage standards will help achieve one of the 
most important objectives of capital reforms, addressing the 
buildup of excessive leverage that contributes to systemic 
risk.
    Just last week, the Federal banking agencies issued a joint 
interagency final rule implementing a liquidity coverage ratio. 
During the recent financial crisis, many banks had insufficient 
liquid assets and could not borrow to meet their liquidity 
needs, which greatly exacerbated the depth of the crisis. The 
liquidity coverage ratio standard will be the first 
quantitative liquidity requirement in the United States and is 
an important step toward bolstering the liquidity position of 
large internationally active banking organizations.
    And, finally, establishing margin requirements for over-
the-counter derivatives is one of the most important reforms of 
the Dodd-Frank Act. Before the crisis, some institutions 
entered into large OTC derivative positions without the prudent 
exchange of collateral, or margin, to support those positions. 
The margin requirements required by the proposed rule should 
promote financial stability by reducing systemic leverage in 
the derivatives marketplace.
    The FDIC and the Federal Reserve have completed their 
reviews of the 2013 Resolution Plans submitted to the agencies 
by the 11 largest, most complex bank holding companies as 
required by Title I of the Dodd-Frank Act. On August 5, the 
agencies issued letters to each of these firms detailing the 
specific shortcomings of each firm's plan and the requirements 
for the 2015 submission. While the shortcomings of the plans 
varied across the firms, the agencies identified several common 
features of the plans' shortcomings, including unrealistic or 
inadequately supported assumptions and the failure to make or 
even to identify the necessary changes in firm structure and 
practices to enhance the prospects for orderly resolution.
    The agencies will work closely with the companies to 
implement required improvements in the resolution plans, 
including simplifying their legal structures, amending 
derivative contracts to provide for a stay of early termination 
rights, ensuring continuity of critical operations during 
bankruptcy, and demonstrating operational capabilities to 
produce reliable information in a timely manner. The agencies 
are also committed to finding an appropriate balance between 
transparency and confidentiality for proprietary and 
supervisory information in the resolution plans.
    Finally, in its role as supervisor of the majority of the 
community banks in the United States, the FDIC has been engaged 
in a sustained effort to better understand the issues related 
to community banks, those institutions that provide traditional 
relationship-based banking services in their local communities. 
Since the beginning of this year, FDIC analysts have published 
new papers dealing with consolidation among community banks, 
the effects of long-term rural depopulation on community banks, 
and the efforts of minority depository institutions to provide 
essential banking services in the communities they serve. We 
have also instituted a new section of the Quarterly Banking 
Profile that focuses specifically on community banks and are 
providing technical assistance to them, including assisting 
with critical cyber risks.
    Mr. Chairman, that concludes my remarks. I would be glad to 
respond to your questions.
    Chairman Johnson. Thank you.
    Comptroller Curry, please proceed.

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

    Mr. Curry. Chairman Johnson, Ranking Member Crapo, and 
Members of the Committee, I am pleased to appear here today to 
provide an update on the steps the OCC has recently taken to 
further enhance the effectiveness of our bank supervision and 
to provide a status report on the completed and current 
projects required by the Dodd-Frank Act.
    Like my colleagues, I, too, however, would like to first 
thank Chairman Johnson for his guidance and steady leadership 
over the years. I have been in public service for a long time 
and learned early on that when Congressman Johnson or Senator 
Johnson had something to say on a financial matter, it was 
worth listening to. I thank you for your years of service and 
wisdom and wish you well in your retirement.
    In the 4 years since passage of the Dodd-Frank Act, new 
tools have been developed and new rules have been put in place 
to address regulatory gaps and to create a stronger financial 
system. For our part, we at the OCC have completed all of the 
Dodd-Frank rulemakings for which we have sole responsibility. 
For those interagency rulemakings that remain to be completed, 
I believe we have made good progress to date and anticipate 
finalizing many of them in the near term.
    Since the crisis, we have also seen steady improvements in 
the overall financial condition of the banking system. Despite 
the improving strength and health of banks, however, I am 
keenly aware of the need for supervisors to remain vigilant.
    Last week, I was pleased to sign a new rule that not only 
memorializes the heightened standards we have applied to large, 
complex banks since 2010, but provides also an enforcement 
mechanism to compel compliance when necessary. Requiring higher 
supervisory standards for the largest and most complex banks we 
oversee is consistent with the Dodd-Frank Act's broad objective 
of strengthening the stability of the financial system. These 
heightened standards address the need for comprehensive and 
effective risk management, an engaged board of directors that 
exercises independent judgment, a more robust audit function, 
talent management recruitment and succession planning, and a 
compensation structure that does not encourage inappropriate 
risk taking.
    Consistent with the heightened standards we are requiring 
of the largest banks, we are holding ourselves accountable to 
supervisory improvements, as well. Last year, I asked a team of 
international regulators to provide a broad, candid, and 
independent assessment of our supervision of mid-sized and 
large banks. The review identified a number of areas where we 
performed really well, but also highlighted areas where we need 
to improve. The OCC has embraced the team's findings and taken 
steps to execute recommendations that include transformational 
improvements.
    One key improvement includes expanding our Lead Expert 
Program, which will allow us to better compare the operations 
of the institutions we regulate to identify trends, best 
practices, and weaknesses. Another change will improve our 
ability to identify systemic risk by enhancing our risk 
monitoring processes and reporting, and that fits squarely with 
the semi-annual public reports by our National Risk Committee. 
Those reports highlight emerging industry trends and identify 
those risk areas where we will focus our resources.
    While the OCC has taken many steps to improve our 
supervision of large banks, we also recognize the impact of our 
activities on community banks. While we are focused on strong 
and effective supervision, we are always mindful of the need to 
avoid unnecessary burden on community banks. We have responded 
by tailoring our supervisory programs to the risks and 
complexity of a bank's activities. In each rulemaking, the OCC 
has sought and listened to the concerns of community banks. As 
an example, the lending limits rule provides a simpler option 
for small banks to use for measuring credit exposures, and the 
final domestic capital rules address concerns of small banks 
with respect to the treatment of TruPS, accumulated other 
comprehensive income, and residential mortgages.
    My written statement includes a full status report on the 
many Dodd-Frank Act rulemakings the OCC has been involved in 
and our efforts to better coordinate with other domestic and 
international regulators. My statement concludes with an update 
of our activities to shore up the industry's defenses against 
cyberthreats, which I regard as one of the most significant 
emerging issues facing the industry.
    Thank you again, and I would be happy to answer the 
Committee's questions.
    Chairman Johnson. Thank you.
    Director Cordray, please proceed.

  STATEMENT OF RICHARD CORDRAY, DIRECTOR, CONSUMER FINANCIAL 
                       PROTECTION BUREAU

    Mr. Cordray. Chairman Johnson, Ranking Member Crapo, 
Members of the Committee, thank you for the opportunity to 
testify today about implementation of the Dodd-Frank Act.
    It will surprise nobody to learn that I will join my 
colleagues in expressing our respect and admiration for your 
leadership on financial reform and in this body. Your obvious 
commitment to fair consumer financial markets set an example 
for this Bureau in our work that, I think, is improving the 
lives of so many people across your State and this country. 
And, I will always remember your personal kindness and your 
family in welcoming me to South Dakota and having me hear from 
your constituents about these issues, and your personal 
kindness, in particular, in advising me that if I pronounced 
the State capital as ``Pierre'' rather than ``Pier,'' that 
would make me a dude.
    [Laughter.]
    Mr. Cordray. The Consumer Financial Protection Bureau, as 
you know, is the Nation's first financial agency whose sole 
focus is on protecting consumers in the financial marketplace, 
and over the past 3 years, we have made considerable progress 
in fulfilling our rulemaking, supervisory, and enforcement 
responsibilities to protect people across this country.
    Our initial focus, as directed by Congress, by all of you, 
was to address deep problems in the mortgage market that helped 
precipitate the financial crisis. We began by issuing a series 
of mortgage rules that took effect early this year. They 
require creditors to make reasonable good faith assessments 
that borrowers are able to repay their loans, address pervasive 
problems in mortgage servicing that caused so many homeowners 
to end up in foreclosure, and regulate compensation practices 
for loan originators, among others. We have worked closely with 
industry housing counselors and other stakeholders to ensure 
the rules are implemented smoothly and timely.
    Last fall, we also issued another mortgage rule to 
accompany a goal long urged in the Congress, which was to 
consolidate and streamline Federal mortgage disclosures under 
various laws. The new ``Know Before You Owe'' mortgage forms 
are streamlined and simplified to help consumers understand 
their options, choose the deal that is best for them, and avoid 
costly surprises at the closing table.
    This summer, we also issued a proposed rule required by 
Congress to implement changes made to the Home Mortgage 
Disclosure Act. As with the redesign of the mortgage disclosure 
forms, we believe this rulemaking presents an opportunity to 
reduce unwarranted regulatory burdens.
    As each of these initiatives proceeds, we are working 
diligently to monitor the effects of our rules on the mortgage 
market and make clarifications and adjustments to our rules 
where warranted. Right now, for instance, we are pursuing 
further research to determine how best to define the scope of 
statutory provisions for small creditors that operate 
predominately in rural or underserved areas in order to promote 
access to credit in those areas.
    We are also addressing pressing issues in nonmortgage 
markets, including the first consumer protections ever for 
remittance transfers--international money transfers, that is--
and a series of larger participant rules to supervise 
operations and activities in other markets. And, we are 
currently in the process of developing proposed rules on 
prepaid cards, debt collection, and payday lending.
    Another key task for the Bureau has been to build effective 
supervision and enforcement programs to ensure compliance with 
Federal consumer financial laws. For the first time ever, we 
have the authority to supervise not only the larger banks, but 
also a broad range of nonbank financial companies, including 
mortgage lenders and servicers, payday lenders, student loan 
originators and servicers, debt collectors, and credit 
reporting companies.
    We made it a priority to coordinate the timing and 
substance of examination activities with our Federal and State 
regulatory partners. Our supervision program is helping to 
drive cultural change within financial institutions that places 
more emphasis on treating customers fairly. Our work has 
strengthened compliance management at the large banks and 
caused many large nonbank firms to implement such systems for 
the first time.
    Consistent enforcement of the laws under our jurisdiction 
benefits consumers, honest businesses, and the economy as a 
whole. To date, our enforcement actions have resulted in $4.7 
billion in relief for 15 million consumers who were harmed by 
illegal practices.
    For example, with officials in 49 States, we took action 
against the Nation's largest nonbank mortgage loan servicer for 
misconduct at every stage in the mortgage servicing process. 
With 13 State Attorneys General, we obtained $92 million in 
debt relief for 17,000 servicemembers and others harmed by a 
company's predatory lending scheme that inflated prices for 
electronics.
    We worked with the Department of Justice to order a large 
auto lender to pay $80 million in damages to 235,000 Hispanic, 
African American, and Asian and Pacific Islander borrowers 
because of discriminatory practices, the largest amount the 
Federal Government has ever secured in an auto lending 
discrimination case. And, we took action against two of the 
Nation's largest payday lenders for various violations of the 
law, including the Military Lending Act.
    The core of our mission is to stand on the side of 
consumers and make sure they are treated fairly in the 
financial marketplace. We have now handled 440,000 consumer 
complaints and counting and secured monetary and nonmonetary 
relief on their behalf, including many people in each of your 
States. We are working on other resources for consumers to help 
them better understand the choices they make in the 
marketplace.
    I would like to say that my outstanding colleagues at the 
Bureau, as well as the leaders of our Federal agencies 
represented on this panel, are strongly dedicated to a shared 
vision of a healthy financial marketplace and we are working 
together well to achieve this goal.
    Thank you, and I look forward to your questions.
    Chairman Johnson. Thank you.
    Chair White, please proceed.

  STATEMENT OF MARY JO WHITE, CHAIR, SECURITIES AND EXCHANGE 
                           COMMISSION

    Ms. White. Thank you. Chairman Johnson, Ranking Member 
Crapo, and Members of the Committee, thank you for inviting me 
to testify about the SEC's ongoing implementation of the Dodd-
Frank Act and our efforts to reduce systemic risk, close 
regulatory gaps, and better protect investors.
    Chairman Johnson, I am a relative newcomer to this 
Committee, but I certainly want to add my admiration for you, 
your professionalism, your leadership of this Committee, and 
your support, really, for all of our efforts. So, thank you 
very much.
    As you know, the Dodd-Frank Act gave the SEC significant 
new responsibilities and included some 90 provisions that 
require complex SEC rulemaking. The SEC has made quite 
substantial progress implementing our Congressionally mandated 
rulemaking agenda as we have simultaneously continued our 
broader core responsibilities of pursuing securities 
violations, important discretionary rulemaking, reviewing 
public company disclosures, inspecting the activities of 
regulated entities, and maintaining fair and efficient markets, 
which has included a continuing review and initiatives to 
enhance the quality of our equity and fixed income markets.
    Since I became Chair in April of last year, we have focused 
on eight key areas of SEC responsibility mandated by the Dodd-
Frank Act: Credit rating agencies, asset-backed securities, 
municipal advisors, asset management including regulation of 
private fund advisers, over-the-counter derivatives, clearance 
and settlement, proprietary activities by financial 
institutions, and executive compensation.
    Specifically, in furtherance of these regulatory 
objectives, the Commission has to date created a new regulatory 
framework for municipal advisors, advanced significant new 
standards for the clearing agencies that stand at the center of 
our financial system, along with our fellow regulators 
implemented new restrictions on the proprietary activities of 
financial institutions through the Volcker Rule, finalized 
rules intended to strengthen the integrity of credit ratings by 
reducing conflicts of interest in ratings and improving their 
transparency. These rules were adopted on August 27 and 
implemented actually 14 credit rating agency rulemakings.
    We have adopted significantly enhanced disclosures of 
asset-backed securitizations, also adopted last month. We 
completed reforms in July to address risks of investor runs in 
money market funds, a systemic vulnerability in the financial 
crisis, pushed forward new rules for previously unregulated 
derivatives, begun implementing additional executive 
compensation disclosures, put in place strong new controls on 
broker-dealers that hold customer assets, reduced reliance on 
credit ratings, and barred bad actors from private securities 
offerings.
    Since April 2013, the SEC has proposed or adopted nearly 20 
significant Dodd-Frank Act rules and thus far has proposed or 
adopted in total rules to address about 90 percent of all the 
provisions of the Dodd-Frank Act that mandate Commission 
rulemaking.
    In the eight categories of mandated rulemaking that I have 
identified, the bulk of our work is completed or nearing 
completion. Our focus now is on finishing our Title VII and 
executive compensation rules as required by Dodd-Frank.
    We have also worked closely with our fellow financial 
regulators to ensure that our financial regulatory system works 
overall to protect against risks, both by promoting financial 
stability and supporting a sensible and integrated financial 
regulatory framework that works effectively for market 
participants. The Financial Stability Oversight Council 
established by the Dodd-Frank Act, on which I participate as a 
member, serves a critical role in that effort.
    While the SEC has made significant progress on both our 
Dodd-Frank and JOBS Act rulemakings, more remains to be done, 
and we must continue our work with intensity. As we do so, we 
must be deliberate as we consider and prioritize our remaining 
mandates and deploy our broadened regulatory authority, 
supported by robust economic analysis. Progress ultimately will 
be measured based on whether we have implemented rules that 
create a strong and effective regulatory framework and stand 
the test of time under intense scrutiny in rapidly changing 
financial markets. We must be focused on fundamental and 
lasting reform that will protect investors and our markets and 
safeguard our financial system.
    Thank you again for the opportunity to testify today. I 
would be happy to answer any questions.
    Chairman Johnson. Thank you.
    Chairman Massad, please proceed.

   STATEMENT OF TIMOTHY G. MASSAD, CHAIRMAN, U.S. COMMODITY 
                   FUTURES TRADING COMMISSION

    Mr. Massad. Thank you, Chairman Johnson and Ranking Member 
Crapo and Members of the Committee. I am pleased to testify 
before you today on behalf of the Commission.
    While this is my first appearance as CFTC Chair, I also 
want to add my thanks to you, Chairman Johnson, particularly 
with respect to my prior role at Treasury overseeing the TARP 
program. It was very unfortunate, of course, that we ever had 
to implement TARP, but I appreciate your support for all of our 
efforts to stabilize the system.
    Before I begin, I would also like to note that my fellow 
Commissioner, Chris Giancarlo, is here. He, like me, is a new 
member of the Commission and I am pleased that he is here 
today.
    I would like to review our progress in implementing the 
Dodd-Frank Act, Congress's response to the worst financial 
crisis since the Great Depression. We must never forget that 
this crisis imposed terrible costs on all Americans--millions 
of jobs lost, homes foreclosed, many businesses shuttered, and 
many retirements and college educations deferred. And, that is 
why implementation is so important.
    In Dodd-Frank, Congress enacted four basic reforms of the 
swap market: Increased oversight of major market players; 
clearing of standardized transactions on central 
clearinghouses; transparent trading of standardized 
transactions on regulated platforms; and regular reporting for 
increased market transparency.
    The CFTC has made substantial progress in implementing 
these reforms. First, we have put in place a framework for the 
oversight of swap dealers and major swap participants. Today, 
104 swap dealers and 2 major swap participants are 
provisionally registered, and we require them to observe strong 
risk management practices and business conduct standards.
    Second, standardized swaps must now be cleared with a 
registered clearinghouse so that risk can be better monitored 
and mitigated. In December 2007, only 16 percent of outstanding 
transactions measured by notional value were cleared, according 
to industry estimates. Last month, 60 percent were cleared. In 
addition, last month, an estimated 85 percent of index credit 
default swaps were cleared.
    Third, standardized swaps must also be traded on a 
regulated platform. There are currently 22 swap execution 
facilities temporarily registered and volumes are growing.
    And, fourth, rules for data reporting are in place. All 
swaps, whether cleared or uncleared, must be reported to swap 
data repositories. We have four SDRs provisionally registered 
and operating.
    And, in getting us where we are today, no group deserves 
more credit than the hard working staff of the agency, and I 
want to publicly thank them for their extraordinary 
contributions.
    But, much work remains to be done. Let me highlight a few 
priorities. First, as we gain experience with new regulations, 
we will likely make adjustments to the rules. With reforms as 
significant as these, this is to be expected. And, in 
particular, we want to make sure the new rules do not place 
undue burdens on commercial end users that were not responsible 
for the crisis and that depend on these markets to hedge risk. 
We will also be mindful of their interest as we complete the 
small number of remaining rules required by Dodd-Frank.
    To that end, I have scheduled a public meeting on September 
17 where we will consider a rule governing special entities, 
like public power companies. The Commission will also consider 
at that time a proposed rule on margin for uncleared swaps 
similar to the rules put forward last week by my banking 
regulator colleagues here today.
    Second, for reforms to succeed, global regulators must work 
together to harmonize rules as much as possible. I have been 
very focused on this effort since the day I took office.
    Third, we must make sure that market participants comply 
with the rules. Strong enforcement and compliance efforts are 
vital to maintaining public confidence and participation in our 
markets.
    And, fourth, technology and data management are priorities. 
The CFTC is leading an international effort to establish 
consistent standards for reporting, and we will also make sure 
the SDRs and market participants report data accurately and 
promptly, as this is critical to effective market oversight and 
transparency.
    All of these tasks require resources. While the agency 
staff is excellent and we will do all we can with what we have, 
I believe the CFTC's current financial resources are 
insufficient to fulfill our increased responsibilities. I hope 
to work with Congress to address this need.
    The United States has the best financial markets in the 
world, the most dynamic, innovative, competitive, and 
transparent, and they have been an engine of our economic 
growth and prosperity. Effective oversight is vital to 
maintaining those strong financial markets.
    Thank you again for inviting me today and I look forward to 
your questions.
    Chairman Johnson. Thank you all.
    I will now ask the Clerk to put 5 minutes on the clock for 
each Member's questions.
    My first question is for each of the panelists. What Wall 
Street Reform rules will be finalized before the end of the 
year by your agency? For example, should we expect a final risk 
retention rule or rule on long-term debt to facilitate an 
orderly resolution? Governor Tarullo, let us begin with you and 
go down the line.
    Mr. Tarullo. Senator, I would expect that we will finalize 
the financial sector concentration rule. And, with respect to 
risk retention, I am interested, actually, to hear what some of 
my colleagues say. I do not know whether I would say by the end 
of the year, but I think we are definitely in the home stretch.
    Mr. Gruenberg. Mr. Chairman, the agencies have been working 
hard on the risk retention rule and I think we are in the end 
game. And, I would hope, without making predictions, that we 
could complete that rulemaking by the end of the year.
    And, you mentioned the long-term debt rule. As you know, 
the FDIC has been working cooperatively with the Fed on that 
rule and I am hopeful the Fed will be able to move forward on 
that area, as well.
    Mr. Curry. I, too, would hope to complete the risk 
retention rule by the end of the year. The OCC is certainly 
committed to devoting the appropriate resources to get it done, 
and I hope to be able to work cooperatively with both the 
Federal banking agencies and the housing-related agencies, as 
well.
    Mr. Cordray. Mr. Chairman, we are not directly involved in 
the risk retention rule, but we take an interest in it as it 
overlaps with our qualified mortgage rule to some significant 
degree.
    We continue to work on the HMDA implementation and the 
mortgage rules implementation, generally. We will have other 
larger participant rules that allow us to supervise other 
financial markets before the end of the year. And, we continue 
to work, as I said, on a number of other issues that are not 
mandated by Dodd-Frank but are an important part of 
implementing its goals.
    Ms. White. With respect to the Dodd-Frank Act, as I 
mentioned in my oral testimony, we expect to focus on Title VII 
and the executive compensation rules. I do not say they will be 
finished by year end, but we will be focusing on those. I do 
expect to work with our fellow regulators in completing the 
credit risk retention rule.
    Outside of Dodd-Frank, we expect to pursue by the end of 
the year Regulation SCI, which is Systems Compliance and 
Integrity, as well as other initiatives in the equity market 
structure area.
    Mr. Massad. Mr. Chairman, we are not part of the risk 
retention rule, but we will, as I noted, be acting on a rule 
for special entities next week which addresses some of the 
smaller end-user concerns. We will also be acting on a 
reproposal of the margin rule. Of course, with the public 
comment period, we may not quite get that finalized by the end 
of the year.
    Most of our rules are done, so, again, we are very focused 
on looking at them and making sure we have addressed some of 
the end-user concerns.
    Chairman Johnson. Thank you.
    Governor Tarullo, your staff has indicated that the Fed is 
taking a two-track approach with capital rules for insurance 
companies, including one approach the Fed could use if Congress 
enacts legislation that the Senate passed unanimously months 
ago to provide the Fed with more flexibility to tailor rules 
for insurance companies. Is it important for Congress to enact 
that law soon to provide for more appropriate rules for 
insurance companies?
    Mr. Tarullo. Senator, it would be very welcome if the House 
would follow your lead and enact that to give us the kind of 
flexibility in making an assessment on liability 
vulnerabilities of insurance companies that are unique to 
insurance companies. We will continue with our two tracks of 
planning. We are going to conduct a quantitative impact study 
to try to develop some more information on insurance industry 
specific products, but it would be very helpful. Thank you.
    Chairman Johnson. Chairman Gruenberg, in August, you 
announced that the living wills for the 11 largest banking 
organizations contain important shortcomings. You have given 
each of these banking organizations until July 1 of 2015 to 
submit a resolution plan that addresses the shortcomings. What 
will your agency be doing in the next year to monitor these 
banks and their efforts to address their living will 
shortcomings?
    Mr. Gruenberg. Mr. Chairman, as I indicated in my opening 
statement, we have, in effect, now given each of the 11 firms a 
detailed road map of changes they need to make to improve the 
resolvability of their firms. We anticipate--by ``we,'' I mean 
the FDIC and the Federal Reserve, which worked together jointly 
on these letters--to give the firms direction and guidance to 
follow through on compliance and implementation of the 
directions contained in those 11 letters.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    I, too, in my first question, want to talk to each of the 
agencies, but I am going to do it in segments. I am focusing in 
this question on EGRPRA, the Economic Growth and Regulatory 
Paperwork Reduction Act, which, as you know, has requirements 
in it for reviews that are statutorily mandated to evaluate 
existing regulations to identify outdated, unnecessary, or 
unduly burdensome regulations. It was actually this Act that we 
used some years back when we made some very good progress 
working with many of you to pass a significant Regulatory 
Relief Act.
    I understand that the Federal Reserve, the FDIC, and the 
OCC are already well into and have been going--well underway 
and are going down the road of doing this, and so my first 
question is to the three of you, which is, will you commit that 
your agencies will provide us with a list of--or a table of 
regulations that fit this category that we could evaluate for 
regulatory reform purposes, and specifically with focus on 
community banks?
    Mr. Curry. Mr. Chairman, I am currently the Chairman of the 
FFIEC, which is overseeing the EGRPRA process, and I think our 
objectives are totally in tune with your objectives that you 
stated today. The focus of our review of unnecessary or 
burdensome rules is really focused on community banks.
    Senator Crapo. Good.
    Mr. Curry. We are also looking to make sure that we get 
adequate input from community bankers directly, so we will be 
holding a series of outreach sessions throughout the country to 
take in that information. And then, ultimately, we do intend to 
do two things: One, to make changes that we have complete 
control over in terms of regulations and policy statements, but 
also to file a report with Congress in which we would make 
recommendations for appropriate statutory changes.
    Senator Crapo. Thank you.
    Mr. Gruenberg. I would simply add that I agree with 
everything the Comptroller said. The EGRPRA process actually 
offers the agencies a nice opportunity to take an overview of 
the regulatory compliance issue and identify opportunities both 
for addressing unneeded regulatory requirements, as well as 
opportunities for any statutory change. This has been a focus 
of attention and priority, certainly for our three agencies. As 
the Comptroller indicated, we are planning a series of public 
hearings around the country. We will be participating directly 
in some of those hearings and we view it as a good opportunity 
to take a broad overview of this.
    Senator Crapo. Thank you.
    Governor Tarullo.
    Mr. Tarullo. Tom gave a good summary, Senator, I think, of 
where the three banking agencies are and I agree with him.
    Senator Crapo. All right. Thank you very much.
    And then to the other three, as I understand it, the CFPB 
is covered by this law, also, but the timing is not necessarily 
kicking in at the same timeframe for the CFPB, and the CFTC and 
SEC are not technically under the law. But, my question to the 
three of you is that, regardless of that, will you pursue the 
same process and help to provide us with your evaluation of the 
kind of unnecessary or unduly regulatory burdensome regulations 
that we have, and in particular with regard to community banks?
    Mr. Cordray. I will simply say, I am part of the FFIEC. We 
are following, as the Comptroller indicated as Chairman of that 
body, his lead on regulatory burden review. We have our own 
statutory provision that requires a 5-year look-back on all 
rules that the CFPB promulgates. We have been actively involved 
with industry looking at the mortgage rules to see if there are 
tweaks that are needed as we go, and we have made a number of 
those to assist compliance. We also have had our own 
streamlining initiative, which led to work on the ATM sticker 
issue, which Congress ultimately resolved, and we provided 
technical assistance on that, and relief on the Annual Privacy 
Notices, which is coming very soon in final form.
    Senator Crapo. Thank you.
    Ms. White. And, I think, Senator Crapo, you are correct. I 
do not think the statute applies to us, but I am very much 
committed to reviewing our rules in that fashion. We also are 
obviously in constant contact with those who our rules impact. 
Our rules do not generally have as much impact on community 
banks.
    One of the other things that I have tried to do since I 
became Chair is also to review our major rules, both JOBS Act 
and Dodd-Frank and others, as they come out the door so that we 
are making changes, making them more efficient, stronger, as we 
go.
    Senator Crapo. Thank you.
    And, Mr. Massad, could you be real fast, because I have got 
to get one more question in here.
    Mr. Massad. Certainly. We agree with the goal, Senator, and 
will be happy to work with your office on it.
    Senator Crapo. Thank you. I appreciate that.
    My next question is for Governor Tarullo, and, Governor, in 
your testimony and in your speech at the Federal Reserve Bank 
of Chicago's Annual Bank Structure Conference, you called for 
raising the trigger when a bank is systemically important from 
$50 billion. I would like you, if you would for us, please, to 
just expand on your thinking there, because I agree with you 
very strongly and I hope we can make progress in this area.
    Mr. Tarullo. Senator, I think we have had the benefit now 
of several years of stress testing under both Dodd-Frank and 
also our capital requirements assessment process, and I think 
we have just concluded that, given the intensity and the 
complexity of the work around the really good stress testing 
which we believe is necessary for the largest firms, we have 
not felt that the additional safety and soundness benefits of 
that really aren't substantial enough to warrant the kinds of 
expenditures that banks above $50 billion but well below the 
largest systemically important institutions have to expend. 
Their balance sheets are pretty easily investigated by us, and 
their lending falls in a fairly discrete number of forms. So, 
in thinking about it, we just thought that having some 
experience put us in a better position to make that judgment, 
and that is why I mentioned it in the Chicago speech.
    Senator Crapo. Well, thank you. I think your observation is 
very well taken and is one of those examples of what I am 
talking about here today, as well, where we need to find places 
where we can resolve some of these unnecessary burdens that are 
causing difficulty. Thank you.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman. I thank the 
witnesses.
    Now, as we speak, the Treasury Secretary and Secretary of 
Transportation are holding a summit with leaders across the 
country to encourage greater investment in infrastructure 
projects. But, unfortunately, the Administration's effort to 
promote greater investment in infrastructure fly in the face of 
rulemaking finalized last week by the Fed, the OCC, and the 
FDIC. By excluding municipal bonds from being considered as 
high-quality liquid assets, Federal regulators have run the 
risk of limiting the scope of financial institutions willing to 
take on investment-grade municipal securities, which we know 
are the lifeblood of development in this country.
    My city and State, New York City and State, rely on this 
financing to pave roads, bridges, and start construction in new 
schools, but it is not just New York. Any city or State that 
have made tough decisions to protect their credit ratings--
Chicago, Philadelphia, California--are susceptible to the 
impact of this rule. Investment-grade municipal bonds not only 
serve as the mechanism through which we are able to create 
bonds and finance critical infrastructure, but the securities 
service high-quality assets that adequately cover liquidity 
outflows in periods of stress.
    I certainly support regulatory efforts to ensure the 
banking section is able to absorb shocks in times of financial 
and economic stress, as well as enhanced liquidity, but I have 
not yet heard a convincing argument why, for instance, 
corporate debt can be considered a high-quality asset but 
investment-grade municipal securities cannot. Investment-grade 
municipal bonds have comparable, if not better, trade, volume, 
and price volatility, and they performed well through the 
financial crisis. In fact, in 2008 and 2009, price declines on 
AAA corporate bonds were greater than the price declines on 
both AA municipal general bonds and revenue bonds. And, this 
does not even touch on the fact the new rule permits foreign 
sovereign debt to be qualified as HQLA while these municipal 
bonds are not.
    And, the exclusion of this type of debt from counting 
toward liquidity coverage for banking institutions has the 
potential for States and municipalities to both increase the 
cost of interest payments and decrease investment by the 
largest banking institutions in infrastructure. Now, more than 
ever, we should be wary of blunt policies that have the 
potential to negatively impact the municipal bond market and, 
ultimately jobs.
    The debt issuances from certain States and local 
municipalities are considered high-quality liquid assets by 
markets and should be treated as such by the rule. Developing 
criteria to assess liquidity and performance of various 
municipal bond offerings is a more narrowly tailored approach 
that was absent from the rule finalized last Wednesday. I hope 
all three agencies will reassess the finalized rule and issue 
supplemental rules that appropriately account for these 
instruments.
    So, here are my questions. First, Governor Tarullo, I know 
this rule is something you have looked at closely. I was 
particularly struck by your comments last week in which you 
acknowledged that, quote, ``Staff analysis suggests that the 
liquidity of some State and municipal bonds is comparable to 
that of the very liquidity of corporate bonds that can qualify 
as HQLA,'' and indicated the staff has been working on some 
idea for determining criteria for such bonds which might be 
considered for inclusion. Would you mind discussing what types 
of ideas do you believe are appropriate, and specifically, 
whether these ideas would allow for greater flexibility so that 
certain investment-grade municipal bonds could be considered 
high-quality liquid assets.
    And, then, after you opine, I would like to ask Chairman 
Gruenberg and Comptroller Curry if they think a rule that 
provides greater flexibility in this area would be something 
that is important to look into.
    Governor Tarullo.
    Mr. Tarullo. Thank you, Senator. As you noted, we, the 
Board, asked the staff to prepare a proposal that would allow 
for recognition as high-quality liquid assets those State and 
municipal bonds which are in the same league with very liquid 
corporates, and what we have asked the staff to do is an 
analysis of the liquidity characteristics of State and munis, 
taking into account daily trading volumes. There are some 
differences in those markets, but our analysis during the 
course of the comment period suggested that there ought to be a 
way of identifying the more liquid State and munis, because if 
they are really liquid, we really do want banks to be able to 
take that into account in thinking about their maturity 
lengths.
    Senator Schumer. Right. So, you want some comparability 
here and you do not want to lump all municipal bonds in one 
pot.
    Mr. Tarullo. That is correct, Senator.
    Senator Schumer. OK. Chairman Gruenberg.
    Mr. Gruenberg. Senator, I----
    Senator Schumer. The question to you is, would you consider 
revising this rule if the analysis shows that the liquidity 
levels are similar.
    Mr. Gruenberg. The short answer is yes, Senator----
    Senator Schumer. Good.
    Mr. Gruenberg. ----and I indicated in my remarks at our 
Board meeting that we would monitor carefully the impact on the 
market, and if there was reason to make adjustments, we would 
consider adjustments.
    Senator Schumer. Yes. We have loads of our mayors and our 
finance directors, as well as Governors, are howling about 
this, and so they really think it will impact their markets and 
they are experienced to know.
    How about Comptroller Curry.
    Mr. Curry. Senator, we are certainly looking forward to 
discussing with the Fed any additional research or thoughts 
that they may have in this area. If there is a possibility to 
calibrate a standard that differentiates certain municipal 
securities from the broader characteristics, we would look 
forward to talking to the Fed about it.
    Senator Schumer. Would you be open to changing--to 
modifying the rule----
    Mr. Curry. Based on----
    Senator Schumer. ----as Mr. Gruenberg and Mr. Tarullo have 
said they would be?
    Mr. Curry. Certainly, based on supporting research or 
thoughts from the Fed.
    Senator Schumer. What does that mean?
    Mr. Curry. I----
    Senator Schumer. Would you be open to revising the rule?
    Mr. Curry. We are open, but we need to talk with our 
colleagues.
    Senator Schumer. OK. Thank you, Mr. Chairman, and I thank 
you. If all three of you are open to it, and two of you seemed 
pretty favorable toward it, I hope you will go ahead and do it, 
because it is really important.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. I appreciate it. I 
appreciate all of you being here and the job that you do.
    Back when Dodd-Frank was being created, each of us were 
assigned certain areas to work on, and our friend Mark Warner 
and I worked on Title I and II, and Amy Friend changed it a 
little bit, but still pretty good. And, I want to focus on 
those two areas. I actually think it was some of the strongest 
pieces of the Dodd-Frank bill. And, I noticed that the FDIC and 
the Fed had a joint letter relative to the living wills. I will 
say, in fairness, Senator Warner was far more focused on the 
living wills, and I appreciate his efforts in that regard.
    But, I noticed that you had a joint statement, and then 
what happened after that is the Fed backed away from that and 
wrote something separate from the joint letter that really 
watered down, if you will, your concern about living wills, 
which created a concern for me, because I know that there is a 
process that gets put in place if both of you agree that they 
are inadequate, and, therefore, by stepping away, that has been 
watered down to a big degree. And, I am just curious as to why 
that took place, and both of you might want to respond to that.
    Mr. Tarullo. Senator, I did not see any watering down of 
the impact of the letters that we agreed on and jointly sent 
out. What we jointly agreed on were the measures that we 
actually want the banks to take in order to become more 
resolvable, which, I think, is the object of this entire 
exercise. And, so far as I could determine, there was 
substantial convergence, certainly at the staff and principal 
levels, on those areas where we expect to see progress.
    I think the difference was that the FDIC made a 
determination of noncredibility of the letters that had been 
submitted already. The feeling at the Board was that there are 
obviously shortcomings--that is why we wanted to get these 
specifics out--but, we also thought that it was important to go 
through another stage of the iterative process that had been 
laid out in our reg, and I think is contemplated by the 
statute, because that, after all, is the object here, to get us 
to the point where the firms are resolvable in bankruptcy as 
well as under Title II. And, as you will note in our statement, 
the Fed statement and also in the letters, if the firms are not 
able to take the steps that we have jointly indicated they need 
to take by next July, the agencies will be prepared to take 
action under Dodd-Frank in order to enforce those provisions.
    And, so, I think by doing that, by being as specific as we 
were, I think we should put to rest any complaints that there 
was not enough guidance from the agencies along the way. I 
think the guidance is out there now and it is actually quite 
explicit.
    Senator Corker. But, it does have the effect, does it not, 
of really slowing down and putting off the institutions taking 
the steps they need to take to simplify--there is an iterative 
process, as you mentioned, and, I think, by doing what the Fed 
did, you added a step to that, did you not?
    Mr. Tarullo. Well, I think, actually, what we did was we 
focused on what we actually want them to change, and we made it 
pretty clear we want a change in the next year. So, I hope 
there is no slow-down here. We are certainly not expecting a 
slow-down. On the contrary. We are expecting acceleration in 
their planning and them to do it with more realistic 
assumptions than they did in their prior submissions.
    Senator Corker. One of the things that I think there have 
been concerns about is you have been--the FSOC has been given 
tremendous powers to deal with these entities if you feel like 
there, in fact, is any possibility that because of their size 
or complexity, they could create a risk to the system. I just 
want to ask the two of you, I know we have asked in letter 
form, several of us, we have gotten back, as we might expect, 
semi-nebulous responses. But, is it a fact or is it not that 
will you use the powers that are given to you if these firms--
if you find themselves after this year process not in a place 
to be resolved appropriately through bankruptcy, will you take 
the measures that you have--many people are trying to pass 
legislation, but you already have powers within the 
organizations to take steps and force them to be less complex. 
Will you do that?
    Mr. Tarullo. Sure, Senator. That is, I think, again, the 
object of the process, is to try to get them to the point of 
resolvability, but as we indicated, we are prepared to use the 
powers granted in Dodd-Frank if, in fact, they do not get 
there.
    I might also add that the things I mentioned this morning--
the higher level of surcharges for the most systemically 
important institutions, the attention to the short-term 
wholesale funding vulnerabilities, and the requirement for a 
substantial amount of subdebt that could be convertible--are 
all measures that are actually intended in the same direction, 
which is to ensure both the resiliency and the resolvability of 
these institutions.
    Mr. Gruenberg. Senator, if I could just add, I think the 
answer to your question is yes, we will be prepared to use the 
authorities of the statute. We have laid down a clear marker at 
the Fed and the FDIC for these firms in terms of the kinds of 
changes that need to be made.
    And, if I may, I would underscore the agreement between the 
two agencies on the substance of the letters, which, I think, 
was really very solid and meaningful. Think the firms are 
clearly on notice that there is an expectation of compliance 
with the directions in the letters, and there is a joint 
commitment by the two agencies to follow through on that.
    Senator Corker. Well, I thank you, and Mr. Chairman, I 
appreciate the time. I will say that a big part of the concerns 
that were expressed during that time in the passage of the bill 
was about the extraordinary actions that we and the American 
people had to take during that time. And, unless you, 
especially the two of you, are willing to take the steps that 
are necessary to ensure that these organizations are not too 
complex to be resolved through bankruptcy, then all is for 
naught. So, I hope you will. I thank you for your work, and I 
appreciate the time, Mr. Chairman.
    And, by the way, thank you for creating a bipartisan 
atmosphere on the Committee, too, since everybody is apparently 
thinking you are going to be Chairman of the Universe after 
this----
    [Laughter.]
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Madam Chair, you and I have on previous occasions discussed 
the CEO pay ratio provision I offered in the Wall Street Reform 
law, which requires companies to disclose the ratio of 
compensation of their chief executive with the pay of median 
workers. This measure focuses investors' attention on the 
relative value a CEO creates in order to facilitate better 
checks and balances against insiders paying themselves runaway 
compensation packages.
    And, while CEOs undoubtedly can create value for companies, 
so can ordinary workers across an organization. So, when a CEO 
asks for a raise while giving other employees a pay cut, 
investors should have this information so they can ask whether 
this is a value creation or simply value capture by insiders, 
especially in an environment in which incomes for the top 1 
percent have grown by more than 86 percent over the last 20 
years, while incomes for everyone else has grown by less than 7 
percent.
    As you know from my letters of support, I was pleased to 
see the SEC's proposed rule last year to implement this 
provision, which, in my view, accurately reflects the 
legislative intent that I and others intended. Can you please 
give us an update on the status of this rulemaking, and when 
does the SEC expect to finalize it?
    Ms. White. Essentially, as I think I said in my oral 
testimony, we are focused for the balance of this year in terms 
of our Dodd-Frank mandated rulemakings on Title VII and 
executive compensation. Pay ratio is one of those that has been 
proposed, but not adopted. It is certainly a priority to 
complete it this year.
    Senator Menendez. So, it is your expectation that you would 
complete it this year?
    Ms. White. It is my hope and expectation to complete it 
this year. The staff is still going through the comments, which 
were extensive, and formulating a final recommendation, but 
that is my expectation.
    Senator Menendez. OK. I hope there will be more expectation 
and less hope.
    Now, let me turn to, Chair White, this summer, the SEC 
received its record one-millionth public comment supporting a 
rule to require public issuer companies to disclose their 
political campaign spending to investors. Supporters include 
leading academics in the field of corporate governance, 
Vanguard founder John Bogle, investment managers and advisors, 
and the investing public. Without disclosure, corporate 
insiders may be spending company funds to support candidates or 
causes that are directly adverse to shareholders' interests 
without shareholders having any knowledge of it. The amounts 
being spent may be small or large, but shareholders have no way 
of knowing. And, even where the amounts are small relative to 
the overall size of the company, the impact on an election, 
and, therefore, on shareholders, can still be very large.
    If corporate political spending is material to investors, 
as the leading experts in the field and over one million 
members and the investing public believe it is, why is not the 
SEC requiring public issuer companies to disclose this 
information? Do you have any plans to engage in a rulemaking on 
this issue any time soon?
    Ms. White. As you know, we have two petitions actually 
still pending before the SEC to require such disclosure. If, in 
fact, in a particular company the political spending is 
material under the law, that would be required to be disclosed 
now. The petition is broader than that.
    Again, as, I believe, the Senator and others are aware, we 
are very focused on our mandated rulemakings under Dodd-Frank 
and the JOBS Act and the staff is currently not working on a 
proposal in that area. I do note that a number of companies 
have voluntarily made those disclosures and that subject can 
also be, and often is, a subject of a proxy proposal.
    Senator Menendez. Well, I appreciate where you said your 
focus is, but when one million--I think it is very rare that 
you get one million public comments in support of a proposal. 
And, even if you look at Justice Kennedy's majority opinion in 
Citizens United, which opened the floodgates for corporate 
election spending and that presumed that shareholders should 
have transparency--it presumed, in his opinion, that 
shareholders would have transparency in order to enforce 
accountability over executives. So, how is it that investors 
have control, have that transparency, if they cannot even get 
basic information about what is being spent?
    Ms. White. I appreciate the intense interest of investors 
and others in this issue. The comment letters, of which there 
have been many, have been on both sides. And, it is an area 
that I am quite sensitive to. It is of high interest. But, as I 
said earlier, at this point in time, it is not part of our 
current regulatory agenda. We are focused on the mandated 
rulemakings.
    Senator Menendez. Well, I appreciate that, as someone who 
was here and helped not only devise Dodd-Frank, but also 
supported it. I will just close on this comment. You know, I 
would hope that--this is true across the spectrum--that all of 
you realize that while you may ultimately deal with significant 
corporations in this country, that at the end of the day, it is 
the public who we collectively seek to serve. And, that is best 
served by transparency and openness and an opportunity to 
understand what companies are doing, whether that is CEO pay to 
worker pay, or whether that is using potentially millions of 
dollars of corporate funds to maybe the disadvantage of the 
very investors who are investing in that company.
    And, so, I hope that the hallmark of what we can expect 
from all of you, but certainly in this case where you have some 
particular unique jurisdiction, is a push toward greater 
transparency so that investors really understand what choices 
they are making and whether the company is best serving them.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman.
    Governor Tarullo, let me go back to the question that the 
Chairman asked you about capital standards relative to 
insurance companies. I fear we have kind of left you folks in a 
difficult position. This bill, as you know, has moved through 
the Senate by unanimous consent, and I thank my colleague, 
Senator Brown, for his help on this bill. So, I think, on the 
Senate side, we are in pretty good shape. It is even kind of 
rarer that things would move by unanimous consent, but this 
did.
    On the House side, it has not happened yet. We hope it 
will. In fact, my sincere desire is that that will happen very 
quickly, certainly by the end of the year, but we do not know 
if that is going to happen, and there you are. You are caught 
in this kind of limbo situation of what do you do here.
    So, let me ask you, how are you folks handling this? Is 
there a track for this law passing and a separate track for 
this law not passing and you having to cobble something 
together that, hopefully, complies with Dodd-Frank? How are you 
dealing with this in this interim period of time?
    Mr. Tarullo. Senator, you have intuited correctly. We are 
trying to think about it under both alternatives. Under one 
alternative, we would be able to take account of the different 
liability structure of core insurance kinds of activities, and 
that would allow us to shape capital requirements at the 
consolidated holding company level in a way that fully took 
account of those differences in business models.
    In the absence of the legislation, we will still be able to 
do some things, because there are insurance products that do 
not resemble existing bank products. And, so, in some cases, we 
can, and we are already planning to, assign different risk 
weights to those based upon our assessment of the actual risk 
associated with those assets. But, that is where the two-
tracking is actually taking place.
    I mentioned a little while back the quantitative impact 
study that we are doing. By getting more information from the 
insurance companies, we hope to actually find a few other areas 
where, consistent with existing statutory requirements, we 
could still make some adjustments.
    But in the end, Senator, it does all come down to core 
insurance activities and the different kind of liability risks 
that are associated with them. The assets are often the same. 
It is really on that liability side of the balance sheet that 
you feel a difference in what a property and casualty insurer 
does as opposed to what a bank does, and that is what we would 
like to be able to take into account.
    Senator Johanns. Your comments lead me to another kind of 
whole other area of inquiry that we are not going to be able to 
get too far into with the limited time, but let me just throw 
out a question, and this probably impacts other panel members, 
too. There is so much about the insurance industry that you are 
telling us you want more information on. You want--you have got 
the quantitative impact study, and there are probably some 
other areas where you are seeking additional information. And, 
yet, we have three insurance companies--Met Life, AIG, 
Prudential--who have been designated systemically risky or 
whatever. How do you do that? How do you get so far down the 
road and identify these folks as being that when, by your own 
testimony, you acknowledge that there are things about the 
insurance industry that you want more information on?
    Mr. Tarullo. So, Senator, I guess I would draw a 
distinction between the creation of capital standards for 
traditional or current insurance activities, on the one hand, 
and an assessment of systemic risk on the other. My own reading 
of the FSOC process with respect to Prudential and AIG is that 
there is not a lot of concern about the core insurance 
activities of those companies. The concerns were with respect 
to some nontraditional insurance activities where runnability 
is more of a concern, and also with respect to things that are 
not insurance activities of any sort. I think that is where the 
analysis would allow one to conclude there is systemic 
importance.
    I personally do not think that the issue of whether there 
is systemic importance in traditional insurance activities has 
really been broached, and I am personally not sure we need to 
broach it. I mean, my pretty strong presumption would be that 
there is not.
    Senator Johanns. OK. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Chair White, I sent you a letter on the SEC's waiver 
policies. I appreciate your response. We received it yesterday, 
and we will follow up with you. Thank you for that.
    Governor Tarullo, I appreciate especially your comments and 
your discussion, and Mr. Gruenberg's, with Senator Corker. I 
thought that was helpful. You say that capital surcharges to 
the largest banks could be a good deal higher than the 2.5 
percent Basel rules. An unnamed Fed official told the Wall 
Street Journal they could be as high as 4.5 percent. Not 
surprisingly, the industry tells us that those additional 
requirements would be costly, would put them at a competitive 
disadvantage. Tell the Committee why they are important for 
financial stability.
    Mr. Tarullo. Senator, I would say several things. First, as 
some of you may recall, a few years ago, when we were beginning 
this exercise on capital surcharges, we did quite a bit of 
analysis. And, while we did not think that we could come up 
with a point estimate of exactly, precisely what was an 
appropriate surcharge given the additional risks to the system 
and the impact on the system of the failure of one of these 
firms, we did come up with a range. And, in all honesty, the 
one to 2.5 percent that the Basel Committee concluded, while an 
important step forward, was at the low end of that range. And, 
I think we will feel more comfortable to be somewhat closer to 
the middle of the range of estimates of the kind of additional 
resiliency that is needed.
    The second point I would make is that a few other countries 
have already come to similar conclusions. Switzerland has on 
its own applied higher surcharges than the Basel approach calls 
for for its two large globally active institutions. Sweden and 
the Netherlands--each has one globally systemically important 
institution--they have done the same, and I think at least one 
or two other countries are thinking of it. I think we are all 
trying to come to grips with what we really need in order to 
provide more assurance that these firms do not threaten the 
financial system.
    And, the third point I would make, which I alluded to in 
the written testimony, is the whole idea of these being 
increasingly strict surcharges, higher surcharges as the 
systemic importance of the entity increases, is grounded in, 
the very sound principle embodied in Dodd-Frank that the 
stringency of these additional prudential standards should 
increase as the systemic importance of the firm increases.
    Now, why is that important? Well, it is important because 
of the potential harm to society if the firm gets in trouble. 
But, it also provides the firm with a kind of tradeoff. You 
know, if the firm really thinks that it has to be this big and 
this complicated to engage in a certain set of activities or to 
have a certain size balance sheet, then it can do so, but it 
has to have very high levels of capital. If, on the other hand, 
those highest levels of capital appear to not be worth it, then 
it has the option of changing what people have called its 
systemic footprint.
    So, I think, for all of those reasons, this is really a 
quite important step forward globally, for everybody to do 
surcharges, but, for us and some other countries to recognize 
that we need to go a little further than the minimums that have 
been provided in Basel.
    Senator Brown. Thank you, and I would note that under these 
estimates, it could take the largest banks to a 14 percent 
requirement. There is a great deal of support in this Committee 
and, I think, throughout the House and Senate on stronger 
capital standards like that.
    Comptroller Curry, thank you for your--the OCC finalizing 
rules for heightened expectations for--just because of lack of 
time, I will not ask you a question, but thank you for that. I 
think that you have taken major steps toward changing the 
culture in board rooms. I think we are obviously not there 
yet--I know you think that, too--changing the culture in terms 
of risk management and elevating risk management to a 
particularly important part of large banks' and holding 
companies' decision-making process. Thank you.
    For my final question, Chair White, at your confirmation 
hearing, I asked you about Industry Guide 3, the SEC's 
disclosure rules for bank holding companies. You responded that 
you agreed that a review of these rules, which an SEC staff 
report says have not been updated since 1986, that a review was 
warranted. When can we expect the SEC to update its Guide 3 
disclosures to help make the largest banks that have increased 
measurably and dramatically in both size and complexity in this 
three-decade time period, when can we expect you to come 
forward to make them more transparent?
    Ms. White. As part of our disclosure effectiveness review, 
the Industry Guide 3 is currently under review by the staff. 
The staff is in the process of actually preparing 
recommendations to update Guide 3, including whether to bring 
the requirements as they ultimately end up into Regulation SK. 
If we change our disclosure requirements, they would also be 
put out for notice and comment. We have opened a window in 
connection with this initiative where we have also been 
receiving some public comments on that. And, so, it is moving 
along.
    In terms of the ``when'' question, I mean, I cannot answer 
it precisely, but it is something that we are actively engaged 
on now. I actually reached out, I think, in August to Governor 
Tarullo to invite the Fed's input into that, too, because, 
obviously, of their role over bank holding companies.
    Senator Brown. Thank you. Thanks, Mr. Chairman.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    You know, we have wrestled with this right here with most 
of you for years. Capital--what is adequate capital? What is 
good capital? What is liquidity, which, I guess, goes to the 
basis of what we are talking about.
    In the insurance field, have you shared with the Committee, 
the Chairman or the Ranking Member, the methodology of how you 
designated some of these big insurance companies, like Met Life 
and Prudential and others, as systemically risky? Do you 
furnish any of the information to the Committee, or would you 
be willing to do that, because this is a topic of more than 
passing interest right now. Governor Tarullo?
    Mr. Tarullo. So, I have to confess, Senator, that I do not 
know the answer to that question. Treasury, as you know, chairs 
the FSOC----
    Senator Shelby. OK.
    Mr. Tarullo. I do not know whether any of my colleagues 
know whether there is a formal submission process to the 
Committee.
    Mr. Gruenberg. Senator----
    Senator Shelby. Chairman.
    Mr. Gruenberg. ----I do not know if there is a specific 
submission for the Committee. After a final decision is 
reached, I believe there is a public document that is released 
laying out the basis for the action in some detail, not 
disclosing proprietary information. But, I do not know that 
there has been a specific communication to the Committee apart 
from that.
    Senator Shelby. I know a lot of the people, participants 
and CEOs and board members in the insurance company, are really 
concerned, because they do not know what direction. I think 
they see the direction, but do not know what is happening next 
in the field. Is there any way you can give them some certainty 
there, or is it just a work in progress as far as you are 
concerned? You have designated, what, three big insurance 
companies? How many? As systemically risky.
    Mr. Tarullo. Oh, there have been final determinations on 
two----
    Senator Shelby. Two.
    Mr. Tarullo. ----Senator. There has been a news report on a 
third.
    Senator Shelby. News.
    Mr. Tarullo. But, that is not a complete administrative 
determination yet. The third already designated is GE Capital, 
which is not insurance.
    Senator Shelby. OK.
    Mr. Curry. Senator----
    Senator Shelby. Yes, sir.
    Mr. Curry. The FSOC has adopted procedures to outline how 
we approach our determinations. I do believe, to answer your 
question, that we could probably do a better job in explaining 
and informing affected institutions as to how that process 
works and making sure that we get the most relevant information 
possible to make our decision.
    Senator Shelby. Let me get into the surcharge a minute. 
Some of our large foreign banks that do business here, will 
they be subject to the surcharge, too, above three, what, 3 
percent or whatever, 2.5--three percent, 3.5--above Basel III? 
Governor.
    Mr. Tarullo. Senator, that is not our current intention, 
although as I mentioned a moment ago, a number of the home 
authorities of countries have already at a consolidated level 
imposed higher than Basel levels on their own institutions.
    Senator Shelby. As high as what you are doing here?
    Mr. Tarullo. I am not sure anybody would go as high, but 
that is probably because those three countries do not have 
anybody who is currently in the so-called top buckets.
    Senator Shelby. OK. Well, but do you basically believe, as 
a matter of public policy, that large foreign banks doing 
business in the U.S. should be subject to--they are--to our 
regulatory authority and also capital standards?
    Mr. Tarullo. Well, yes. That, is, of course, why we----
    Senator Shelby. That is what we did----
    Mr. Tarullo. ----adopted the intermediate holding company 
regulatory requirement and made sure that all the operations of 
the big foreign banks are brought under one umbrella and they 
are subject to capital standards, liquidity standard, and, if 
need be, resolution standards here in the U.S.
    Senator Shelby. Chairman Gruenberg, do you agree with that?
    Mr. Gruenberg. I do, Senator.
    Senator Shelby. Comptroller?
    Mr. Curry. Yes, Senator.
    Senator Shelby. OK. That is all. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    I am going to make a couple quick editorial comments before 
I get to a question, actually, for Chairman White. First of 
all, I want to follow up on what Senator Corker said. We did 
struggle through on Title I and II, and the living wills 
concept or funeral plans, it was a new idea. There were others, 
Senator Brown and others, who had a more clearly defined cap on 
too big to fail. A fair debate took place. I think that debate 
continues to be revisited. And, I would simply say that--or 
urge, again, I understand this iterative process, but we really 
need to keep a fire lit underneath this, and if at some point 
the FSOC does not act to start using some of these tools that 
were given, then I really do question whether we, as well 
intentioned as we were, whether we got it right in Title I and 
Title II in terms of ending the too big to fail.
    So, my editorial comment would be, let us speed up this 
iterative process. The fact that we are now going into many, 
many years of getting these plans right, we have got to get it 
right, but I would also like to see it come to a conclusion, 
and, I think, some evidence that some of these tools that were 
broad in grant would actually be used.
    Second, and Governor Tarullo, I was pleased to hear your 
comments at the outset. I would like to follow up with you 
both, one, on looking at the asset cap size of $50 billion may 
not be the right number. I think we need to acknowledge, again, 
that historically, Congress never gets it 100 percent right. 
You have got to come back and do fix-it bills, and I think it 
is time for a fix-it bill around Dodd-Frank.
    I also hope, echoing what Senator Crapo emphasized, that we 
tried to put in restrictions on smaller enterprises, community 
banks. One part that Senator Crapo raised which I would love to 
echo, as well, is the regulatory creep. But, we tried to be 
explicit on community banks not falling into some of the more 
burdensome regulatory requirements of Dodd-Frank. My fear is 
that while we put that in as a legislated exclusion under, I 
believe $10 billion cap, that kind of best practices creep has 
kind of come into that, and I find repeatedly from smaller 
institutions enormous additional marginal cost added. So, I 
hope you will come back with some specific suggestions there on 
how we might look at that.
    Chairman White, I cannot get in front of a public session 
without echoing once again, urging you to continue to move 
forward on JOBS Act. I sent you another letter last Friday. I 
am again looking at what is happening, or not happening, for 
that matter, around the country on equity fundraising. I still 
think it is a tool we may not, again, get 100 percent right, 
but we have got to try to use that tool, the sooner the better.
    I would like to get to a question. I have been spending 
some time looking at the excess complexity in equity trading 
that, I think, sometimes allows entrenched firms advantages 
over smaller firms. For example, Direct Edge, EDGX, as just one 
example, has a hundred different ways a share stock can be 
billed. They have 12 different tiers, seven of which pay 
customers to trade. And, for some certain select customers, the 
rebate per share fee is greater than the take fee. I know we 
have talked about maker taker and some of these areas. This is 
a level of complexity further down.
    Do you have any specific plans to address complexity in the 
marketplace? For example, would the SEC support ensuring 
transparency for market participants by providing them the 
ability to audit the fees or rebates, or even looking at 
potentially banning some of these practices? How far down the 
trail are you at looking at this issue?
    Ms. White. We have a number of initiatives, as actually 
discussed publicly in June, with respect to enhancing the 
transparency of the equity markets, and particularly on the 
fees. Also we are talking about initiatives on the conflicts of 
interest in terms of complexity of order types. I mean, that is 
of concern on a number of fronts. One of the things that I 
mentioned in that speech, and then followed up on, is to have 
the exchanges basically do an audit of all of those and report 
back to the SEC. I expect that to be completed in the fall. It 
is underway.
    We are also looking at, really, across the board a number 
of other near-term initiatives and then a broader review of the 
structural issues, as well. Our markets are very strong and 
very reliable, but that does not mean that enhancements and 
more level playing field initiatives cannot and should not be 
undertaken.
    Senator Warner. I would be very interested in continuing to 
work with you on that.
    And then, finally--and you may not get a chance to address 
it since my time is running out--I am concerned about the 
increased leverage ratios among some of the broker-dealers. My 
understanding from your own data, that firms like Barclays are 
up toward 30-to-1 on their leverage ratios. That is getting 
close to where Lehman and Bear Stearns and others were. I hope 
this is a subject of some concerns----
    Ms. White. Yes, and I probably should get back to you in 
the interest of time, but certainly, that is an area that is 
monitored by us, and FINRA, as well. We can talk about what our 
net capital rule does, as well as some initiatives we have to 
enhance some of our financial responsibility oversight of 
broker-dealers, including a possible rulemaking on leverage.
    Senator Warner. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you, Mr. Chairman.
    Thank you for this excellent testimony. We have all been 
sort of thinking back to some of the challenges of Dodd-Frank. 
One of the challenges on derivatives was to have a regime which 
would be able to be effective, given that there were two 
different agencies that had jurisdiction over derivatives, 
dictated more by history than logic. And, my understanding--
and, what we did is we insisted upon some joint rulemaking in 
critical areas, and I understand that this joint rulemaking has 
been completed. Is that the case, Chair White, Chairman Massad?
    Mr. Massad. Yes, that is generally true, and I would just 
say on the point of making sure that we work together well, I 
think that is certainly a priority of mine. I believe Chair 
White shares that feeling, and we have been in touch on a 
number of issues already and our staffs are working together.
    Senator Reed. Well, let me commend you on that, because as 
you understood--as we understood--trying to sort out the lines 
and create different agencies, to do different things--what we 
tried to do is basically take the existing structure and make 
it cooperate and work more congruently, for want of a better 
term.
    But, let me shift to the SEC. Throughout the course of the 
testimony, you have pointed out the huge issues that you still 
have to face. My calculation is roughly 18 rules left the SEC 
has to complete with respect to the swaps, including 
securities-based swaps, execution facilities, rules governing 
registered security-based swap repositories, to rules regarding 
conflict of interest. And, you have pointed out that you are 
prioritizing Dodd-Frank rules. Can you give us the assurance 
that these derivatives rules are at the very top of your list 
to get done very quickly?
    Ms. White. I can assure you of that. We have a number to 
complete, as you have pointed out. It is a very high priority 
of mine to get them done as quickly as we can, but also as well 
as we can. And, one of the areas which you also touched on is 
making sure that they are workable for this global market as 
well as strong and robust, working not only with Chairman 
Massad on these--I have the benefit of his rulemaking in a 
number of those areas--but also our international counterparts. 
But, totally committed to getting them done.
    Senator Reed. And, Chairman Massad made the point that the 
resources are getting pretty thin. Is that the same case in the 
SEC, Madam Chair?
    Ms. White. It is absolutely the case, Senator.
    Senator Reed. So, we can talk the talk here about how you 
have got to get things done, how it is important and so 
critical, et cetera, but if we do not--the Congress--provide 
you the resources, you cannot get it done.
    Ms. White. I very much appreciate that. And also, I think 
we all have to be focused on, the fact that once these rules 
are finished, we have to implement them and enforce them, and 
that takes resources.
    Senator Reed. Thank you. Let me just quickly shift gears 
because we have been talking about what is already on the table 
that you have to get done. Some of my colleagues have suggested 
other things that you should be interested in. One of the 
issues, really, is cybersecurity, Madam Chair. You have public 
companies that have been reporting significant problems, which 
leads me to believe that they are not alone and that the SEC 
has to start thinking seriously about routine disclosure for 
two reasons.
    One is the investing public should know very quickly that 
there is something amiss, but also it is like that old line in 
the Army. What people inspect and evaluate, they tend to do 
more of, and I think this would be an action-forcing device for 
companies now that either feel they are free riders or they are 
too small, et cetera, to really begin to think and take 
seriously their responsibilities to their shareholders, 
ultimately, in this area. Are you thinking along these lines?
    Ms. White. Certainly, in terms of the priority of cyber- 
and the long-term risk it is to not only investors, but the 
country. No question about that. As you know, Senator, we 
issued guidance, disclosure guidance, in 2011. We also, in our 
Division of Corporation Finance, continued to review the 
filings of the companies under that guidance and get comments 
on that. I have recently also formed an interdivisional cyber 
working group within the SEC to bring all of the expertise and 
information together, and that is one of the things that we 
will look at, among others. I mean, we also, obviously, have 
cyber responsibilities for our registrants----
    Senator Reed. Right----
    Ms. White. ----systems and so forth.
    Senator Reed. You are moving fast. I suggest we all have to 
move faster.
    Chairman Cordray, thank you for extraordinary work, 
particularly with the Military Lending Act. Can you explain why 
it is important to finalize some of the rules that are pending, 
and update the rules to protect these servicemen and women.
    Mr. Cordray. I think it is obvious on its face, and 
Congress, of course, intervened very helpfully about a year and 
a half ago to require a review and revision of the rules that 
did not implement that law as intended by Congress. The 
statute, as you know, indicated that the CFPB was to consult 
with the Department of Defense. We have worked closely with 
them, and organized a larger group that included colleagues 
from the other agencies. Department of Treasury took a lead 
role. These rules are well along. They are at OMB at this 
point, and my understanding is that they are now moving. I 
think that your efforts to prod that along have been helpful, 
fruitful, and I believe that we will see action very quickly at 
this point, and I am pleased to be able to say that.
    Senator Reed. Well, thank you very much, Mr. Chairman. I 
had the opportunity to mention that to Secretary of Defense 
Hagel, who gets it from the E5 level, which he was in Vietnam, 
to the SECDEF level, and we talked, again, a lot about what we 
owe to our servicemen and women. We certainly owe, as a 
minimum, fair dealing in the marketplace.
    Mr. Cordray. Thank you for that, and I think this will go a 
long way to getting us where we should be.
    Senator Reed. Thank you, Mr. Chairman. Thank you.
    Chairman Johnson. Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman, and I thank all 
of you for being here today.
    I would like to first say that my little State of West 
Virginia depends an awful lot on community banks, so I am going 
to be talking about cybersecurity here and the need for reform 
with cybersecurity. We just learned about Home Depot's data 
breach, which might be the largest retailer breach and is just 
on the heels of the Target breach.
    According to one report, U.S. banks had to reissue 8 
percent of all debit cards and 4 percent of all credit cards, 
on average. For small community banks, reissuing those cards 
cost just over $11 per debit card and $12.75 per credit card, 
including production, mailing, and staff time. That is what the 
report said. This is not simply a drop in the bucket for these 
community banks, as I am sure you all know. These hacks could 
prove the difference between being in the black and bleeding 
red for the bottom lines and make all of them very vulnerable.
    So, even if your agency is not directly responsible--which 
I know it is not--for cybersecurity, it has an effect on the 
banks you regulate. What is your opinion about the need for the 
reform and how it is affecting the financial markets today? Mr. 
Tarullo, I will start with you, over at that end.
    Mr. Tarullo. Senator, you are raising an issue that we have 
discussed in this Committee--I think, somewhat ironically, the 
last hearing was right after the Target breach, I believe. And, 
I think, again, you have just noted that even though there is 
work to do in the banking sector--and there surely is, and I 
think Tom, in a moment, will probably explain some of what we 
have been trying to do together in the FFIEC. I do think, for 
all of us as bank regulators, when we see the asymmetry in the 
requirements of nonbank companies, or the absence of 
requirements for nonbank companies to take measures to protect 
personal information, it is frustrating, particularly for the 
smaller banks, but to be honest, for banks of all sizes, and I 
think we feel, to some degree, we have all got one hand tied 
behind our back.
    So, among the many other things that need to be done in 
this area one is to get a set of expectations as to what 
nonfinancial companies that are not subject to the regulation 
of those of us sitting at this table are expected to do in 
protecting the very same kinds of information that our 
institutions hold.
    Senator Manchin. I think what I am trying to get to is the 
cost that, basically, small community banks are incurring, 
especially in States such as West Virginia, that depends on 
them, basically, for our banking community, if you will. And, 
you add anything else to that from Dodd-Frank that trickles 
down to the community banks, you are just adding more on their 
vulnerability. So, if you would like to----
    Mr. Curry. Yes. I would like to add, as Governor Tarullo 
mentioned, this has been an issue that we are coordinating 
through the FFIEC in terms of making sure that community banks, 
in particular, are appropriately responding to cyberthreats, 
and we see this as actually a much larger issue----
    Senator Manchin. Sure.
    Mr. Curry. ----than just the financial costs of reissuing 
cards, because it really goes to the trust between a customer 
and the security of their deposit or other banking 
relationship.
    But, as Governor Tarullo mentioned, it is really an issue 
of leveling the playing field in terms of the regulatory 
requirements between banks and nonbanks, and in this case, 
retailers. Banks really have, clearly, longstanding over a 
decade, expectations in terms of maintaining the security of 
account information, including electronic access to it. We 
actually assess, as part of our regulatory function, their 
capabilities from an IT standpoint. And, we have clear rules on 
customer notification and notification to law enforcement and 
regulatory authorities. I think it is important that Governor 
Tarullo mentioned, that similar requirements need to be in 
place for the nonbank participants in our payment system.
    Senator Manchin. OK. Thank you. If I could--I have one more 
question, sir, and I am so sorry, but I wanted to get to Ms. 
White.
    Chairman White, the Wall Street Journal recently reported 
that two firms are working to create a fund for Bitcoin to 
allow investors to speculate on Bitcoin's worth. As you know, I 
wrote a letter describing my concern that the regulators have 
not yet issued rules on Bitcoin. And, this is especially 
troubling since Bitcoin is wildly speculative, as you know, and 
is especially subject to electronic theft and scams.
    I know your agency is taking a particularly long period of 
time to approve a Bitcoin exchange traded fund and I would 
applaud your caution. However, I want to convey my concern with 
this virtual currency again and hope that the other regulators 
will help you to fill in the gaps so that you can protect all 
of our American consumers. So, if you can just give me a quick 
update--I know my time is running out here--on----
    Ms. White. I will be quick. Basically, this is an evolving 
area for all the regulators----
    Senator Manchin. Yes.
    Ms. White. ----as you know. We have taken enforcement 
actions, actually, in Bitcoin-involved Ponzi schemes some time 
ago. We have issued, I think, two separate investor alerts, and 
as you mentioned, we are also reviewing a filing very 
carefully----
    Senator Manchin. Yes.
    Ms. White. ----that is key to Bitcoin. At this point, there 
is not a conclusion by our staff that the currency itself is a 
security, so there is not that kind of regulation that flows at 
this point, but we continue to look at it very, very carefully 
and work with our fellow regulators on it, as well.
    Senator Manchin. Do you think you will be having a rule----
    Ms. White. Well, I think, at this stage, there is not a 
planned rulemaking. As I say, at this stage, we have not 
concluded that it is a security that would be subject to that 
kind of regulation by us. But, it is something we are still 
very focused on.
    Senator Manchin. Thank you.
    Chairman Johnson. Senator Heitkamp.
    Senator Heitkamp. Mr. Chairman, first, let me thank my good 
friend, Senator Warren from Massachusetts, for letting me bump 
in line. I have to go preside at noon.
    But, I want to make the point, in case you guys have not 
figured that out from my letters and my discussions with you, I 
really care about small community banks. They are the 
lifeblood, the capital lifeblood for the many, many people in 
the great State of North Dakota. I know we consistently talk 
about the need for reform, the need for look-back, the need to 
have a very directed discussion about the regulatory 
responsibilities and how that is affecting community banks.
    I would like to be able to go back to my independent 
community banks and tell them when there is going to be 
regulatory relief enacted, and I know there is always a lot of 
swirl and a lot of talk, but I share Senator Crapo's 
discussion, and so I am curious about timeframe, because they 
are making decisions today. And, what started out to be too big 
to fail has become for many of these community banks too small 
to succeed. They are moving out of lending in certain areas as 
a result of what they perceive to be massive regulatory burden.
    And, so, if we are going to stem the tide of dissolution of 
that portion of their business because of compliance burdens, 
we need to offer a timeframe, and so I am curious to anyone who 
can tell me when we will actually get an answer to small 
community banks on regulatory relief.
    Mr. Curry. Senator, from an FFIEC perspective, where we are 
coordinating the Federal banking agencies' EGRPRA process, that 
is already underway. We have put out for comment a series of 
rules and regulations. That comment period closed. There will 
be two more. So, we are programmatically reviewing the 
regulations that are under our authority to make those 
judgments that you are asking us to do to recommend or to 
eliminate those rules and regulations under our control.
    An important part of this process, as I mentioned earlier, 
we are going to have direct input from community bankers. We 
have asked them to identify those areas where they are most 
pressing in need of a change and how we can go about doing 
that.
    Senator Heitkamp. That does not answer the question about 
time. Maybe----
    Mr. Curry. The statute requires a fairly lengthy review 
process, but we intend to do it as quickly as possible and to 
have either action taken under our own independent rulemaking 
or to make recommendations to Congress.
    Senator Heitkamp. Mr. Tarullo.
    Mr. Tarullo. Senator, I would just comment. Sometimes, 
people, when they talk about regulatory burden, they lump 
together two sets of things. One is actual legislative or 
regulatory requirements, called the Federal Register type 
requirements.
    The second thing, which Senator Manchin and maybe Senator 
Warner, several of you have referred to already today, is the--
somebody called it, quite aptly, the trickle down effect of 
supervisory practices, and we do not have to wait for a formal 
process to do something about that. I think Tom met with the 
same group yesterday of small bankers. They were a very good 
group, and the reason I thought they were a particularly good 
group is they came in with specifics. They came in with 
specifics and they said, look, here is a way in which some 
articulated supervisory expectation is, we think, not 
appropriate for us, creating a problem for us, and we think it 
is trickling down. In some cases, I think they were right. It 
was good for our staff to be there to hear it, as we have done 
with groups of small community bankers in the past. We got a 
list of action items to follow up on.
    So, although the EGRPRA process is kind of formalized, I 
think--and I suspect the same thing is going on at the OCC and 
the FDIC--that we can be constantly in a process of trying to 
change current practices, and, you know, if you do it even at 
the request of a small number of smaller banks, the benefits of 
that can proliferate.
    I do think, in the end, we have this problem of we have got 
thousands of examiners and it is hard to get them all 
coordinated without bringing all the decisions to Washington, 
which none of us wants to do.
    Senator Heitkamp. And, I am running out of time. I have a 
couple more questions I will submit for the record, with the 
agreement of the Chairman.
    But, just back to this, there is nothing like certainty. I 
mean, there can be promises that this is how supervise--you 
know, what is going to happen in a bank audit, and do not worry 
about this, but they will worry about it, and they will worry 
about compliance burdens because the cost of not being in 
compliance is so high that just the risk will cause those banks 
to retreat from the market. And, I do not think that is in the 
best interest of this country, and it certainly is not in the 
best interest of my State.
    And, so, thank you for elevating this to one of your top 
concerns. I understand all of the great burdens that you all 
have in making sure that we do not have systemic failure, but, 
again, what was too big to fail has become too small to succeed 
and we need to fix that problem.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    In the past year, the three largest banks in this country--
JPMorgan Chase, Citigroup, and Bank of America--have admitted 
to breaking the law and have settled with the Government for a 
combined $35 billion. Now, as Judge Rakoff of the Southern 
District of New York has noted, the law on this is clear. No 
corporation can break the law unless an individual within that 
corporation broke the law. Yet, despite the misconduct at these 
banks that generated tens of billions of dollars in settlement 
payments by the companies, not a single senior executive at 
these banks has been criminally prosecuted.
    Now, I know that your agencies cannot bring prosecutions 
directly, but you are supposed to refer cases to the Justice 
Department when you think individuals should be prosecuted. So, 
can you tell me how many senior executives at these three banks 
you have referred to the Justice Department for prosecution?
    Mr. Tarullo. Well, Senator, I do not know the answer to 
that question, but I want to pick up on something you just 
said, because I think it is actually quite important, that 
although failures of the sort that have resulted in these big 
fines, criminal and civil, almost always result from problems 
in organizations, because there are many ways to catch these--
--
    Senator Warren. Governor Tarullo----
    Mr. Tarullo. Hold on, Senator, if I could. There often are 
individuals who can clearly be identified as responsible, and 
although, as you know, we do not have criminal prosecutorial 
power, what we do have is the power to insist that firms either 
discharge current employees who have been implicated in this, 
even if they have not been criminally prosecuted--which we have 
done in the past couple of cases--or, as we are doing now, 
conducting investigations under the authorities that are 
already in the law that would allow us to ban these people from 
working for----
    Senator Warren. So, I take it what you are saying, Governor 
Tarullo, is that you do not know of any criminal prosecutions 
in these three banks that the Fed has recommended.
    Mr. Tarullo. Well, we have----
    Senator Warren. You have investigated enough to know that--
--
    Mr. Tarullo. We shared all----
    Senator Warren. ----that these banks are responsible. They 
have given--they have admitted to wrongdoing. They have signed 
up for $35 billion in a settlement. And no one has been 
referred?
    Mr. Tarullo. Well, Senator, we have shared all the 
information that the Department of Justice needed, and I think 
the Justice Department has probably made its own assessment on 
both sets of criminal and civil----
    Senator Warren. So, you are saying you have referred people 
for criminal prosecution?
    Mr. Tarullo. No. We have provided information to----
    Senator Warren. But, you have not actually referred someone 
for criminal prosecution. You know, I just----
    Mr. Tarullo. Well, we----
    Senator Warren. I want to be clear about the contrast here. 
After the savings and loan crisis in the 1970s and the 1980s, 
the Government brought over a thousand criminal prosecutions 
and got over 800 convictions. The FBI opened nearly 5,500 
criminal investigations because of referrals from banking 
investigators and regulators.
    So, if we did not even limit it to these three banks, how 
many prosecutions have you all regulated [sic]? What we have to 
remember here is the main reason that we punish illegal 
behavior is for deterrence, you know, to make sure that the 
next banker who is thinking about breaking the law remembers 
that a guy down the hall was hauled out of here in handcuffs 
when he did that. These civil settlements do not provide 
deterrence. The shareholders for the companies pay the 
settlement. Senior management does not pay a dime.
    And, in fact, if you are like Jamie Dimon, the CEO of 
JPMorgan Chase, you might even get an $8.5 million raise for 
the settlement of negotiating such a great settlement when your 
company breaks the law. So, without criminal prosecutions, the 
message to every Wall Street banker is loud and clear. If you 
break the law, you are not going to jail, but you might end up 
with a much bigger paycheck.
    So, no one should be above the law. If you steal a hundred 
bucks on Main Street, you are probably going to jail. If you 
steal a billion bucks on Wall Street, you darn well better go 
to jail, too.
    So, I have another question I want to ask about, and that 
is about living wills, that is, the plans that big banks are 
supposed to submit now so that if they start to fail, they 
could be liquidated without bringing down the economy or 
needing a taxpayer bailout. Last month, the FDIC and the Fed, 
as we talked about earlier, sent letters to 11 of the country's 
biggest banks, telling them that their living wills did not cut 
it. You said that if these banks failed, either they would need 
a Government bailout or they would bring down the economy. 
These letters confirmed quite literally that 6 years after the 
financial crisis, all of our biggest banks remain too big to 
fail.
    Now, in your joint statement, you said--and I want to get 
this right--that by next July, the 11 banks must demonstrate, 
quote, ``significant progress to address all the shortcomings 
identified in the letter,'' and if the banks do not address 
significant progress, you told Senator Corker earlier in this 
hearing, you have tools to force the banks to make changes, and 
I just want to underline that means higher capital standards, 
higher liquidity standards, restrict bank growth, limit bank 
operations. But, these actions take place only if there is not 
significant progress on the part of the banks.
    So, I just would like the two of you, FDIC and the Fed, 
just to speak briefly to the question--because I realize I am 
out of time here, Mr. Chairman--what constitutes 
``significant'' in this case? What is it you want to see the 
too big to fail banks do, and if they do not do it, the action 
you are going to take? Chairman Gruenberg, maybe we could start 
with you, and then Governor Tarullo.
    Mr. Gruenberg. Senator, we laid out in these letters a 
pretty specific set of markers for the institutions to meet 
that goes to some of the key obstacles to orderly resolution of 
these firms. We directed them in the letters to simplify their 
legal structures so that they put their business lines in line 
with their legal entity so that in resolution, you can sort the 
firm out and figure out how to manage the failure.
    A critical issue is their derivatives contracts. Those 
contracts provide for automatic termination in the event at the 
beginning of an insolvency proceeding. Those contracts need to 
be changed in order to avoid the contagion consequences that we 
saw in 2008 from a disorderly termination of those contracts. 
We direct in the letters the firms to change those contracts.
    Critical operations--a firm has got to be able, during the 
course of a resolution process, to maintain its IT and other 
critical operations so the whole operation does not fall apart. 
You may have an IT operation in a foreign jurisdiction that 
could get taken out or not made available as a result of 
problems by the institution. The institution has to develop 
back-up capabilities to sustain its critical operations. 
Otherwise, the public ends up having to pick up the slack.
    Information--the institutions have to be able to produce 
critical, timely information that is essential to managing a 
resolution process. The firms right now do not have that 
capability.
    These are specific, measurable actions that we have 
directed the firms to take, and we are going to be looking for 
these firms to take specific, measurable actions to address 
these. And, they have got a year now. They are on notice. We 
are going to be working closely with these firms so there is 
clarity of guidance, and we are going to be expecting action, 
and that is really the whole purpose of this effort.
    Senator Warren. Thank you, Chairman.
    Mr. Tarullo. If I could just underscore that last point 
that Marty made, Senator. None of us wants to be in the 
situation where, next July or August, there is this issue of, 
well, we made this progress. Is this significant or is this not 
significant?
    Senator Warren. Right.
    Mr. Tarullo. And, so, what Marty just alluded to is the 
point I was going to make and I will now underscore, that we 
have our supervisors from the Fed and the FDIC in the 
institutions right now and this will be a process of what are 
you going to do about this and wanting to hear in very tangible 
terms what it is they are doing. And, I know at the Fed, I 
suspect at the FDIC, the boards will be regularly briefed on 
this so that we will be in a position to be giving indications 
that this is what we expected or you guys are already falling 
short, because I think what lay behind your question was the 
concern that, next July, we get into this palaver of whether 
progress has been significant or not.
    Senator Warren. So, we are not going to be back here a year 
from now having this same conversation again. You are prepared 
to demand that they take these measurable steps, and if they 
fail to do so, you are going to use your tools to take them for 
them----
    Mr. Tarullo. Correct.
    Senator Warren. ----is that right? Good. Thank you.
    Thank you for your indulgence, Mr. Chairman.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    I want to follow up on Senator Warren's observations 
regarding the Justice Department and criminal activity in 
financial institutions or whatever. I realize that you are 
regulators. You are not prosecutors. But, if there is $35 
billion, more or less, in fines or settlements because of 
criminal conduct, and there is no justice--justice is important 
for the big and the well-being and also small--something is 
wrong with the Justice Department. People should not be able, 
whoever they are, not just financial institutions, should be 
able to buy their way out of culpability, especially when it is 
so strong, it defies rationality. You know, I agree with her on 
that.
    But, I think, Senator Warren, that it goes to the Justice 
Department, because I am not defending my regulators, because I 
call them to task at times, but they can make recommendations, 
they can send things over, but, ultimately, it seems like the 
Justice Department seems bent on money rather than justice, you 
know, and that is a mistake and the American people pick up on 
that.
    Having said that, Governor, I want to get back on the 
insurance regulation, if I could. Have you or others, have you 
consulted with any of the State regulators in making the SIFI 
designations for the insurers, and if you have, what did they 
say? For years, we all know this, the States have regulated 
insurance. We know the story of AIG. We have hashed it out here 
many times. But, AIG was not running an insurance company. They 
had visions. But, they got out of their basic stuff and it 
caused them great harm, as we all know, and caused headaches 
right here in this Committee and with you guys.
    But, Met Life and Prudential, to my knowledge, they have 
not been involved in credit default swaps and everything, other 
than managing their own risk. I do not know. You might have a 
better feel for this. But, have you consulted or dealt, had a 
dialog with some of the State regulators before you make these 
designations, and if you have, what have they said, and if you 
have not, why have you not?
    Mr. Tarullo. I would say first, Senator, as I am sure you 
know, that on the FSOC, there is a slot reserved for a 
representative of the National Association of Insurance 
Commissioners----
    Senator Shelby. I know. We know.
    Mr. Tarullo. ----and there is also, by statute, the 
independent insurance person, who also brings to bear expertise 
and experience----
    Senator Shelby. Sure.
    Mr. Tarullo. ----and they, obviously, have both been fully 
involved. I certainly would be a little reluctant to speak for 
them here, but they are fully involved and other commissioners 
in the NAIC have been, as well.
    Senator Shelby. Is this--you know, the States have 
regulated these insurance companies for years, and this is new 
for the Federal Government and for you. Is this the beginning 
of a preemption of the Federal over the State in the regulation 
of insurance? Some people would argue that.
    Mr. Tarullo. Yes. Certainly not from the Fed's point of 
view.
    Senator Shelby. Uh-huh.
    Mr. Tarullo. There are two ways that we get supervision of 
entities that are either owned by or include insurance firms. 
One, if the entity also owns a depository institution, because 
that is when the Holding Company Act requirements come in.
    Senator Shelby. Uh-huh.
    Mr. Tarullo. Or, two, if they are designated by the FSOC. 
When they are designated by the FSOC, it is because of their 
systemic importance, and our supervision and oversight and 
regulation of those institutions is directed toward the 
containment of systemic risk, not their insurance business. As 
I said earlier, I, at least, do not regard generally 
traditional insurance activities as posing systemic risk.
    It is the nontraditional, the more runnable things, the new 
things where we see similarities that are more toward contagion 
and runnable assets and the like, the sort of thing that we are 
regulating in the banking arena, but we do not want to be in 
the business of regulating insurance companies the way State 
insurance commissioners do, which is trying to preserve the 
franchise for the benefit of the policy holders. Our purpose is 
a different one, which is assuring on a consolidated basis the 
safety and soundness of a----
    Senator Shelby. Sure.
    Mr. Tarullo. ----large financial institution.
    Senator Shelby. Let me ask you a question, if I could----
    Chairman Johnson. One more question.
    Senator Shelby. I have to ask a long question, then----
    [Laughter.]
    Senator Shelby. Would a big insurance company--we will just 
use Met Life or Prudential or anybody--that was managing their 
own risk through derivatives and so forth, would they be 
considered, for the most part, an end user?
    Mr. Massad. Well, generally, our consideration of end users 
applies to companies that are not primarily financial in 
nature.
    Senator Shelby. Uh-huh, like steel and all this?
    Mr. Massad. Exactly. Exactly.
    Senator Shelby. Hard commodities.
    Mr. Massad. So, large insurance companies who have a lot of 
swap activity, we would not consider----
    Senator Shelby. OK.
    Mr. Massad. ----as end users.
    Senator Shelby. Thank you. Thank you, Mr. Chairman.
    Chairman Johnson. I want to thank today's witnesses, again, 
for their testimony.
    This hearing is adjourned.
    [Whereupon, at 12:10 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
                PREPARED STATEMENT OF DANIEL K. TARULLO
       Governor, Board of Governors of the Federal Reserve System
                           September 9, 2014
    Chairman Johnson, Ranking Member Crapo, and other Members of the 
Committee, thank you for the opportunity to testify on the Federal 
Reserve's activities in mitigating systemic risk and implementing the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act). In testifying before this Committee in February, I noted my hope 
and expectation that this year would be the beginning of the end of our 
implementation of the major provisions of the Dodd-Frank Act. Seven 
months later, we are on track to fulfill that expectation. The Federal 
Reserve and other banking supervisors have continued to make progress 
in implementing the congressional mandates in the Dodd-Frank Act, 
promoting a stable financial system, and strengthening the resilience 
of banking organizations. In today's testimony, I will provide an 
update on the Federal Reserve's implementation of the Dodd-Frank Act 
and describe key upcoming regulatory and supervisory priorities to 
address the problems of ``too big to fail'' and systemic risk. The 
Federal Reserve is committed to continuing to work with our fellow 
banking agencies and with the market regulators to help ensure that the 
organizations we supervise operate in a safe and sound manner and are 
able to support activity in other sectors of the economy.
    As we complete our revisions to the financial regulatory 
architecture, we are cognizant that regulatory compliance can impose a 
disproportionate burden on smaller financial institutions. In addition 
to overseeing large banking firms, the Federal Reserve supervises 
approximately 800 State-chartered community banks that are members of 
the Federal Reserve System, as well as several thousand small bank 
holding companies. In my testimony, I also will describe how the 
Federal Reserve is seeking to ensure that its regulations and 
supervisory framework are not unnecessarily burdensome for community 
banking organizations so they can continue their important function of 
safe and sound lending to local communities.
Recent Dodd-Frank Act Implementation Milestones
    Since the passage of the Dodd-Frank Act more than 4 years ago, the 
Federal Reserve and the other agencies represented at this hearing have 
completed wide-ranging financial regulatory reforms that have remade 
the regulatory landscape for financial firms and markets. 
Internationally, at the Basel Committee on Banking Supervision (BCBS), 
we have helped develop new standards for global banks on risk-based 
capital, leverage, liquidity, single-counterparty credit limits, and 
margin requirements for over-the-counter derivatives. We have also 
worked with the Financial Stability Board (FSB) to reach global 
agreements on resolution regimes for systemic financial firms and on a 
set of shadow banking regulatory reforms.
    Domestically, we have completed many important measures. We 
approved final rules implementing the Basel III capital framework, 
which help ensure that U.S. banking organizations maintain strong 
capital positions and are able to continue lending to creditworthy 
households and businesses even during economic downturns. We 
implemented the Dodd-Frank Act's stress testing requirements, which are 
complemented by the Federal Reserve's annual Comprehensive Capital 
Analysis and Review. Together, these supervisory exercises provide a 
forward-looking assessment of the capital adequacy of the largest U.S. 
banking firms. Pursuant to section 165 of the Dodd-Frank Act, we 
established a set of enhanced standards for large U.S. banking 
organizations to help increase the resiliency of their operations and 
thus promote financial stability. In addition, the Federal Reserve 
implemented a rule requiring foreign banking organizations with a 
significant U.S. presence to establish U.S. intermediate holding 
companies over their U.S. subsidiaries and subjecting such companies to 
substantially the same prudential standards applicable to U.S. bank 
holding companies. We finalized the Volcker rule to implement section 
619 of the Dodd-Frank Act and prohibit banking organizations from 
engaging in short-term proprietary trading of certain securities and 
derivatives. These and other measures have already created a financial 
regulatory architecture that is much stronger and much more focused on 
financial stability than the framework in existence at the advent of 
the financial crisis.
    More recently, the Federal Reserve, often in tandem with some or 
all of the other agencies represented at this hearing, has made 
progress on a number of other important regulatory reforms. I will 
discuss those steps in more detail.
Liquidity Rules for Large Banking Firms
    Last week, the Federal Reserve and the other U.S. banking agencies 
approved a final rule, consistent with the enhanced prudential 
standards requirements in section 165 of the Dodd-Frank Act, which 
implements the first broadly applicable quantitative liquidity 
requirement for U.S. banking firms. Liquidity standards for large U.S. 
banking firms are a key contributor to financial stability, as they 
work in concert with capital standards, stress testing, and other 
enhanced prudential standards to help ensure that large banking firms 
manage liquidity in a manner that mitigates the risk of creditor and 
counterparty runs.
    The rule's liquidity coverage ratio, or LCR, requires covered 
banking firms to hold minimum amounts of high-quality liquid assets--
such as central bank reserves and high-quality Government and corporate 
debt--that can be converted quickly and easily into cash sufficient to 
meet expected net cash outflows over a short-term stress period. The 
LCR applies to bank holding companies and savings and loan holding 
companies with $250 billion or more in total consolidated assets or $10 
billion or more in on-balance-sheet foreign exposures. The rule also 
applies a less stringent, modified LCR to bank holding companies and 
savings and loan holding companies that are below these thresholds but 
with more than $50 billion in total assets. The rule does not apply to 
bank holding companies or savings and loan holding companies with less 
than $50 billion in total assets, nor to nonbank financial companies 
designated by the Financial Stability Oversight Council (FSOC). The 
Federal Reserve will apply enhanced liquidity standards to designated 
nonbank financial companies through a subsequently issued order or rule 
following an evaluation of each of their business models, capital 
structures, and risk profiles.
    The rule's LCR is based on a liquidity standard agreed to by the 
BCBS but is more stringent than the BCBS standard in several areas, 
including the range of assets that qualify as high-quality liquid 
assets and the assumed rate of outflows for certain kinds of funding. 
In addition, the rule's transition period is shorter than that in the 
BCBS standard. The accelerated phase-in of the U.S. LCR reflects our 
objective that large U.S. banking firms maintain the improved liquidity 
positions they have already built following the financial crisis, in 
part because of our supervisory oversight. We believe the LCR will help 
ensure that these improved liquidity positions will not weaken as 
memories of the financial crisis fade.
    The final rule is largely identical to the proposed rule, with a 
few key adjustments made in response to comments from the public. Those 
adjustments include changing the scope of corporate debt securities and 
publicly traded equities qualifying as high-quality liquid assets, 
phasing in reporting requirements, and modifying the stress period and 
reporting frequency for firms subject to the modified LCR.
Swap Margin Reproposal
    Sections 731 and 764 of the Dodd-Frank Act require the 
establishment of initial and variation margin requirements for swap 
dealers and major swap participants (swap entities) on swaps that are 
not centrally cleared. These requirements are intended to ensure that 
the counterparty risks inherent in swaps are prudently limited and not 
allowed to build to unsustainable levels that could pose risks to the 
financial system. In addition, requiring all uncleared swaps to be 
subject to robust margin requirements will remove economic incentives 
for market participants to shift activity away from contracts that are 
centrally cleared.
    The Federal Reserve and four other U.S. agencies originally issued 
a proposed rule to implement these provisions of the Dodd-Frank Act in 
April 2011. Following the release of the original proposal, the BCBS 
and the International Organization of Securities Commissions began 
working to establish a consistent global framework for imposing margin 
requirements on uncleared swaps. This global framework was finalized 
last September. After considering the comments that were received on 
the April 2011 U.S. proposal and the recently established global 
standards, the agencies issued a reproposal last week. Under the 
reproposal, swap entities would be required to collect and post initial 
and variation margin on uncleared swaps with another swap entity and 
other financial end-user counterparties. The requirements are intended 
to result in higher initial margin requirements than would be required 
for cleared swaps, which is meant to reflect the more complex and less 
liquid nature of uncleared swaps.
    In accordance with the statutory requirement to establish margin 
requirements regardless of counterparty type, the reproposal would 
require swap entities to collect and post margin in connection with any 
uncleared swaps they have with nonfinancial end users. These 
requirements, however, are quantitatively and qualitatively different 
from the margin requirements for swaps with financial end users. 
Specifically, swaps with nonfinancial end users would not be subject to 
specific, numerical margin requirements but would only be subject to 
initial and variation margin requirements at such times, in such forms, 
and in such amounts, if any, that the swap entity determines is 
necessary to address the credit risk posed by the counterparty and the 
transaction. There are currently cases where a swap entity does not 
collect initial or variation margin from nonfinancial end users because 
it has determined that margin is not needed to address the credit risk 
posed by the counterparty or the transaction. In such cases, the 
reproposal would not require a change in current practice. The agencies 
believe that these requirements are consistent with the Dodd-Frank Act 
and appropriately reflect the low level of risk presented by most 
nonfinancial end users.
    The agencies in the reproposal have taken several steps to help 
mitigate any impact to the liquidity of the financial system that could 
result from the swap margin requirements. These steps include 
incorporating an initial margin requirement threshold below which 
exchanges of initial margin are not required, allowing for a wider 
range of assets to serve as eligible collateral, and providing smaller 
swap entities with an extended timeline to come into compliance. We 
look forward to receiving comments on the reproposal.
Modifications to the Supplementary Leverage Ratio and Adoption of the 
        Enhanced Supplementary Leverage Ratio
    Also last week, the Federal Reserve and the other U.S. banking 
agencies approved a final rule that modifies the denominator 
calculation of the supplementary leverage ratio in a manner consistent 
with the changes agreed to earlier this year by the BCBS. The revised 
supplementary leverage ratio will apply to all banking organizations 
subject to the advanced approaches risk-based capital rule starting in 
2018. These modifications to the supplementary leverage ratio will 
result in a more appropriately measured set of leverage capital 
requirements and, in the aggregate, are expected to modestly increase 
the stringency of these requirements across the covered banking 
organizations.
    This rule complements the agencies' adoption in April of a rule 
that strengthens the internationally agreed-upon Basel III leverage 
ratio as applied to U.S.-based global systemically important banks (G-
SIBs). This enhanced supplementary leverage ratio, which will be 
effective in January 2018, requires U.S. G-SIBs to maintain a tier 1 
capital buffer of at least 2 percent above the minimum Basel III 
supplementary leverage ratio of 3 percent, for a total of 5 percent, to 
avoid restrictions on capital distributions and discretionary bonus 
payments. In light of the significantly higher risk-based capital rules 
for G-SIBs under Basel III, imposing a stricter leverage requirement on 
these firms is appropriate to help ensure that the leverage ratio 
remains a relevant backstop for these firms.
Key Regulatory Priorities
    As we near the completion of the implementation of the major 
provisions of the Dodd-Frank Act, some key regulatory reforms remain 
unfinished. To that end, the Federal Reserve contemplates near- to 
medium-term measures to enhance the resiliency and resolvability of 
U.S. G-SIBs and address the risks posed to financial stability from 
reliance by financial firms on short-term wholesale funding.
    The financial crisis made clear that policymakers must devote 
significant attention to the potential threat to financial stability 
posed by our most systemic financial firms. Accordingly, the Federal 
Reserve has been working to develop regulations that are designed to 
reduce the probability of failure of a G-SIB to levels that are 
meaningfully below those for less systemically important firms and to 
materially reduce the potential adverse impact on the broader financial 
system and economy in the event of a failure of a G-SIB.
G-SIB Risk-Based Capital Surcharges
    An important remaining Federal Reserve initiative to improve G-SIB 
resiliency is our forthcoming proposal to impose graduated common 
equity risk-based capital surcharges on U.S. G-SIBs. The proposal will 
be consistent with the standard in section 165 of the Dodd-Frank Act 
that capital requirements be progressively more stringent as the 
systemic importance of a firm increases. It will build on the G-SIB 
capital surcharge framework developed by the BCBS, under which the size 
of the surcharge for an individual G-SIB is a function of the firm's 
systemic importance. By further increasing the amount of the most loss-
absorbing form of capital that is required to be held by firms that 
potentially pose the greatest risk to financial stability, we intend to 
improve the resiliency of these firms. This measure might also create 
incentives for them to reduce their systemic footprint and risk 
profile.
    While our proposal will use the G-SIB risk-based capital surcharge 
framework developed by the BCBS as a starting point, it will strengthen 
the BCBS framework in two important respects. First, the surcharge 
levels for U.S. G-SIBs will be higher than the levels required by the 
BCBS, noticeably so for some firms. Second, the surcharge formula will 
directly take into account each U.S. G-SIB's reliance on short-term 
wholesale funding. We believe the case for including short-term 
wholesale funding in the surcharge calculation is compelling, given 
that reliance on this type of funding can leave firms vulnerable to 
runs that threaten the firm's solvency and impose externalities on the 
broader financial system.
Resolvability of G-SIBs
    Our enhanced regulation of G-SIBs also includes efforts to improve 
their resolvability. Most recently, in August, the Federal Reserve and 
the Federal Deposit Insurance Corporation (FDIC) completed reviews of 
the second round of resolution plans submitted to the agencies in 
October 2013 by 11 U.S. bank holding companies and foreign banks. 
Section 165(d) of the Dodd-Frank Act requires banking organizations 
with total consolidated assets of $50 billion or more and nonbank 
financial companies designated by the FSOC to submit resolution plans 
to the Federal Reserve and the FDIC. Each plan must describe the 
organization's strategy for rapid and orderly resolution in the event 
of material financial distress or failure. In completing the second 
round reviews of these banking organizations' resolution plans, the 
FDIC and the Federal Reserve noted certain shortcomings in the 
resolution plans that the firms must address to improve their 
resolvability in bankruptcy. Both agencies also indicated the 
expectation that the firms make significant progress in addressing 
these issues in their 2015 resolution plans.
    In addition, the Federal Reserve has been working with the FDIC to 
develop a proposal that would require the U.S. G-SIBs to maintain a 
minimum amount of long-term unsecured debt at the parent holding 
company level. While minimum capital requirements are designed to cover 
losses up to a certain statistical probability, in the even less likely 
event that the equity of a financial firm is wiped out, successful 
resolution without taxpayer assistance would be most effectively 
accomplished if a firm has sufficient long-term unsecured debt to 
absorb additional losses and to recapitalize the business transferred 
to a bridge operating company. The presence of a substantial tranche of 
long-term unsecured debt that is subject to bail-in during a resolution 
and is structurally subordinated to the firm's other creditors should 
reduce run risk by clarifying the position of those other creditors in 
an orderly liquidation process. A requirement for long-term debt also 
should have the benefit of improving market discipline, since the 
holders of that debt would know they faced the prospect of loss should 
the firm enter resolution.
    The Federal Reserve is working with global regulators, under the 
auspices of the FSB, to develop a proposal that would require the 
largest, most complex global banking firms to maintain a minimum amount 
of loss absorbency capacity beyond the levels mandated in the Basel III 
capital requirements.
    Another element of our efforts to promote resolvability of large 
banking organizations involves the early termination rights of 
derivative counterparties to G-SIBs. Some of the material operating 
subsidiaries of G-SIBs are counterparties to large volumes of over-the-
counter derivatives and other qualifying financial contracts that 
provide for an event of default based solely on the insolvency or 
receivership of the parent holding company. Although the Dodd-Frank Act 
created an orderly liquidation authority (OLA) to better enable the 
Government to resolve a failed systemically important financial firm--
and the OLA's stay and transfer provisions can prevent exercise of such 
contractual rights by counterparties to contracts under U.S. law--the 
OLA provisions may not apply to contracts under foreign law. 
Accordingly, counterparties of the foreign subsidiaries and branches of 
G-SIBs may have contractual rights and substantial economic incentives 
to accelerate or terminate those contracts as soon as the U.S. parent 
G-SIB enters OLA. This could render a resolution unworkable by 
resulting in the disorderly unwind of an otherwise viable foreign 
subsidiary and the disruption of critical intra-affiliate activities 
that rely on the failing subsidiary. The challenge would be compounded 
in a bankruptcy resolution because derivatives and other qualifying 
financial contracts are exempt from the automatic stay under bankruptcy 
law, regardless of whether the contracts are governed by U.S. or 
foreign law.
    The international regulatory community is working to mitigate this 
risk as well. The Federal Reserve is working with the FDIC and global 
regulators, financial firms, and other financial market actors to 
develop a protocol to the International Swaps and Derivatives 
Association (ISDA) Master Agreement to address the impediments to 
resolvability generated by these early termination rights. The FSB will 
be reporting progress on this effort in the fall.
Short-Term Wholesale Funding
    As I have noted in prior testimony before this Committee, short-
term wholesale funding plays a critical role in the financial system. 
During normal times, it helps to satisfy investor demand for safe and 
liquid investments, lowers funding costs for borrowers, and supports 
the functioning of important markets, including those in which monetary 
policy is executed. During periods of stress, however, runs by 
providers of short-term wholesale funding and associated asset 
liquidations can result in large fire sale externalities and otherwise 
undermine financial stability. A dynamic of this type engulfed the 
financial system in 2008.
    Since the crisis, the Federal Reserve has taken several steps to 
address short-term wholesale funding risks. The Basel III capital 
framework and the Federal Reserve's stress testing regime have 
significantly increased the quantity and quality of required capital in 
the banking system, particularly for those banking organizations that 
are the most active participants in short-term wholesale funding 
markets. Similarly, the implementation of liquidity regulations such as 
the LCR, together with related efforts by bank supervisors, will help 
to limit the amount of liquidity risk in the banking system.
    We have also taken steps to reduce risks posed by the use of short-
term wholesale funding by actors outside the banking system. These 
include leading an effort to reduce reliance by borrowers in the 
triparty repo market on intraday credit from clearing banks and 
increasing the regulatory charges on key forms of credit and liquidity 
support that banks provide to shadow banks. In part because of these 
actions and in part because of market adjustments, there is less risk 
embedded in short-term wholesale funding markets today than in the 
period immediately preceding the financial crisis. The short-term 
wholesale funding markets are generally smaller, the average maturity 
of short-term funding arrangements is moderately greater, and 
collateral haircuts are more conservative. In addition, the banking 
organizations that are the major intermediaries in short-term wholesale 
funding markets are much more resilient based on the measures I 
discussed earlier.
    Nevertheless, we believe that more needs to be done to guard 
against short-term wholesale funding risks. While the total amount of 
short-term wholesale funding is lower today than immediately before the 
crisis, volumes are still large relative to the size of the financial 
system. Furthermore, some of the factors that account for the reduction 
in short-term wholesale funding volumes, such as the unusually flat 
yield curve environment and lingering risk aversion from the crisis, 
are likely to prove transitory.
    Federal Reserve staff is currently working on three sets of 
initiatives to address residual short-term wholesale funding risks. As 
discussed above, the first is a proposal to incorporate the use of 
short-term wholesale funding into the risk-based capital surcharge 
applicable to U.S. G-SIBs. The second involves proposed modifications 
to the BCBS's net stable funding ratio (NSFR) standard to strengthen 
liquidity requirements that apply when a bank acts as a provider of 
short-term funding to other market participants. The third is numerical 
floors for collateral haircuts in securities financing transactions 
(SFTs)--including repos and reverse repos, securities lending and 
borrowing, and securities margin lending.
    Modifications to the NSFR could be designed to help address the 
types of concerns described in my previous testimony regarding SFT 
matched book activity. In the classic fact pattern, a matched book 
dealer uses SFTs to borrow on a short-term basis from a cash investor, 
such as a money market mutual fund, to finance a short-term SFT loan to 
a client, such as a leveraged investment fund. The regulatory 
requirements on SFT matched books are generally low despite the fact 
that matched books can pose significant microprudential and 
macroprudential risks. Neither the BCBS LCR nor the NSFR originally 
finalized by the Basel Committee would have imposed a material charge 
on matched book activity.
    In January, the BCBS proposed a revised NSFR that would require 
banks to hold a material amount of stable funding against short-term 
SFT loans, as well as other short-term credit extensions, to nonbank 
financial entities. By requiring banks that make short-term loans to 
hold stable funding, such a charge would help limit the liquidity risk 
that a dealer would face if it experiences a run on its SFT liabilities 
but is unable to liquidate corresponding SFT assets. In addition, by 
making it more expensive for the dealer to provide short-term credit, 
the charge could help lean against excessive short-term borrowing by 
the dealer's clients.
    Turning to numerical floors for SFT haircuts, the appeal of this 
policy measure is that it would help address the risk that post-crisis 
reforms targeted at banking organizations will drive systemically risky 
activity toward places in the financial system where prudential 
standards do not apply. In its universal form, a system of numerical 
haircut floors for SFTs would require any entity that wants to borrow 
against a security to post a minimum amount of excess margin to its 
lender that would vary depending on the asset class of the collateral. 
Like minimum margin requirements for derivatives, numerical floors for 
SFT haircuts would serve as a mechanism for limiting the build-up of 
leverage at the transaction level and could mitigate the risk of 
procyclical margin calls.
    Last August, the FSB issued a consultative document that 
represented an initial step toward the development of a framework of 
numerical floors. However, the FSB's proposal contained some 
significant limitations, including that its scope was limited to 
transactions in which a bank or broker-dealer extends credit to an 
unregulated entity and that the calibration of the numerical floor 
levels was relatively low. Since then, the FSB has been actively 
considering whether to strengthen the proposal along both of these 
dimensions.
Financial Sector Concentration Limits
    In May, the Federal Reserve proposed a rule to implement section 
622 of the Dodd-Frank Act, which prohibits a financial company from 
combining with another company if the resulting financial company's 
liabilities exceed 10 percent of the aggregate consolidated liabilities 
of all financial companies. Under the proposal, financial companies 
subject to the concentration limit would include insured depository 
institutions, bank holding companies, savings and loan holding 
companies, foreign banking organizations, companies that control 
insured depository institutions, and nonbank financial companies 
designated by the FSOC for Federal Reserve supervision. Consistent with 
section 622, the proposal generally defines liabilities of a financial 
company as the difference between its risk-weighted assets, as adjusted 
to reflect exposures deducted from regulatory capital, and its total 
regulatory capital. Firms not subject to consolidated risk-based 
capital rules would measure liabilities using generally accepted 
accounting standards. We anticipate finalizing this rule in the near 
term.
Credit Risk Retention
    Section 941 of the Dodd-Frank Act requires firms generally to 
retain credit risk in securitization transactions they sponsor. 
Retaining credit risk creates incentives for securitizers to monitor 
closely the quality of the assets underlying a securitization 
transaction and discourages unsafe and unsound underwriting practices 
by originators. In August 2013, the Federal Reserve, along with several 
other agencies, revised a proposal from 2011 to implement section 941. 
The Federal Reserve is working with the other agencies charged by the 
Dodd-Frank Act with implementing this rule to complete it in the coming 
months.
Rationalizing the Regulatory Framework for Community Banks
    Before closing, I would like to discuss the Federal Reserve's 
ongoing efforts to minimize regulatory burden consistent with the 
effective implementation of our statutory responsibilities for 
community banks, given the important role they play within our 
communities. Over the past few decades, community banks have 
substantially reduced their presence in lines of businesses such as 
consumer lending in the face of competition from larger banks 
benefiting from economies of scale. Today, as a group, their most 
important forms of lending are to small- and medium-sized businesses. 
Smaller community banks--those with less than $1 billion in assets--
account for nearly one-fourth of commercial and industrial lending, and 
nearly 40 percent of commercial real estate lending, to small- and 
medium-sized businesses, despite their having less than 10 percent of 
total commercial banking assets. These figures reveal the importance of 
community banks to local economies and the damage that could result if 
these banks were unable to continue operating within their communities.
    Banking regulators have taken many steps to try to avoid 
unnecessary regulatory costs for community banks, such as fashioning 
more basic supervisory expectations for smaller, less complex banks and 
identifying which provisions of new regulations are relevant to smaller 
banks. In this regard, the Federal Reserve has worked to communicate 
clearly the extent to which new rules and policies apply to smaller 
banks and to tailor them as appropriate. We also work closely with our 
colleagues at the Federal and State banking regulatory agencies to 
ensure that supervisory approaches and methodologies are consistently 
applied to community banks.
    But several new statutory provisions apply explicitly to some 
smaller banks or, by failing to exclude any bank from coverage, apply 
to all banks. The Federal Reserve is supportive of considering areas 
where the exclusion of community banks from statutory provisions that 
are less relevant to community bank practice may be appropriate. For 
example, we believe it would be worthwhile to consider whether 
community banks should be excluded from the scope of the Volcker rule 
and from the incentive compensation requirements of section 956 of the 
Dodd-Frank Act. The concerns addressed by statutory provisions like 
these are substantially greater at larger institutions and, even where 
a practice at a smaller bank might raise concerns, the supervisory 
process remains available to address what would likely be unusual 
circumstances.
    Another area in which the Federal Reserve has made efforts to 
right-size our supervisory approach with regard to community banks is 
to improve our off-site monitoring processes so that we can better 
target higher risk institutions and activities. Research conducted for 
a 2013 conference sponsored by the Federal Reserve System and the 
Conference of State Bank Supervisors addressed the resilience of the 
community bank model and showed how some banks performed better than 
others during the recent crisis. Building on this research, we are 
updating our off-site monitoring screens to reflect experience gained 
during the crisis and recalibrating our examination scoping process for 
community banks to focus our testing on higher-risk banks and 
activities, and whenever possible reduce procedures for banks of lower 
risk.
    Recognizing the burden that the on-site presence of many examiners 
can place on the day-to-day business of a community bank, we are also 
working to increase our level of off-site supervisory activities. 
Responding to on-site examinations and inspections is of course a cost 
for community banks, but this cost must be weighed against the 
supervisory benefit of face-to-face interactions with bank examiners to 
explore and resolve institution-specific concerns. The Federal Reserve 
aims to strike the appropriate balance of off-site and on-site 
supervisory activities to ensure that the quality of community bank 
supervision is maintained without creating an overly burdensome 
process. To that end, last year we completed a pilot on conducting 
parts of the labor-intensive loan review off-site using electronic 
records from banks. Based on good results with the pilot, we are 
planning to continue using this approach in future reviews at banks 
where bank management is supportive of the process and where electronic 
records are available. We are also exploring whether other examination 
procedures can be conducted off-site without compromising the ability 
of examiners to accurately assess the safety and soundness of 
supervised banks.
Conclusion
    The Federal Reserve has made significant progress in implementing 
the Dodd-Frank Act and other measures designed to improve the 
resiliency of banking organizations and reduce systemic risk. We are 
committed to working with the other U.S. financial regulatory agencies 
to promote a stable financial system in a manner that does not impose a 
disproportionate burden on smaller institutions. To help us achieve 
these goals, we will continue to seek the views of the institutions we 
supervise and the public as we further develop regulatory and 
supervisory programs to preserve financial stability at the least cost 
to credit availability and economic growth.
    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
                           September 9, 2014
    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) actions to implement the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act).
    My written testimony will address several key topics. First, I will 
discuss capital and liquidity rules that the bank regulatory agencies 
recently finalized, as well as a recently proposed margin rule on 
derivatives. Second, I will provide an update on our progress in 
implementing the authorities provided the FDIC relating to the 
resolution of systemically important financial institutions (SIFIs). I 
will then discuss an updated proposed risk retention rule for 
securitizations and implementation of the Volcker Rule. Finally, I will 
discuss our supervision of community banks, including the FDIC's 
efforts to address emerging cybersecurity and technology issues.
Capital, Liquidity, and Derivative Margin Requirements
    The new regulatory framework established under the Dodd-Frank Act 
augments and complements the banking agencies' existing authorities to 
require banking organizations to maintain capital and liquidity well 
above the minimum requirements for safety and soundness purposes, as 
well as to establish margin requirements on derivatives. The recent 
actions by the agencies to adopt a final rule on the leverage capital 
ratio, a final rule on the liquidity coverage ratio, and a proposed 
rule on margin requirements for derivatives address three key areas of 
systemic risk and, taken together, are an important step forward in 
addressing the risks posed particularly by the largest, most 
systemically important financial institutions.
Supplementary Leverage Ratio
    In April 2014, the FDIC published a final rule that, in part, 
revises minimum capital requirements and, for advanced approaches 
banks, \1\ introduces the supplementary leverage ratio requirement. The 
Office of the Comptroller of the Currency (OCC) and the Federal Reserve 
adopted a final rule in October 2013 that is substantially identical to 
the FDIC's final rule. Collectively, these rules are referred to as the 
Basel III capital rules.
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     \1\ An advanced approaches bank is an insured depository 
institution (IDI) that is an advanced approaches national bank or 
Federal savings association under 12 CFR 3.100(b)(1), an advanced 
approaches Board-regulated institution under 12 CFR 217.100(b)(1), or 
an advanced approaches FDIC-supervised institution under 12 CFR 
324.100(b)(1). In general, an IDI is an advanced approaches bank if it 
has total consolidated assets of $250 billion or more, has total 
consolidated on-balance sheet foreign exposures of $10 billion or more, 
or elects to use or is a subsidiary of an IDI, bank holding company, or 
savings and loan holding company that uses the advanced approaches to 
calculate risk-weighted assets.
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    The Basel III rulemaking includes a new supplementary leverage 
ratio requirement--an important enhancement to the international 
capital framework. Prior to this rule, there was no international 
leverage ratio requirement. For the first time, the Basel III accord 
included an international minimum leverage ratio, and consistent with 
the agreement, the Basel III rulemaking includes a 3 percent minimum 
supplementary leverage ratio. This ratio, which takes effect in 2018, 
applies to large, internationally active banking organizations, and 
requires them to maintain a minimum supplementary leverage ratio of 3 
percent (in addition to meeting other capital ratio requirements, 
including the agencies' long-standing Tier 1 leverage ratio).
    In April 2014, the FDIC, the OCC and the Federal Reserve also 
finalized an Enhanced Supplementary Leverage Ratio final rule for the 
largest and most systemically important bank holding companies (BHCs) 
and their insured banks. This rule strengthens the supplementary 
leverage capital requirements beyond the levels required in the Basel 
III accord. Eight banking organizations are covered by these Enhanced 
Supplementary Leverage standards based on the thresholds in the final 
rule.
    The agencies' analysis suggests that the 3 percent minimum 
supplementary leverage ratio contained in the international Basel III 
accord would not have appreciably mitigated the growth in leverage 
among SIFIs in the years leading up to the crisis. Accordingly, the 
Enhanced Supplementary Leverage standards that the agencies finalized 
in April will help achieve one of the most important objectives of the 
capital reforms: addressing the buildup of excessive leverage that 
contributes to systemic risk.
    Under the Enhanced Supplementary Leverage standards, covered 
insured depository institutions (IDIs) will need to satisfy a 6 percent 
supplementary leverage ratio to be considered well capitalized for 
prompt corrective action (PCA) purposes. The supplementary leverage 
ratio includes off-balance sheet exposures in its denominator, unlike 
the longstanding U.S. leverage ratio which requires capital only for 
balance sheet assets. This means that more capital is needed to satisfy 
the supplementary leverage ratio than to satisfy the U.S. leverage 
ratio if both ratios were set at the same level. For example, based on 
recent supervisory estimates of the off-balance sheet exposures of 
these banks, a 6 percent supplementary leverage ratio would correspond 
to roughly an 8.6 percent U.S. leverage requirement. Covered BHCs will 
need to maintain a supplementary leverage ratio of at least 5 percent 
(a 3 percent minimum plus a 2 percent buffer) to avoid restrictions on 
capital distributions and executive compensation. This corresponds to 
roughly a 7.2 percent U.S. leverage ratio.
    An important consideration in calibrating the Enhanced 
Supplementary Leverage ratio was the idea that the increase in 
stringency of the leverage requirements and the risk-based requirements 
should be balanced. Leverage capital requirements and risk-based 
capital requirements are complementary, with each type of requirement 
offsetting potential weaknesses of the other. In this regard, the Basel 
III rules strengthened risk-based capital requirements to a much 
greater extent than they strengthened leverage requirements. The 
Enhanced Supplementary Leverage ratio standard will ensure that the 
leverage requirement continues to serve as an effective complement to 
the risk-based capital requirements of the largest, most systemically 
important banking organizations, thereby strengthening the capital base 
and the stability of the U.S. banking system.
    Maintaining a strong capital base at the largest, most systemically 
important financial institutions (SIFIs) is particularly important 
because capital shortfalls at these institutions can contribute to 
systemic distress and lead to material adverse economic effects. These 
higher capital requirements will also put additional private capital at 
risk before the Deposit Insurance Fund (DIF) and the Federal 
Government's resolution mechanisms would be called upon. The final 
Enhanced Supplementary Leverage ratio rule is one of the most important 
steps the banking agencies have taken to strengthen the safety and 
soundness of the U.S. banking and financial systems.
    On September 3, 2014, the FDIC Board also finalized a rule 
originally proposed in April 2014 that revises the denominator measure 
for the supplementary leverage ratio and introduced related public 
disclosure requirements. The changes in this rule apply to all advanced 
approaches banking organizations, including the eight covered companies 
that would be subject to the Enhanced Supplementary Leverage standards. 
The denominator changes are consistent with those agreed upon by the 
Basel Committee on Banking Supervision and would, in the aggregate, 
result in a modest further strengthening of the supplementary leverage 
ratio requirement as compared to the capital rules finalized in April.
Liquidity Coverage Ratio
    On September 3, 2014, the FDIC issued a joint interagency final 
rule with the Federal Reserve Board and the OCC implementing a 
liquidity coverage ratio (LCR). During the recent financial crisis, 
many banks had insufficient liquid assets and could not borrow to meet 
their liquidity needs. The LCR final rule is designed to strengthen the 
liquidity positon of our largest financial institutions, thereby 
promoting safety and soundness and the stability of the U.S. financial 
system.
    This final rule applies to the largest, internationally active 
banking organizations: U.S. banking organizations with $250 billion or 
more in total consolidated assets or $10 billion or more in on-balance 
sheet foreign exposure and their subsidiary depository institutions 
with $10 billion or more in total assets. The Federal Reserve also 
finalized a separate rule that would apply a modified LCR requirement 
to BHCs with between $50 billion and $250 billion in total consolidated 
assets. Other insured banks are not subject to the rule.
    The LCR final rule establishes a quantitative minimum liquidity 
coverage ratio that builds upon approaches already used by a number of 
large banking organizations to manage liquidity risk. It requires a 
covered company to maintain an amount of unencumbered high-quality 
liquid assets (HQLA) sufficient to meet the total stressed net cash 
outflows over a prospective 30 calendar-day period. A covered company's 
total net cash outflow amount is determined by applying outflow and 
inflow rates described in the rule, which reflect certain stressed 
assumptions, against the balances of a covered company's funding 
sources, obligations, and assets over a 30 calendar-day period.
    A number of commenters have expressed concern about the exclusion 
of municipal securities from HQLA in the final rule. It is our 
understanding that banks do not generally hold municipal securities for 
liquidity purposes, but rather for longer term investment and other 
objectives. We will monitor closely the impact of the rule on municipal 
securities and consider adjustments if necessary.
Margin Rule for Derivatives
    Before the passage of the Dodd-Frank Act, the derivatives 
activities of financial institutions were largely unregulated. One of 
the issues observed in the crisis was that some financial institutions 
had entered into large over-the-counter (OTC) derivatives positions 
with other institutions without the prudent initial exchange of 
collateral--a basic safety-and-soundness practice known as margin--in 
support of the positions. Title VII addressed this situation in part by 
requiring the use of central clearinghouses for certain standardized 
derivatives contracts, and by requiring the exchange of collateral, 
i.e., margin, for derivatives that are not centrally cleared.
    Central clearinghouses for derivatives routinely manage their risks 
by requiring counterparties to post collateral at the inception of a 
trade. This practice is known as initial margin, in effect a type of 
security deposit or performance bond. Moreover, central clearinghouses 
routinely require a counterparty to post additional collateral if the 
market value of the position moves against that counterparty, greatly 
reducing the likelihood the clearinghouse will be unable to collect 
amounts due from counterparties. This type of collateral is known as 
variation margin.
    Sections 731 and 764 of the Dodd Frank Act requires the large 
dealers in swaps to adopt certain prudent margining practices for their 
OTC derivatives activities that clearinghouses use, namely the posting 
and collecting of initial and variation margin. The exchange of margin 
between parties to a trade on OTC derivatives is an important check on 
the buildup of counterparty risk that can occur with OTC derivatives 
without margin. More generally, the appropriate exchange of margin 
promotes financial stability by reducing systemic leverage in the 
derivatives marketplace and promotes the safety and soundness of banks 
by discouraging the excessive growth of risky OTC derivatives 
positions.
    The FDIC recently approved an interagency proposed rule to 
establish minimum margin requirements for the swaps of an insured 
depository institution or other entity that: (1) is supervised by the 
FDIC, Federal Reserve, OCC, Federal Housing Finance Administration 
(FHFA), or Farm Credit Administration (FCA); and (2) is also registered 
with the Commodity Futures Trading Commission (CFTC) or the Securities 
and Exchange Commission (SEC) as a dealer or major participant in 
swaps. The proposed rule will be published in the Federal Register with 
a 60-day public comment period.
    In developing this proposal, the FDIC, along with the other banking 
agencies, worked closely with the Basel Committee on Banking 
Supervision (BCBS) and the International Organization of Securities 
Commissions (IOSCO) to develop a proposed framework for margin 
requirements on noncleared swaps (the ``international margin 
framework'') with the goal of creating an international standard for 
margin requirements on noncleared swaps. After considering numerous 
comments, BCBS and IOSCO issued a final international margin framework 
in September 2013. The agencies' 2014 proposed rule is closely aligned 
with the principles and standards from the 2013 international 
framework. The E.U. and other jurisdictions also have issued similar 
proposals.
    The proposed rule would require a covered swap entity (a swap 
dealer, major swap participant, security-based swap dealer, or major 
security-based swap participant) to exchange initial margin with 
counterparties that are: (1) registered with the CFTC or SEC as swap 
entities; or (2) financial end users with material swaps exposure--that 
is, with more than $3 billion in notional exposure of OTC derivatives 
that are not cleared. The rule would not require a covered swap entity 
to collect initial margin from commercial end users. The agencies 
intend to maintain the status quo with respect to the way that banks 
interact with commercial end users.
    The proposed rule would also require a covered swap entity to 
exchange variation margin on swaps with all counterparties that are: 
(1) swap entities; or (2) financial end users (regardless of whether 
the financial end user has a material swaps exposure). There is no 
requirement that a covered swap entity must collect or post variation 
margin with commercial end users.
    Because community banks typically do not have more than $3 billion 
in notional exposure of OTC derivatives that are not cleared, the 
agencies expect that the proposed rule will not result in community 
banks being required to post initial margin. Community banks that do 
engage in OTC derivatives that are not cleared are likely already 
posting variation margin in the normal course of business, or in 
amounts too small to fall within the scope of the rule. As a result, 
the margin rule likely will have little, if any, impact on the vast 
majority of community banks.
Resolution of Systemically Important Financial Institutions
Resolution Plans--``Living Wills''
    Under the framework of the Dodd-Frank Act, bankruptcy is the 
preferred option in the event of a SIFI's failure. To make this 
objective achievable, Title I of the Dodd-Frank Act requires that all 
BHCs with total consolidated assets of $50 billion or more, and nonbank 
financial companies that the Financial Stability Oversight Council 
(FSOC) determines could pose a threat to the financial stability of the 
United States, prepare resolution plans, or ``living wills,'' to 
demonstrate how the company could be resolved in a rapid and orderly 
manner under the Bankruptcy Code in the event of the company's 
financial distress or failure. The living will process is an important 
new tool to enhance the resolvability of large financial institutions 
through the bankruptcy process.
    In 2011, the FDIC and the FRB jointly issued a final rule (the 
165(d) rule) implementing the resolution plan requirements of Section 
165(d) of the Dodd-Frank Act. The 165(d) rule provided for staggered 
annual submission deadlines for resolution plans based on the size and 
complexity of the companies. Eleven of the largest, most complex 
institutions (collectively referred to as ``first wave filers'') 
submitted initial plans in 2012 and revised plans in 2013.
    During 2013, the remaining 120 institutions submitted their initial 
resolution plans under the 165(d) rule. The FSOC also designated three 
nonbank financial institutions for Federal Reserve supervision that 
year. In July 2014, 13 firms that previously had submitted at least one 
resolution plan submitted revised resolution plans, and the 3 nonbank 
financial companies designated by the FSOC submitted their initial 
resolution plans. The Federal Reserve and the FDIC granted requests for 
extensions to two firms whose second resolution plan submissions would 
have been due July 1. Those plans are now due to the agencies by 
October 1, 2014. The remaining 116 firms are expected to submit their 
second submission revised resolution plans in December 2014.
    Following the review of the initial resolution plans submitted in 
2012, the Federal Reserve and the FDIC issued joint guidance in April 
2013 to provide clarification and direction for developing 2013 
resolution plan submissions. The Federal Reserve and the FDIC 
identified an initial set of obstacles to a rapid and orderly 
resolution that covered companies were expected to address in the 
plans. The five obstacles identified in the guidance--multiple 
competing insolvencies, potential lack of global cooperation, 
operational interconnectedness, counterparty actions, and funding and 
liquidity--represent the key impediments to an orderly resolution. The 
2013 plans should have included the actions or steps the companies have 
taken or propose to take to remediate or otherwise mitigate each 
obstacle and a timeline for any proposed actions. The agencies also 
extended the deadline for submitting revised plans from July 1, 2013, 
to October 1, 2013, to give the firms additional time to develop 
resolution plan submissions that addressed the agencies' instructions.
    Section 165(d) of the Dodd-Frank Act and the jointly issued 
implementing regulation \2\ require the FDIC and the Federal Reserve to 
review the 165(d) plans. If the agencies jointly determine that a plan 
is not credible or would not facilitate an orderly resolution under the 
U.S. Bankruptcy Code, the FDIC and the Federal Reserve must notify the 
filer of the areas in which the plan is deficient. The filer must 
resubmit a revised plan that addresses the deficiencies within 90 days 
(or other specified timeframe).
---------------------------------------------------------------------------
     \2\ 12 CFR Part 243 and 12 CFR Part 381.
---------------------------------------------------------------------------
    The FDIC and the Federal Reserve have completed their reviews of 
the 2013 resolution plans submitted to the agencies by the 11 bank 
holding companies that submitted their revised resolution plans in 
October 2013. On August 5, 2014, the agencies issued letters to each of 
these first wave filers detailing the specific shortcomings of each 
firm's plan and the requirements for the 2015 submission.

    While the shortcomings of the plans varied across the first wave 
firms, the agencies have identified several common features of the 
plans' shortcomings, including: (1) assumptions that the agencies 
regard as unrealistic or inadequately supported, such as assumptions 
about the likely behavior of customers, counterparties, investors, 
central clearing facilities, and regulators; and (2) the failure to 
make, or even to identify, the kinds of changes in firm structure and 
practices that would be necessary to enhance the prospects for orderly 
resolution. The agencies will require that the annual plans submitted 
by the first wave filers on July 1, 2015, demonstrate that those firms 
are making significant progress to address all the shortcomings 
identified in the letters, and are taking actions to improve their 
resolvability under the U.S. Bankruptcy Code. These actions include:

    establishing a rational and less complex legal structure 
        which would take into account the best alignment of legal 
        entities and business lines to improve the firm's 
        resolvability;

    developing a holding company structure that supports 
        resolvability, including maintaining sufficient longer term 
        debt;

    amending, on an industrywide and firm-specific basis, 
        financial contracts to provide for a stay of certain early 
        termination rights of counterparties triggered by insolvency 
        proceedings;

    ensuring the continuity of shared services that support 
        critical operations and core business lines throughout the 
        resolution process; and

    demonstrating operational capabilities for resolution 
        preparedness, such as the ability to produce reliable 
        information in a timely manner.

    Agency staff will work with each of the first wave filers to 
discuss required improvements in its resolution plan and the efforts, 
both proposed and in progress, to facilitate each firm's preferred 
resolution strategy. The agencies are also committed to finding an 
appropriate balance between transparency and confidentiality of 
proprietary and supervisory information in the resolution plans. As 
such, the agencies will be working with these firms to explore ways to 
enhance public transparency of future plan submissions.
    Based upon its review of submissions by first wave filers, the FDIC 
Board of Directors determined, pursuant to section 165(d) of the Dodd-
Frank Act, that the plans submitted by the first wave filers are not 
credible and do not facilitate an orderly resolution under the U.S. 
Bankruptcy Code. The FDIC and the Federal Reserve agreed that in the 
event that a first wave filer has not, by July 1, 2015, submitted a 
plan responsive to the shortcomings identified in the letter sent to 
that firm, the agencies expect to use their authority under section 
165(d) to determine that a resolution plan does not meet the 
requirements of the Dodd-Frank Act.
Improvements to Bankruptcy
    At the December 2013 meeting of the FDIC's Systemic Resolution 
Advisory Committee, the FDIC heard how the existing bankruptcy process 
could be improved to better apply to SIFIs. The current provisions of 
the U.S. Bankruptcy Code do not expressly take into account certain 
features of SIFIs that distinguish these firms from other entities that 
are typically resolvable under bankruptcy without posing risk to the 
U.S. financial system. Issues such as the authority to impose a stay on 
qualified financial contracts and the ability to move part of a 
bankrupt firm into a bridge entity in an expeditious and efficient 
fashion are left unaddressed in current law. It also is unclear whether 
traditional debtor-in-possession financing, which is available under 
bankruptcy, would be sufficient to address the significant liquidity 
needs arising from the failure of a SIFI. A further challenge in a U.S. 
bankruptcy proceeding would be how it could foster global cooperation 
with foreign authorities, courts, creditors, or other pertinent 
parties, including U.S. financial regulatory officials, to ensure that 
their interests will be protected.
    Additionally, a number of scholars, policy analysts, and public 
officials have made helpful proposals for changes to the U.S. 
Bankruptcy Code that would facilitate the resolution of a SIFI in 
bankruptcy. The FDIC has been reaching out to those in the bankruptcy 
community to discuss ways to enhance the U.S. Bankruptcy Code to 
facilitate an orderly failure of a SIFI. In addition, the FDIC has been 
working with foreign authorities to encourage the International Swaps 
and Derivatives Association (ISDA) to modify its standard-form 
contracts to facilitate resolution in bankruptcy. The FDIC supports 
these efforts and is prepared to work with Congress on modifications to 
the U.S. Bankruptcy Code for the treatment of SIFIs in bankruptcy.
Implementation of Title II
    Congress also recognized that there may be circumstances in which 
the resolution of a SIFI under the U.S. Bankruptcy Code would have 
serious adverse effects on financial stability in the U.S. Accordingly, 
in Title II of the Dodd-Frank Act, Congress provided the FDIC with 
orderly liquidation authority to resolve a failing SIFI as a last 
resort in the event that resolution under the U.S. Bankruptcy Code 
would result in systemic disruption of the financial system. This 
Orderly Liquidation Authority serves as a backstop to protect against 
the risk of systemic disruption to the U.S. financial system and allows 
for resolution in a manner that results in shareholders losing their 
investment, creditors taking a loss and management responsible for the 
failure being replaced, resulting in an orderly unwinding of the firm 
without cost to U.S. taxpayers.
    In my February testimony before this Committee, I described how the 
FDIC is developing a strategic approach, referred to as Single Point of 
Entry (SPOE) strategy, to carry out its Orderly Liquidation Authority 
for resolving a SIFI in the event it is determined that a firm cannot 
be resolved under bankruptcy without posing a risk to the U.S. 
financial system. Under the SPOE strategy, the FDIC would be appointed 
receiver of the top-tier parent holding company of the financial group 
following the company's failure and the completion of the 
recommendation, determination, and expedited judicial review process 
set forth in Title II of the Act. For the SPOE strategy to be 
successful, it is critical that the top-tier holding company maintain a 
sufficient amount of unsecured debt that would be available to provide 
capital to manage the orderly unwinding of the failed firm. In a 
resolution, the holding company's debt would be used to absorb losses 
and keep the operating subsidiaries open and operating until an orderly 
wind-down could be achieved.
    In support of the SPOE strategy, the Federal Reserve, in 
consultation with the FDIC, is considering the merits of a regulatory 
requirement that the largest, most complex U.S. banking firms maintain 
a minimum amount of unsecured debt at the holding company level, in 
addition to the regulatory capital those companies already are required 
to maintain. Such a requirement would ensure that there is sufficient 
debt at the holding company level to absorb losses at the failed firm.
Cross-Border Issues
    Advance planning and cross-border coordination for the resolution 
of globally active SIFIs (G-SIFIs) will be essential to minimizing 
disruptions to global financial markets. Recognizing that G-SIFIs 
create complex international legal and operational concerns, the FDIC 
continues to reach out to foreign regulators to establish frameworks 
for effective cross-border cooperation.
    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 developing contingency plans for the failure 
of a G-SIFI that has operations in the United States and the United 
Kingdom. Of the 28 G-SIFIs identified by the Financial Stability Board 
(FSB) in the G20 countries, four are headquartered in the United 
Kingdom, and eight in the United States. Moreover, more than 70 percent 
of the reported foreign activities of the eight U.S. G-SIFIs originate 
in the United Kingdom. The magnitude of the cross-border financial 
relationships and local activity of G-SIFIs in the United States and 
the United Kingdom makes the U.S.-UK bilateral relationship by far the 
most significant with regard to the resolution of G-SIFIs. Therefore, 
our two countries have a strong mutual interest in ensuring that the 
failure of such an institution could be resolved at no cost to 
taxpayers and without placing the financial system at risk.
    The FDIC and UK authorities are continuing to work together to 
address the cross-border issues raised in the December 2012 joint paper 
on resolution strategies and the December 2013 tabletop exercise 
between staffs at the FDIC, the Bank of England (including the 
Prudential Regulation Authority), the Federal Reserve, and the Federal 
Reserve Bank of New York. This work is intended to identify actions 
that could be taken by each regulator to implement the SPOE resolution 
strategy in the event of a resolution.
    The FDIC also has continued to coordinate with representatives from 
other European authorities to discuss issues of mutual interest, 
including the resolution of European G-SIFIs and ways in which we can 
harmonize receivership actions. The FDIC and the European Commission 
(E.C.) continue to work collaboratively through a joint Working Group 
composed of senior executives from the FDIC and the E.C., focusing on 
both resolution and deposit insurance issues. The Working Group meets 
twice a year, in addition to less formal meetings and exchanges of 
detailees. In 2014, the Working Group convened in May, and there has 
been ongoing collaboration at the staff level. The FDIC and the E.C. 
have had in-depth discussions regarding the FDIC's experience with 
resolution as well as the FDIC's SPOE strategy.
    The E.U. recently adopted important legislation related to the 
resolution of global SIFIs, such as the E.U.-wide Credit Institution 
and Investment Firm Recovery and Resolution Directive, amendments that 
further harmonize deposit guarantee schemes E.U.-wide, and a Single 
Resolution Mechanism for Euro-area Member States and others that opt-
in. The E.U. is now working to implement that legislation through 
secondary legislation, in the form of guidelines and standards, and by 
establishing the organizational capacity necessary to support the work 
of the Single Resolution Board under the Single Resolution Mechanism. 
FDIC and E.C. staffs continue to collaborate in exchanging information 
related to this implementation work. In June 2014, at the request of 
the E.C., the FDIC conducted a 2-day seminar on resolutions for 
resolution authorities and a broad audience of E.C. staff involved in 
resolutions-related matters.
    The FDIC continues to foster relationships with other jurisdictions 
that regulate G-SIFIs, including Switzerland, Germany, France and 
Japan. So far in 2014, the FDIC has had significant principal and 
staff-level engagements with these countries to discuss cross-border 
issues and potential impediments that would affect the resolution of a 
G-SIFI. We will continue this work during the remainder of 2014 and in 
2015 and plan to host tabletop exercises with staff from these 
authorities. We also held preliminary discussions on developing joint 
resolution strategy papers, similar to the one with the United Kingdom, 
as well as possible exchanges of detailees.
    In a significant demonstration of cross-border cooperation on 
resolution issues, the FDIC signed a November 2013 joint letter with 
the Bank of England, the Swiss Financial Market Supervisory Authority 
and the German Federal Financial Supervisory Authority to ISDA. This 
letter encouraged ISDA to develop provisions in derivatives contracts 
that would provide for short-term suspension of early termination 
rights and other remedies in the event of a G-SIFI resolution. The 
authorities are now providing comments on proposed draft ISDA protocols 
that would contractually implement these provisions during a resolution 
under bankruptcy or under a special resolution regime. The adoption of 
the provisions would allow derivatives contracts to remain in effect 
throughout the resolution process under a number of potential 
resolution strategies. The FDIC believes that the development of a 
contractual solution has the potential to remove a key impediment to 
cross-border resolution.
    We anticipate continuation of our international coordination and 
outreach and will continue to work to resolve impediments to an orderly 
resolution of a G-SIFI.
Risk Retention
    On August 28, 2013, the FDIC approved an NPR issued jointly with 
five other Federal agencies to implement the credit risk retention 
requirement in Section 941 of the Dodd-Frank Act. The proposed rule 
seeks to ensure that securitization sponsors have appropriate 
incentives to monitor and ensure the underwriting and quality of assets 
being securitized. The proposed rule generally requires that the 
sponsor of any asset-backed security (ABS) retain an economic interest 
equal to at least 5 percent of the aggregate credit risk of the 
collateral. This was the second proposal under Section 941; the first 
was issued in April 2011.
    The FDIC reviewed approximately 240 comments on the August 2013 
NPR. Many comments addressed the proposed definition of a ``qualified 
residential mortgage'' (QRM), which is a mortgage that is statutorily 
exempt from risk retention requirements under the Dodd-Frank Act. The 
NPR proposed to align the definition of QRM with the definition of 
``qualified mortgage'' (QM) adopted by the Consumer Financial 
Protection Bureau (CFPB) in 2013. The NPR also included a request for 
public comment on an alternative QRM definition that would add certain 
underwriting standards to the existing QM definition. The August 2013 
proposal also sets forth criteria for securitizations of commercial 
real estate loans, commercial loans, and automobile loans that meet 
specific conservative credit quality standards to be exempt from risk 
retention requirements.
    The issuing agencies have reviewed the comments, met with 
interested groups to discuss their concerns and have given careful 
consideration to all the issues raised. The agencies have made 
significant progress toward finalizing the rule and expect to complete 
the rule in the near term.
Volcker Rule Implementation
    In adopting the Volcker Rule, the agencies recognized that clear 
and consistent application of the final rule across all banking 
entities would be extremely important. To help ensure this consistency, 
the five agencies formed an interagency Volcker Rule Implementation 
Working Group. The Working Group has been meeting on a weekly basis and 
has been able to make meaningful progress on coordinating 
implementation. The Working Group has been able to agree on a number of 
interpretive issues and has published several Frequently Asked 
Questions. In addition, the Working Group has been able to successfully 
develop a standardized metrics reporting template, which has been 
provided to and tested by the industry. In addition, the Working Group 
is developing a collaborative supervisory approach by the agencies.
Community Banks
Focus of Research
    Since 2011, the FDIC has been engaged in a sustained research 
effort to better understand the issues related to community banks--
those institutions that provide traditional, relationship-based banking 
services in their local communities. Our initial findings were 
presented in a comprehensive study published in December 2012. The 
study covered topics such as structural change, geography, financial 
performance, lending strategies and capital formation, and it 
highlighted the critical importance of community banks to our economy 
and our banking system. While the study found that community banks 
account for about 14 percent of the banking assets in the U.S., they 
also account for around 45 percent of all the small loans to businesses 
and farms made by all banks in the U.S. In addition, the study found 
that, of the more than 3,100 U.S. counties, nearly 20 percent (more 
than 600 counties)--including small towns, rural communities and urban 
neighborhoods--would have no physical banking presence if not for the 
community banks operating there.
    The study also showed that community banks' core business model--
defined around careful relationship lending, funded by stable core 
deposits, and focused on the local geographic community that the bank 
knows well--performed comparatively well during the recent banking 
crisis. Among the more than 500 banks that have failed since 2007, the 
highest rates of failure were observed among noncommunity banks and 
among community banks that departed from the traditional model and 
tried to grow with risky assets often funded by volatile brokered 
deposits.
    Our community bank research agenda remains active. Since the 
beginning of the year, FDIC analysts have published new papers dealing 
with consolidation among community banks, the effects of long-term 
rural depopulation on community banks, and the efforts of Minority 
Depository Institutions to provide essential banking services in the 
communities they serve.
    We have also instituted a new section in the FDIC Quarterly Banking 
Profile, or QBP, that focuses specifically on community banks. Although 
some 93 percent of FDIC-insured institutions met our community bank 
definition in the first quarter, they hold a relatively small portion 
of industry assets; as a result, larger bank trends tend to obscure 
community bank trends. This new quarterly report on the structure, 
activities and performance of community banks should help smaller 
institutions compare their results with those of other community banks 
as well as those of larger institutions. Introducing this regular 
quarterly report is one example of the FDICs commitment to maintain an 
active program of research and analysis on community banking issues in 
the years to come.
Subchapter S
    The Basel III capital rules introduce a capital conservation buffer 
for all banks (separate from the supplementary leverage ratio buffer 
applicable to the largest and most systemically important BHCs and 
their insured banks). If a bank's risk-based capital ratios fall below 
specified thresholds, dividends and discretionary bonus payments become 
subject to limits. The buffer is meant to conserve capital in banks 
whose capital ratios are close to the minimums and encourage banks to 
remain well-capitalized.
    In July 2014, the FDIC issued guidance clarifying how it will 
evaluate requests by S corporation banks to make dividend payments that 
would otherwise be prohibited under the capital conservation buffer. S 
corporation banks have expressed concern about the capital conservation 
buffer because of a unique tax issue their shareholders face. Federal 
income taxes of S corporation banks are paid by their investors. If an 
S corporation bank has income, but is limited or prohibited from paying 
dividends, its shareholders may have to pay taxes on their pass-through 
share of the S corporation's income from their own resources. 
Relatively few S corporation banks are likely to be affected by this 
issue, and in any case not for several years. The buffer is phased-in 
starting in 2016 and is not fully in place until 2019.
    As described in the guidance, if an S corporation bank faces this 
tax issue, the Basel III capital rules allow it (like any other bank) 
to request an exception from the dividend restriction that the buffer 
would otherwise impose. The primary regulator can approve such a 
request if consistent with safety and soundness. Absent significant 
safety and soundness concerns about the requesting bank, the FDIC 
expects to approve on a timely basis exception requests by well-rated S 
corporations to pay dividends of up to 40 percent of net income to 
shareholders to cover taxes on their pass-through share of the bank's 
earnings.
Cybersecurity
    In its role as supervisor of State-chartered financial institutions 
that are not members of the Federal Reserve System, the FDIC works with 
other bank regulators to analyze emerging cyberthreats, bank security 
breaches, and other technology incidents. An important initiative of 
the FFIEC is a project to assess the level of cybersecurity readiness 
at banks, technology service providers and our own supervisory 
policies. The agencies plan to review any identified gaps to enhance 
supervisory policies to address cyberthreats.
    Recognizing that addressing cyber risks can be especially 
challenging for community banks, the FDIC has taken a number of actions 
in addition to those taken by the FFIEC to further improve awareness of 
cyber risks and encourage practices to protect against threats. In 
April, the FDIC issued a press release urging financial institutions to 
utilize available cyber resources to identify and help mitigate 
potential threats. During the first quarter of 2014, the FDIC 
distributed a package to all FDIC supervised banks that included a 
variety of tools to assist them in developing cyber readiness. As part 
of this kit, the FDIC developed a ``Cyber Challenge'' resource for 
community banks to use in assessing their preparedness for a cyber-
related incident, and videos and simulation exercises were made 
available on www.FDIC.gov and mailed to all FDIC-supervised banks. The 
Cyber Challenge is intended to assist banks in beginning a discussion 
of the potential impact of IT disruptions on important banking 
functions. In April, the FDIC also reissued three documents on 
technology outsourcing that contain practical ideas for community banks 
to consider when they engage in technology outsourcing. The documents 
are: Effective Practices for Selecting a Service Provider; Tools To 
Manage Technology Providers' Performance Risk: Service Level 
Agreements; and Techniques for Managing Multiple Service Providers.
    In addition to the FDIC's operations and technology examination 
program, the FDIC monitors cybersecurity issues in the banking industry 
on a regular basis through on-site examinations, regulatory reports, 
and intelligence reports. The FDIC also works with a number of groups, 
including the Finance and Banking Information Infrastructure Committee, 
the Financial Services Sector Coordinating Council for Critical 
Infrastructure Protection and Homeland Security, the Financial Services 
Information Sharing and Analysis Center, other regulatory agencies and 
law enforcement to share information on emerging issues.
Conclusion
    Thank you for the opportunity to share with the Committee the work 
that the FDIC has been doing to address systemic risk in the aftermath 
of the financial crisis. I would be glad to respond to your questions.


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                 PREPARED STATEMENT OF THOMAS J. CURRY
 Comptroller of the Currency, Office of the Comptroller of the Currency
                           September 9, 2014
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to update you on steps the 
Office of the Comptroller of the Currency (OCC) has taken to enhance 
the effectiveness of our supervision and the status of our efforts to 
implement the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act or Act).* The OCC is the primary regulator of nearly 
1,650 national banks and Federal savings associations with 
approximately $10.5 trillion in assets, which represents 68 percent of 
all bank and thrift assets insured by the Federal Deposit Insurance 
Corporation (FDIC). \1\ OCC-supervised banks and thrifts hold the 
majority of FDIC-insured deposits and range from small, community banks 
with assets of less than $100 million to some of the largest and most 
complex financial institutions.
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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.
     \1\ All data are as of June 30, 2014.
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    Our Nation's economic and financial condition has steadily improved 
since the financial crisis, and the strength and health of our Federal 
banking system reflect this progress. As a bank supervisor, I take 
comfort in these improvements. I am keenly aware, however, that we need 
to remain vigilant, and I am instituting new measures to ensure we do 
so. Specifically, the OCC is recalibrating the way we supervise large, 
complex financial institutions based on the lessons we have learned 
since the financial crisis. Importantly, we are strengthening our 
capacity to take a broad, horizontal view across the institutions we 
regulate to identify emerging trends and red flags, while enhancing our 
traditional hands-on supervision of individual institutions. In 
addition, we are requiring our largest institutions to improve risk 
management and corporate governance.
    In my testimony today, I will address recent OCC initiatives that 
are central to the effective and vigilant oversight of national banks 
and Federal savings associations. Additionally, in response to the 
Committee's letter of invitation, I will discuss the OCC's progress in 
issuing and implementing the rules required by the Dodd-Frank Act, as 
well as the OCC's efforts to coordinate our supervision with other 
domestic and international regulators. Finally, my testimony will touch 
on emerging issues related to cybersecurity.
I. State of the National Banking and Federal Thrift System
    The condition of the national banks and Federal savings 
associations that the OCC supervises (collectively referred to here as 
``banks'') has steadily improved over the past 4 years, as the economy 
has slowly recovered from the severe 2008-2009 credit crisis and 
recession. Banks have increased their total lending volume during this 
period, although this increase is at a pace below the long-term average 
rate of growth. Total credit growth has been subdued, primarily due to 
an extended contraction in residential mortgage activity, with only 
recent signs of emerging loan growth in this area. Private residential 
mortgage securitization has yet to recover.
    Although housing credit has continued to struggle, other areas of 
loan growth have shown more resilience. For example, commercial and 
industrial loan growth has averaged 10 percent per year during the past 
4 years, triple its average pace in the decade before the financial 
crisis. Auto sales and lending also have rebounded from the lows of the 
recession and are fast approaching precrisis levels. Credit quality has 
significantly improved. Charge-off rates for all major loan categories 
are at or below the 25-year average and, as a result, the Federal 
banking system's total loan charge-off rate is now 0.6 percent, 40 
percent below the 25-year average of 1 percent. The ratio of loan loss 
reserves to total loans, a measure of a bank's expectation of future 
loan losses, has returned to its 1984-2006 average of below 2 percent, 
after peaking at 4 percent in 2010. That said, concerns have begun to 
emerge related to subprime auto lending outside the banking system and 
to loan terms more generally. Leveraged lending also has grown rapidly, 
and the OCC, along with the other Federal banking agencies, issued 
guidance aimed at preventing overheating in this area.
    Given the gradual recovery in lending and improved credit 
performance, the profitability of the Federal banking system has 
steadily improved, from a 7 percent return on equity in 2010 to 
approximately 10 percent today. However, the return on assets is 
approximately 1.1 percent, and profitability levels remain subdued 
relative to the precrisis period. This is due in part to a continued 
low level of loans to total assets and the narrow lending margins that 
result from persistently low interest rates, as well as elevated 
expenses tied to enhanced compliance and ongoing litigation costs. Even 
so, the proportion of unprofitable banks is at 8.9 percent, just above 
the 8 percent average in the decade prior to the crisis and well down 
from a peak of nearly one-in-three at the height of the crisis.
    The number of troubled institutions supervised by the OCC (CAMELS 4 
or 5 rated) has decreased significantly, from a high of 196 in December 
2010, to 77 in June of this year. Bank balance sheets also reflect 
stronger capital and improved liquidity. Tier 1 common equity stands at 
nearly 13 percent of risk-weighted assets, up from a low of 9 percent 
in the fall of 2008. The current capital leverage ratio is now at 9.3 
percent, 40 percent above the ratio in 2008. Liquid assets have 
achieved a 30-year high of 15 percent of total assets.
II. Enhancing Supervision
    The financial crisis underscored the critical role of supervision 
in ensuring a safe and sound global banking system as well as the need 
to change supervisory approaches that may not have kept pace with 
developments in the industry. Key lessons from both the crisis and the 
international supervisory peer review study that we commissioned 
prompted the OCC to reassess and revise our supervisory approach for 
all banks, particularly larger banks. Below, I describe OCC initiatives 
in this area that will transform how we supervise both larger 
institutions and the small institutions whose vitality is critical to 
so many communities across our country.
A. New Supervisory Initiatives
    In 2013, I asked a team of international regulators (referred to 
here as the ``peer review team'') to provide the OCC with a candid and 
independent assessment of our supervision of midsize and large banks. 
The scope of the assessment was broad: it included how we go about the 
business of supervision; our agency culture and approach to risk 
identification; and any gaps in our supervisory approach or systems.
    While the peer review team complimented many areas of OCC 
supervision, it also identified areas where the OCC can improve: 
enhancing systemic risk monitoring and the processes that support 
supervisory responses; improving the consistency of supervisory 
practices within and across business lines; and strengthening the 
standards we use to supervise. In the months since the peer review 
team's report, \2\ the OCC has taken steps to improve our supervisory 
processes and execute plans based on the report's findings that include 
a number of transformational improvements, which I describe below.
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     \2\ http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-
2013-184.html
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            Remaking the Large Bank Lead Expert Program
    We are expanding and restructuring the organization, functions, and 
responsibilities of our Large Bank Lead Expert Program in which an 
expert, independent of the dedicated examination staff, is assigned to 
each key risk area. This expansion will allow us to compare the 
operations of the institutions we regulate and improve our ability to 
identify systemic risk. It will also enhance the quality control of our 
exam processes and enable us to allocate our resources more 
effectively. In addition, we are making a number of changes to our 
dedicated examiner program and implementing a rotation policy to 
enhance the skills and broaden the perspectives of our examination 
teams.
            Enhancing Risk Monitoring
    The OCC's supervisory program includes our National Risk Committee 
(NRC), which monitors the condition of the Federal banking system and 
emerging threats to the system's safety and soundness. The NRC meets 
quarterly and issues guidance to examiners providing important 
perspectives on industry trends and highlighting issues requiring 
supervisory attention. This information allows the OCC to react more 
quickly to emerging risks and trends and to allocate our resources in a 
manner that matches the challenges we are likely to face going forward.
    In addition, using midyear and year-end data, the NRC publishes the 
Semiannual Risk Perspective report, which informs the development of 
our supervisory strategies and processes. We make this report available 
to the public. The broad dissemination of this information is part of 
our continuing efforts to provide greater transparency to both the 
public and industry regarding the issues to which we are devoting 
increased supervisory attention. In June 2014, the report also began 
outlining our key supervisory priorities for the next twelve months 
both for large bank supervision and for midsize and community bank 
supervision.
    Other analytical groups that focus on specific risk areas, such as 
retail and commercial credit and conditions across our districts, 
support the work of the NRC. We recently augmented the existing risk 
committees with a Large Bank Supervision Risk Committee (LBSRC). The 
LBSRC will further enhance our ability to identify and respond quickly 
to emerging risk issues across large, complex institutions, ensure 
consistency in our supervisory activities, and assist the NRC in its 
risk monitoring activities.
            Improving Management Information Systems and Data Analytics
    The OCC has unique and secure access to substantial and 
comprehensive banking system data, and it is imperative that we have 
strong data analytics. Our goal is to transition to a shared services 
environment across functions within the agency to improve the ability 
of our supervisory staff to use this data and enhance the integrity and 
consistency of our data analytics. These changes will improve the 
consistency, reliability, and efficiency of our supervision of the 
institutions that we oversee.
            Formalizing an Enterprise Risk Management Framework
    The OCC sets a high bar for the institutions we supervise, and we 
must ask no less of ourselves. To this end, we are developing and 
formalizing an enterprise risk management framework for the OCC, 
including a risk appetite statement, to better define, measure, and 
control the risks that we accept in pursuit of our mission, vision, and 
strategic goals. A working group will soon conduct an initial 
enterprisewide risk assessment and inventory existing risk management 
practices.
B. Heightened Standards for Large Banks
    Due to their size, activities, and implications for the U.S. 
financial system, large institutions require more rigorous regulation 
and supervision than less systemically significant institutions. Since 
the crisis, we have applied heightened standards to large institutions. 
These standards address comprehensive and effective risk management; 
the need for an engaged board of directors that exercises independent 
judgment; the need for a robust audit function; the importance of 
talent development, recruitment, and succession planning; and a 
compensation structure that does not encourage inappropriate risk 
taking.
    Last week, we issued final guidelines refining and formalizing 
these standards and making them enforceable. These standards provide 
important additional supervisory tools to examiners and focus bank 
management and boards of directors on strengthening their institutions' 
risk management practices and governance. The standards are generally 
applicable to insured national banks, insured Federal savings 
associations, and insured Federal branches of foreign banks with 
average total consolidated assets of $50 billion or greater (referred 
to in this subsection as ``banks'').
    The final guidelines set forth minimum standards for the design and 
implementation of a bank's risk governance framework and provide 
minimum standards for the board's oversight of the framework. The 
standards make clear that the framework should address all risks to a 
bank's earnings, capital, and liquidity that arise from the bank's 
activities.
    The standards also set out roles and responsibilities for the 
organizational units that are fundamental to the design and 
implementation of the risk governance framework. These units, often 
referred to as a bank's three lines of defense, are front line business 
units, independent risk management, and internal audit. The standards 
state that, together, these units should establish an appropriate 
system to control risk taking. The standards also provide that banks 
should develop a risk appetite statement that articulates the aggregate 
level and types of risk a bank is willing to assume to achieve its 
strategic objectives, consistent with applicable capital, liquidity, 
and other regulatory requirements.
    In addition, the final guidelines contain standards for boards of 
directors regarding oversight of the design and implementation of a 
bank's risk governance framework. They note that it is vitally 
important for each director to be engaged in order to understand the 
risks that his or her institution is taking and to ensure that those 
risks are well-managed. Directors should be in a position to present a 
credible challenge to bank management with the goal of preserving the 
sanctity of the bank's charter. That is, a bank should not be treated 
merely as a booking entity for a holding company. The Federal bank 
charter is a special corporate franchise that provides a gateway to 
Federal deposit insurance and access to the discount window. 
Accordingly, management and independent directors must see that the 
bank operates in a safe and sound manner.
    We issued the final standards as a new appendix to Part 30 of our 
regulations. Part 30 codifies an enforcement process set out in the 
Federal Deposit Insurance Act that authorizes the OCC to prescribe 
operational and managerial standards. If a bank fails to satisfy a 
standard, the OCC may require it to submit a compliance plan detailing 
how it will correct the deficiencies and how long it will take. The OCC 
can issue an enforceable order if the bank fails to submit an 
acceptable compliance plan or fails in any material way to implement an 
OCC-approved plan.
    Higher supervisory standards for the large banks we oversee, such 
as those in the final guidelines, along with bank management's 
implementation of these standards, are consistent with the Dodd-Frank 
Act's broad objective of strengthening the stability of the financial 
system. We believe that this increased focus on strong risk management 
and corporate governance will help banks maintain the balance sheet 
improvements achieved since the financial crisis and make them better 
able to withstand the impact of future crises.
C. Supervision of Community Banks
    The OCC is the supervisor of approximately 1,400 institutions with 
assets under $1 billion, of which approximately 870 have less than $250 
million in assets. These small institutions play a vital role in our 
country's financial system by providing essential products and services 
to our communities and businesses, including credit that is critical to 
economic growth and job creation.
    The OCC is a resource to these community banks through our more 
than 60 offices throughout the United States. Our examiners are part of 
the communities in which they work and are empowered to make most 
supervisory decisions at the local level. In addition, the entire 
agency works to support these examiners and small banks and provides 
them with easy access to licensing specialists, lawyers, compliance and 
information technology specialists, and a variety of other subject 
matter experts.
    Small banks face unique challenges, and the OCC has been sensitive 
to this in our implementation of the Dodd-Frank Act and in our approach 
to supervising these institutions. Throughout the rulemaking process, 
the agency has sought and listened to comments and concerns from 
community banks. We have heard--and we agree--that a one-size-fits-all 
approach to bank supervision is not appropriate. Accordingly, we tailor 
our supervisory programs to the risk and complexity of a bank's 
activities and have separate lines of business for community and 
midsize banks and large banks. When developing regulations, the OCC 
works to avoid unnecessary regulatory and compliance burden on small 
banks.
    Our commitment to this principle is evident in many of the rules we 
have issued. For example, the lending limits rule we issued under the 
Dodd-Frank Act provides a simpler option that small banks may use for 
measuring the credit exposure of derivative and securities financing 
transactions. The final domestic capital rules, issued on an 
interagency basis, also accommodate concerns of small banks with 
respect to the treatment of trust preferred securities (TruPS), 
accumulated other comprehensive income, and residential mortgages. 
Finally, with our interagency counterparts, we revised the treatment of 
certain collateralized debt obligations (CDOs) backed primarily by 
TruPS under the Volcker Rule largely to address concerns raised by 
community banks.
    The OCC, along with the other Federal banking agencies, is also 
engaged in a review of regulatory burden pursuant to the Economic 
Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA). This 
statute requires the OCC, as well as the FDIC and Board of Governors of 
the Federal Reserve System (FRB), to seek public comment at least once 
every 10 years to identify outdated, unnecessary, or unduly burdensome 
regulations. The EGRPRA review provides the public with an opportunity 
to recommend to the agencies how to reduce burden through targeted 
regulatory changes.
    In connection with the EGRPRA process, the agencies published a 
Federal Register notice this past June asking for comment on three 
categories of rules. The comment period on this first notice ended 1 
week ago, and the agencies are reviewing the comments received. Over 
the next 2 years, the agencies will issue three more Federal Register 
notices that will invite public comment on the remaining rules. In each 
notice, we will specifically ask the public, including small 
institutions, to identify ways to reduce unnecessary burden associated 
with our regulations.
    The OCC also has taken steps to communicate more effectively with 
the small banks we supervise. Certain provisions of the Dodd-Frank Act 
apply to institutions of all sizes, but many apply only to larger 
banks. Therefore, in each bulletin transmitting a new regulation or 
supervisory guidance to our banks, we include both a ``highlights 
section'' that succinctly summarizes the major provisions of the 
issuance and an easy-to-see box written in plain English that allows 
community banks to assess quickly whether the issuance applies to them. 
We have also developed other methods for distilling complex 
requirements, such as summaries and guides that highlight aspects of 
rules that are relevant to small institutions. We have received 
positive feedback on these communication tools, and we will continue to 
work to make the regulatory process manageable for small banks.
III. Dodd-Frank Act: Regulatory Milestones Achieved
    Congress enacted the Dodd-Frank Act to address regulatory gaps, 
create a stronger financial system, and address systemic issues that 
contributed to, or that accentuated and amplified the effects of, the 
financial crisis. To achieve these objectives, the Act provided the 
Federal financial regulators, including the OCC, with new tools to 
address risk and to mitigate future financial crises.
    The implementation of the Dodd-Frank Act presented challenges on an 
unprecedented scale, as many of these new tools required, among other 
things, the Federal financial regulators to write or revise a number of 
highly complex regulations. In the 4 years since the Act became law, 
the OCC has worked tirelessly to fulfill this mandate. I am pleased to 
report that the OCC has completed all rules that we have independent 
authority to issue. Furthermore, the OCC has finalized many of the 
regulations that the Dodd-Frank Act required the OCC to issue jointly 
or on a coordinated basis with other Federal financial regulators. For 
those rulemakings that remain, we have made good progress and, in many 
cases, we have seen meaningful improvements in industry practices in 
anticipation of the finalized rules. Below, I will discuss the 
completed rulemakings followed by a description of the rulemakings that 
are in-process.
A. Finalized Rules
            OCC/OTS Integration
    The Dodd-Frank Act transferred to the OCC all the functions of the 
Office of Thrift Supervision (OTS) relating to Federal savings 
associations, as well as the responsibility for the examination, 
supervision, and regulation of Federal savings associations. We have 
previously reported on the successful transfer of these functions, 
including the integration into the OCC of former OTS employees and 
systems and the development of an aggressive cross-credentialing 
program that qualifies examiners to lead examinations of both national 
banks and Federal savings associations.
    We are committed to continuing to improve and refine our new 
responsibilities. For example, we are undertaking a comprehensive, 
multiphase review of our regulations and those of the former OTS to 
reduce regulatory burden and duplication, promote fairness in 
supervision, and create efficiencies for both types of institutions. We 
have begun this process and, in June of this year, we issued a proposal 
to integrate national bank and Federal saving association rules 
relating to corporate activities and transactions.
    In addition, as we have gained experience in our supervision of 
Federal savings associations, I have come to recognize that the current 
legal framework limits the ability of these institutions to adapt their 
business strategies to changing economic and business environments 
unless they change their charter or business plans. More specifically, 
Federal savings associations that want to move from a mortgage lending 
business model to providing a mix of business loans and consumer credit 
would need to change charters. I believe that the thrift charter should 
be flexible enough to accommodate either strategy.
    When I was a regulator in Massachusetts, we made State bank and 
thrift powers and investment authorities, as well as supervisory 
requirements, the same or comparable regardless of charters, and we 
allowed the institutions to exercise those powers while retaining their 
own corporate structure. Congress may wish to consider authorizing a 
similar system at the Federal level. This flexibility will improve the 
ability of thrifts to meet the financial needs of their communities.
            The ``Volcker Rule''
    On December 10, 2013, the OCC, jointly with the FDIC, FRB, and the 
Securities and Exchange Commission (SEC), adopted final regulations 
implementing the requirements of section 619, also known as the 
``Volcker Rule''. \3\ Section 619 prohibits a banking entity from 
engaging in short-term proprietary trading of financial instruments and 
from owning, sponsoring, or having certain relationships with hedge 
funds or private equity funds (referred to here and in the final 
regulations as ``covered funds''). Notwithstanding these prohibitions, 
section 619 permits certain financial activities, including market 
making, underwriting, risk-mitigating hedging, trading in Government 
obligations, and organizing and offering a covered fund.
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     \3\ The Commodity Futures Trading Commission (CFTC) issued a 
separate rule adopting the same common rule text and a substantially 
similar preamble.
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    In accordance with the statute, the final regulations prohibit 
banking entities from engaging in impermissible proprietary trading and 
strictly limit their ability to invest in covered funds. At the same 
time, the regulations are designed to preserve market liquidity and 
allow banks to continue to provide important client-oriented services. 
As discussed later in this testimony, the OCC and the other agencies 
are currently working together to implement this rulemaking.
    The agencies followed this rulemaking with an interagency interim 
final rule to permit banking entities to retain interests in certain 
CDOs backed primarily by TruPS. We issued this interim rule because of, 
and in response to, concerns expressed primarily by small institutions 
that they would otherwise have to divest instruments that the Dodd-
Frank Act expressly allows for capital-raising purposes.
            Annual Stress Tests
    This OCC-only rule, issued on October 9, 2012, implements section 
165(i)(2) of the Act by requiring banks with average total consolidated 
assets of $10 billion or greater to conduct annual ``stress tests.'' 
The rule, which is consistent with and comparable to the stress test 
rules issued by the other Federal banking agencies, establishes methods 
for conducting stress tests, requiring that the tests be based on at 
least three different economic scenarios (baseline, adverse, and 
severely adverse). The rule also sets forth the form and content for 
reporting the test results and requires banks to publish a summary of 
the results. In addition, the rule divides banks into two categories, 
based on asset size, so that those with total consolidated assets 
between $10 and $50 billion and those with assets over $50 billion are 
subject to different test requirements, as well as reporting and 
disclosure deadlines.
            Lending Limits
    The OCC issued a final rule on June 25, 2013, implementing section 
610 of the Act, which amended the national bank statutory lending limit 
at 12 U.S.C. 84. The rule revises the lending limits applicable to 
banks to include credit exposures arising from derivative transactions, 
as well as repurchase agreements, reverse repurchase agreements, 
securities lending transactions, and securities borrowing transactions.
            Appraisals for Higher-Priced Mortgage Loans
    On January 18, 2013, the OCC participated in the issuance of an 
interagency rule concerning appraisals for ``higher-priced mortgage 
loans,'' which are loans secured by a consumer's home with interest 
rates above certain thresholds. The rule requires that creditors for 
higher-priced loans obtain appraisals that meet certain standards, 
notify loan applicants of the purpose of the appraisal, and give 
applicants for certain higher-priced mortgages a copy of the appraisal 
before advancing credit. In addition, if the seller acquired the 
property for a lower price during the 6 months before the sale and the 
price difference exceeds a certain threshold, a creditor must obtain a 
second appraisal at no cost to the consumer. This requirement for 
higher-priced home-purchase mortgage loans seeks to address fraudulent 
property flipping by ensuring that the property value increase was 
legitimate.
            Collins Amendment
    The OCC participated with the FDIC and FRB in issuing an 
interagency rule on June 11, 2011, that established a floor for the 
risk-based capital requirements applicable to the largest, 
internationally active banking organizations. This rule amended the 
advanced risk-based capital adequacy standards (the ``advanced 
approaches rules'') consistent with section 171(b) of the Act, known as 
the ``Collins Amendment''. Under the rule, a banking organization that 
has received approval to use the advanced approaches rules is required 
to meet the higher of the minimum requirements under the general risk-
based capital rules or the minimum requirements under the advanced 
approaches rules.
            Alternatives to External Credit Ratings
    On June 13, 2012, the OCC published a rule implementing sections 
939 and 939A of the Act. This rule removes references to external 
credit ratings from the OCC's noncapital regulations, including its 
regulation that sets forth the types of investment securities that 
banks may purchase, sell, deal in, underwrite, and hold. Banks must 
conduct their own analysis of whether a security is investment grade. 
In addition, the OCC, together with the other Federal banking agencies, 
removed all references to external credit ratings from their risk-based 
capital rules when we finalized the enhanced capital rule on October 
11, 2013 (discussed below). For example, for securitization positions, 
the enhanced capital rule replaced a ratings-based approach with a non-
ratings-based supervisory formula for determining risk-based capital 
requirements.
B. Rules In-Process
            Swaps Margin Rule
    The OCC, jointly with the FDIC, FRB, Federal Housing Finance Agency 
(FHFA), and Farm Credit Administration, published a proposal in 2011 to 
implement sections 731 and 764 of the Act by requiring covered swap 
entities to collect margin for their noncleared swaps and noncleared 
security-based swaps. Subsequently, the OCC, FDIC, and FRB participated 
in international efforts to coordinate the implementation of margin 
requirements among the G20 Nations. Following extensive public review 
and comment, the Basel Committee on Bank Supervision (Basel Committee) 
and the International Organization of Securities Commissions finalized 
an international framework in September of last year.
    After considering the international framework and the comments we 
received on the U.S. proposal, the agencies decided to repropose the 
U.S. swaps margin rule. I am happy to report that last week I signed an 
interagency reproposal that imposes minimum initial margin and 
variation requirements for certain noncleared swaps and security-based 
swaps. The reproposal specifically seeks to avoid unnecessarily 
burdening both nonfinancial entities that use swap contracts to hedge 
commercial costs and smaller financial companies whose activities do 
not pose a risk to the financial system. The rule would reduce risk, 
increase transparency, and promote market integrity within the 
financial system by addressing the weaknesses in the regulation and 
structure of the swaps markets that the financial crisis revealed. The 
comment period on this reproposal is open for 60 days but, as 
previously noted in the OCC's Quarterly Report on Bank Trading and 
Derivatives Activities, we have already seen improvements in the 
overall collateralization rates for industry derivative exposures.
            Credit Risk Retention
    The OCC participated in the issuance of an interagency proposal in 
2011 that established asset-backed securities requirements designed to 
motivate sponsors of securitization transactions to exercise due 
diligence regarding the quality of the loans they securitize. Under 
this proposal, a securitizer would have to retain a material economic 
interest in the credit risk of any asset that it transferred, sold, or 
conveyed to a third party. The agencies received over 10,000 comments 
on the proposal and concluded that the rulemaking would benefit from a 
second round of public review and comment.
    In September 2013, the interagency group issued a reproposal. 
Although the reproposal includes significant changes from the original, 
its focus is the same--to ensure that sponsors are held accountable for 
the performance of the assets they securitize. The OCC and the other 
participating agencies expect to approve the final rule in the near 
future.
            Incentive-Based Compensation Arrangements
    The OCC, together with the FRB, FDIC, OTS, National Credit Union 
Administration, SEC, and FHFA, published a proposal on April 14, 2011, 
designed to ensure that certain financial institutions with more than 
$1 billion in assets structure their incentive compensation 
arrangements: (1) to balance risk and financial rewards; (2) to be 
compatible with effective controls and risk management; and (3) to be 
supported by strong corporate governance. Specifically, the proposal, 
which would implement section 956 of the Act, would require these 
institutions to report incentive-based compensation arrangements and 
prohibit arrangements that either provide excessive compensation or 
could expose an institution to inappropriate risks that could lead to 
material financial loss. In light of the thousands of comments that the 
agencies received on the proposal, as well as significant industry and 
international developments related to incentive-based compensation, the 
agencies continue to work on the rule. The completion of this rule is 
an OCC priority because of the impact that poorly structured incentive 
compensation can have on risk-taking behaviors and the overall safety 
and soundness of an institution. Finalizing this rule will reinforce 
and complement the risk management principles and heightened standards 
that we are implementing.
            Retail Foreign Exchange Transactions
    On July 14, 2011, the OCC issued a final retail foreign exchange 
transactions rule for OCC-regulated entities that engage in off-
exchange transactions in foreign currency with retail customers, 
implementing section 742(c)(2) of the Act. The rule contains a variety 
of consumer protections, including margin requirements, required 
disclosures, and business conduct standards, on foreign exchange 
options, futures, and futures-like transactions with certain retail 
customers. To promote regulatory comparability, the OCC worked closely 
with the CFTC, SEC, FDIC, and FRB in developing this rule. On October 
12, 2012, the OCC issued a proposal to amend this final rule in light 
of related CFTC and SEC rules, and we continue to work on finalizing 
this proposal.
            Appraisal Management Companies
    In April 2014, the OCC joined in the issuance of an interagency 
proposal to implement section 1473 of the Act, which sets forth minimum 
requirements for State registration and supervision of appraisal 
management companies (AMCs). (AMCs serve as intermediaries between 
appraisers and lenders and provide appraisal management services). The 
proposal: (1) provides that AMC-coordinated appraisals must adhere to 
applicable quality control standards; (2) facilitates State oversight 
of AMCs; and (3) ensures that States report to the Federal Financial 
Institutions Examination Council's (FFIEC) Appraisal Subcommittee the 
information needed to administer a national AMC registry. The agencies 
plan to issue a final rule in the near term.
            Source of Strength
    The OCC, FRB, and FDIC continue to work on an interagency basis to 
draft a proposal to implement section 616(d) of the Act to require bank 
and savings and loan holding companies, as well as other companies that 
control depository institutions, to serve as a ``source of strength'' 
for their subsidiary depository institutions. As we saw during the 
crisis, too often banks served as a source of strength for nonbank 
subsidiaries of their holding companies. This rulemaking will 
complement actions we have taken elsewhere to preserve the federally 
insured bank's financial health.
IV. Other Significant OCC Rulemaking Projects
    The OCC, together with the FRB and FDIC, has proposed or finalized 
a number of other significant rules over the past 4 years. Many of 
these rules, although not mandated by the Dodd-Frank Act, share the 
same broad objectives and address many of the same concerns as the Act. 
Several of these rules result from international initiatives by groups 
such as the Basel Committee and, consistent with the Dodd-Frank Act, 
are intended to strengthen global capital and liquidity requirements 
and promote a more resilient banking sector. I describe these rules 
below.
            Enhanced Liquidity Standards
    On September 3, 2014, the OCC, FDIC, and FRB approved a final rule 
to implement the Basel Committee's liquidity coverage ratio in the 
United States. These standards address banking organizations' 
maintenance of sufficient liquidity during periods of acute short-term 
financial distress. Under the rule, large, internationally active 
banking organizations \4\ are required to hold an amount of high 
quality liquid assets to cover 100 percent of their total net cash 
outflows over a prospective 30 calendar-day period.
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     \4\ This category of institutions is defined as those with $250 
billion or more in total consolidated assets or $10 billion or more in 
foreign financial exposure.
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    The agencies are also working with the Basel Committee to develop a 
net stable funding ratio, which is intended to complement the liquidity 
funding ratio by enhancing long-term structural funding. It is expected 
that these liquidity standards, once fully implemented, will accompany 
the existing liquidity risk guidance and enhanced liquidity standards 
(issued by the FRB in consultation with the OCC and the FDIC) that are 
part of the heightened prudential standards required by section 165 of 
the Dodd-Frank Act.
            Enhanced Capital Rule
    Last year, the OCC, FDIC, and FRB issued a rule that 
comprehensively revises U.S. capital standards. Most revisions, 
including the narrowing of instruments that count as regulatory 
capital, will be phased in over several years. For large, 
internationally active banking organizations, this phase-in has already 
begun. For all other banks, the phase-in will begin in 2015.
    The Basel Committee's efforts to revise the international capital 
framework shared many of the goals of the Dodd-Frank Act and addressed 
many of the same issues. For example, both the agencies' enhanced 
capital rule and the Dodd-Frank Act focus increased attention on 
efforts to address the excessive interconnectedness of financial sector 
exposures and to create incentives for the use of central clearing 
houses for over-the-counter derivatives. This capital rule and the 
Dodd-Frank Act require an improvement in the quality and consistency of 
regulatory capital by narrowing the instruments that count as 
regulatory capital. Furthermore, the enhanced capital rule establishes 
conservative, stringent capital standards, especially for large banking 
organizations, by increasing overall risk-based capital requirements 
and refining the methodologies for determining risk-weighted assets to 
better capture risk.
            Supplementary Leverage Ratio
    Regulatory capital standards in the U.S. have long included both 
risk-based capital and leverage ratio requirements. The Basel 
Committee's revisions to the international capital framework introduced 
a new leverage ratio requirement for large, internationally active 
banking organizations. The Federal banking agencies' supplementary 
leverage ratio implements this additional and stricter leverage 
requirement. Unlike the more broadly applicable leverage ratio, this 
supplementary leverage ratio adds off-balance sheet exposures into the 
measure of total leverage exposure (the denominator of the leverage 
ratio). The supplementary leverage ratio is a more demanding standard 
because large banking organizations often have significant off-balance 
sheet exposures arising from different types of commitments, 
derivatives, and other activities.
    Earlier this year, to further strengthen the resilience of the 
banking sector, the Federal banking agencies finalized a rule that 
enhances the supplementary leverage ratio requirement for the largest, 
most systemically important U.S. banking organizations (those with $700 
billion or more in total consolidated assets or $10 trillion or more in 
assets under custody). Under this rule, these banking organizations 
will be required to maintain even more Tier 1 capital for every dollar 
of exposure in order to be deemed ``well capitalized.''
    Last week, the OCC and other Federal banking agencies approved a 
final rule that further strengthens the supplementary leverage ratio by 
more appropriately capturing a banking organization's potential 
exposures. In particular, the revisions contained in this final rule 
will better capture leverage embedded in a bank's buying and selling of 
credit protection through credit derivatives. This should further 
improve our assessment of leverage at the largest banks that are the 
most involved in the credit derivatives business.
V. Coordination With Domestic and International Regulators
    The Committee has also asked us to report on the OCC's efforts to 
better coordinate with other domestic and international regulators. The 
OCC, FDIC, and FRB have a long history of cooperative and productive 
relationships, through a combination of formal agreements, informal 
working groups, and the FFIEC. For example, although the OCC, FDIC, and 
FRB each has its own infrastructure, focus, and responsibilities, we 
work together to foster a coordinated and cohesive supervisory approach 
that minimizes overlaps and avoids supervisory gaps. This allows each 
agency to deploy its resources effectively and leverage supervisory 
work products. It also allows for the timely communication of 
supervisory risks, concerns, priorities, and systemic information, 
while reducing the supervisory burden on our institutions and the 
agencies. In addition, I am very pleased to report that the OCC and SEC 
recently signed a Memorandum of Understanding to facilitate sharing and 
coordination between our two agencies.
    We have extended this network to include collaboration with the 
Bureau of Consumer Financial Protection (CFPB) and State banking 
regulators. For example, we have protocols in place to share 
information with the CFPB, and we work together to schedule exams and 
coordinate other supervisory activities. In addition, the OCC is 
engaged in the Financial Stability Oversight Council, which the Dodd-
Frank Act established to help identify and respond to emerging risks 
across the financial system. Together, these relationships allow 
agencies to share and compare insights and expertise and to reduce 
duplication.
    Implementation of the Volcker Rule is another important area where 
we are working together with other agencies to coordinate our 
supervisory strategies and our interpretive approaches. An informal, 
interagency staff-level working group meets regularly to discuss 
interpretive issues common to all of the agencies with a goal of 
developing and publishing uniform answers to frequently asked 
questions. The agencies published the first set of ``Frequently Asked 
Questions'' on their respective Web sites on June 10, 2014. In 
addition, the agencies are discussing how the collaborative approach to 
supervision in use among the banking agencies could be expanded to 
include the SEC and the CFTC for purposes of Volcker compliance 
supervision. I strongly support a supervisory approach that promotes 
orderly, coherent supervision by the agencies involved in implementing 
the Volcker Rule, and I look forward to our ongoing cooperation toward 
that end.
    The interconnectedness of the global financial system has also 
increased the importance of effective international supervisory 
coordination and collaboration. As members of the Basel Committee, the 
OCC and the other U.S. Federal banking agencies played a critical role 
in developing international standards incorporating many lessons 
learned since the financial crisis, such as those reflected in the 
agencies' enhanced capital rule. In addition, OCC staff serves on 
numerous Basel Committee working groups and chairs its Supervision and 
Implementation Group (SIG). The SIG has overseen the Basel Committee's 
recent work disseminating good practices on stress testing and business 
model analysis, as well as updating principles for bank governance, 
risk data aggregation, and the management of supervisory colleges.
    The OCC, along with the FDIC and FRB, also regularly enters into 
arrangements with foreign regulators that broadly govern information 
access and sharing. The purpose of these arrangements, which include 
Memoranda of Understanding, statements of cooperation, and exchanges of 
letters, is to assist each regulator in obtaining the information 
necessary to carry out its respective supervisory responsibilities. 
They address issues including cooperation during the licensing process, 
the supervision of ongoing activities, and the handling of problem 
banks.
    The OCC also plays an important role in international discussions 
concerning cross-border resolutions including through the Financial 
Stability Board's Cross-Border Crisis Management Group and the Legal 
Experts Group of the Resolutions Steering Group. In addition, the OCC 
participates in such discussions in firm-specific Crisis Management 
Groups and Supervisory Colleges and on a bilateral basis with 
prudential supervisors. For example, we have been working with the 
FDIC, FRB, SEC, and numerous foreign jurisdictions to develop 
agreements to facilitate coordination in future crises that affect 
significant, cross-border financial institutions.
VI. Emerging Issues: Cybersecurity
    While it is essential that we learn lessons from history, it is 
unlikely that the challenges of tomorrow will take the same form as 
those of the past. The now regular and wide-scale reports of 
cyberattacks underscore the importance of cybersecurity and 
preparedness. It is clear that some of these attacks use increasingly 
sophisticated malware and tactics. With this in mind, I want to share 
with you what the OCC and our colleagues in the banking regulatory 
community are doing to address one of the most pressing concerns facing 
the financial services industry today--the operational risks posed by 
cyberattacks. There are few issues more important to me, to the OCC, 
and to our country's economic and national security than shoring up the 
industry's and our own defenses against cyberthreats.
    In June 2013, the FFIEC, which I currently chair, announced the 
creation of the Cybersecurity and Critical Infrastructure Working Group 
(CCIWG). This group coordinates with intelligence, law enforcement, the 
Department of Homeland Security, and industry officials to provide 
member agencies with accurate and timely threat information. Within its 
first year, this working group released joint statements on the risks 
associated with ``distributed denial of service'' attacks, automated 
teller machine ``cash-outs,'' and the wide-scale ``Heartbleed'' 
vulnerability. They held an industry webinar for over 5,000 community 
bankers and conducted a cybersecurity assessment of over 500 community 
institutions. The information from this assessment will help FFIEC 
members identify and prioritize actions that can enhance the 
effectiveness of cybersecurity-related guidance to community financial 
institutions.
    The CCIWG is also working to identify gaps in the regulators' 
examination procedures and examiner training to further strengthen the 
banking industry's cybersecurity readiness and its ability to address 
the evolving and increasing cybersecurity threats. The OCC will 
continue to work with the institutions we supervise, our Federal 
financial regulatory colleagues, and others within Federal, State, and 
local governments as we address this ongoing threat to our financial 
system.
Conclusion
    Thank you again for the opportunity to appear before you and to 
update the Committee on the OCC's continued efforts to implement the 
Dodd-Frank Act and other initiatives at the agency.
                                 ______
                                 
                 PREPARED STATEMENT OF RICHARD CORDRAY
            ADirector, Consumer Financial Protection Bureau
                           September 9, 2014
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to testify today about the 
implementation of the Dodd-Frank Act. We appreciate your oversight and 
leadership as we all work to strengthen our financial system and to 
ensure that it serves both consumers and the long-term foundations of 
the American economy.
    As you know, the Consumer Financial Protection Bureau is the 
Nation's first Federal agency whose sole focus is protecting consumers 
in the financial marketplace. The effects of the financial crisis--with 
millions of lost jobs, millions of lost homes, and tremendous declines 
in household wealth amounting to trillions of dollars--remain vivid in 
our collective experience. Although the damage done to individuals and 
communities was substantial, our country is finally recovering.
    In passing the Dodd-Frank Act, Congress vested in this new Bureau 
the responsibility to stand on the side of consumers and to help 
restore their trust in the financial marketplace. Over the past 3 
years, we have made considerable progress in fulfilling our rulemaking, 
supervisory, and enforcement responsibilities to protect people all 
across this country.
    Our initial focus, as directed by Congress, was to address deep 
problems in the mortgage market that helped precipitate the financial 
crisis. We began by issuing a series of mortgage rules that took effect 
earlier this year. They require creditors to make reasonable, good 
faith assessments that borrowers are able to repay their loans; address 
pervasive problems in mortgage servicing that caused many homeowners to 
end up in foreclosure; regulate compensation practices for loan 
originators; and address various other practices that contributed to 
the housing crisis and ensuing financial meltdown. We have spent much 
of the last 20 months working intensively with industry, housing 
counselors, and other stakeholders to ensure that these rules are 
implemented smoothly according to the timelines established by 
Congress.
    Last fall, we also issued another mortgage rule to accomplish a 
goal long urged in the Congress, which was to consolidate Federal 
mortgage disclosures under various laws. The new ``Know Before You 
Owe'' mortgage forms are streamlined and simplified to help consumers 
understand their options, choose the deal that is best for them, and 
avoid costly surprises at the closing table. We conducted extensive 
testing of the new forms before issuing a proposal and later to 
validate the results. The testing showed that consumers at very 
different levels of experience were able to understand the new forms 
better than the current forms. This rule takes effect about a year from 
now, and we again are working intensively to help industry implement 
the rule and to prepare educational materials that help consumers 
understand and use the new forms.
    This summer, we also issued a proposed rule to implement changes 
Congress made to the Home Mortgage Disclosure Act. The point is to 
improve the quality of data available to monitor compliance with fair 
lending laws, public and private investment to meet housing needs, and 
general developments in the mortgage market. As with the redesign of 
the mortgage disclosure forms, we believe this rulemaking presents an 
opportunity to reduce unwarranted regulatory burdens. So we are looking 
closely at how to clarify existing requirements and streamline the 
processes and infrastructure for reporting this data. We have conducted 
detailed discussions with a group of small creditors to focus on their 
particular concerns, and we are now seeking broad public comment from 
all stakeholders on the proposed rule through the end of October.
    As each of these initiatives proceeds, we are working diligently to 
monitor the effects of our rules on the mortgage market; make 
clarifications and adjustments to our rules where warranted; provide 
compliance guides, webinars, and other tools to facilitate the 
implementation process; and work closely with our fellow agencies to 
support their own regulatory initiatives. We are intent on making sure 
that these statutory and regulatory provisions achieve their intended 
goals. Right now, for instance, we are pursuing further research to 
determine how best to define the scope of statutory provisions for 
small creditors that operate predominantly in ``rural or underserved'' 
areas in order to promote access to credit in those areas.
    We are also intensifying our focus on nonmortgage markets to 
address other pressing consumer financial protection issues. For 
example, we adopted a rule specified by Congress that fashioned the 
first comprehensive Federal consumer protections for international 
money transfers, often called remittances. We have also issued a series 
of rules defining the parameters of the Bureau's supervision authority 
over larger participants in certain financial markets, which enables us 
to impose supervisory oversight over their operations and activities. 
More of those rules are on their way. We are well into the process of 
developing proposed rules in several other areas, including prepaid 
cards, debt collection, and payday lending. And we are conducting 
intensive research on overdraft services and various other topics to 
determine what kind of rulemaking activity may be warranted in those 
areas.
    Another key task for the Bureau has been to build effective 
supervision and enforcement programs to ensure compliance with Federal 
consumer financial laws. This work is critical to protect consumers, 
yet at the same time it is designed to create fair markets through 
evenhanded oversight. For the first time ever, this new Federal agency 
has authority to supervise not only the larger banks but also a broad 
range of nonbank financial companies, including mortgage lenders and 
servicers, payday lenders, student loan originators and servicers, debt 
collectors, and credit reporting companies. As we have built and 
refined our supervision program, we have devised a system of risk-based 
prioritization to make the best use of our examination resources. This 
prioritization includes an assessment of potential consumer risk along 
with factors such as product market size, the entity's market share, 
the potential for consumer harm, and field and market intelligence that 
includes other factors such as management quality, prior regulatory 
history, and consumer complaints.
    We strive to conduct effective examinations while minimizing 
unnecessary burden on supervised entities. Examinations typically 
involve work done both off site and on site, scoped to focus on areas 
posing the highest potential risks to consumers. We have made it a 
priority to coordinate the timing and substance of examination 
activities with our Federal and State regulatory partners. By these 
methods, our supervision program is helping to drive a cultural change 
within financial institutions that places more emphasis on compliance 
with the law and treating customers fairly. When examinations reveal 
legal violations, we require appropriate corrective action, including 
financial restitution to consumers. We are also insistent that 
institutions must have compliance management systems to prevent 
violations and ensure appropriate self-monitoring, correction, and 
remediation where violations have occurred. This work has strengthened 
compliance management at the large banks and caused many large nonbank 
firms to implement compliance management systems for the first time. 
Reinforcement of these expectations is helping to level the playing 
field for competitors across entire markets, regardless of charter or 
corporate form.
    Our enforcement team is responsible for investigating possible 
violations of Federal consumer financial laws and enforcing the law 
through administrative and judicial proceedings. Consistent enforcement 
of the laws under our jurisdiction benefits consumers, honest 
businesses, and the economy as a whole. To date, our enforcement 
actions amount to $4.7 billion in relief for roughly 15 million 
consumers who were harmed by illegal practices.
    Let me give just a few recent examples. Along with officials in 49 
States, we took action against the Nation's largest nonbank mortgage 
loan servicer for misconduct at every stage of the mortgage servicing 
process. A Federal court consent order requires the company to provide 
$2 billion in principal reduction to underwater borrowers and to refund 
$125 million to nearly 185,000 borrowers who had already been 
foreclosed upon. We also partnered with 13 State attorneys general to 
obtain $92 million in debt relief for about 17,000 servicemembers and 
others harmed by a company's predatory lending scheme involving 
inflated prices for electronics where the actual annual percentage rate 
charged exceeded 100 percent more than six times the rate that was 
disclosed to servicemembers and other consumers.
    We worked with the Department of Justice on two significant 
matters. First, we secured an order from a Federal district court in 
Pennsylvania requiring a bank to pay $35 million to African American 
and Hispanic borrowers who were charged higher prices on mortgage loans 
than nonminority borrowers. Second, we ordered one of the largest 
indirect auto lenders to pay $80 million in damages to 235,000 
Hispanic, African American, and Asian and Pacific Islander borrowers 
because of discriminatory practices in ``marking up'' interest rates on 
auto loans to rates higher than those charged to similarly situated 
white borrowers. The $80 million refund to consumers and $18 million 
civil penalty stand as the largest amount of relief that the Federal 
Government has ever secured in a case of auto loan discrimination.
    We also took action against two of the Nation's largest payday 
lenders for violations of the law. In one of the actions, we secured 
complete consumer refunds of up to $14 million and a $5 million civil 
penalty from a company for robo-signing court documents related to debt 
collection lawsuits, illegally overcharging servicemembers in violation 
of the Military Lending Act, and destroying records in advance of our 
examination. In the other matter, we determined after an investigation 
that the company used illegal debt collection tactics--including 
harassment and false threats of lawsuits or criminal prosecution--to 
bully overdue borrowers into taking out new payday loans with expensive 
fees despite their demonstrated inability to repay their existing 
loans. The company will pay $10 million in restitution and penalties. 
In both matters, injunctive relief has been imposed to prevent such 
misconduct from recurring in the future.
    At the heart of our mission is the premise that consumers deserve 
to have someone stand on their side and make sure they are treated 
fairly in the financial marketplace. Since the day we opened our doors 
and received our first few hundred consumer complaints, we have now 
handled nearly 440,000 complaints and secured both monetary and 
nonmonetary relief on behalf of tens of thousands of individual 
consumers, including many people in each of your States.
    Consumers should also have the tools and information they need to 
navigate financial choices. We have developed consumer resources such 
as the ``Ask CFPB'' feature on our Web site, which allows consumers to 
find answers to more than a thousand common financial questions and has 
been visited by more than 3.3 million unique visitors. We developed 
``Know Before You Owe'' tools to make the costs and risk of financial 
products more clear. We also worked with the Department of Education to 
develop the ``Financial Aid Shopping Sheet'', which has now been 
adopted by more than 2,000 colleges and universities to help students 
make apples-to-apples comparisons of college costs. We constantly 
engage in extensive outreach efforts, and our Office of Servicemember 
Affairs, led by Holly Petraeus, has visited 91 military installations 
and units to hear concerns and share information with servicemembers.
    All of our work has benefited by the engagement of millions of 
Americans, and our constructive dialogue with financial institutions, 
including community banks and credit unions in regular meetings all 
around the country. My outstanding colleagues at the Consumer Bureau, 
as well as the leaders of our fellow agencies represented on this 
panel, are strongly dedicated to a shared vision of a healthy consumer 
financial marketplace and we continue to work very well together in 
pursuit of that goal.
    Thank you and I look forward to your questions.
                                 ______
                                 
                  PREPARED STATEMENT OF MARY JO WHITE
               Chair, Securities and Exchange Commission
                           September 9, 2014
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for inviting me to testify about the Securities 
and Exchange Commission's (``SEC'' or ``Commission'') ongoing 
implementation of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'' or ``Act'') to reduce systemic 
risks, enhance transparency and better protect investors, as well as 
other steps taken to improve financial stability, close regulatory 
gaps, and better coordinate with domestic and international regulators. 
\1\
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     \1\ The views expressed in this testimony are those of the Chair 
of the Securities and Exchange Commission and do not necessarily 
represent the views of the full Commission.
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    The Dodd-Frank Act gave the SEC significant new responsibilities, 
requiring the agency to undertake the largest and most complex 
rulemaking agenda in its history. The Act includes some 90 provisions 
that require SEC rulemaking and more than 20 other provisions that 
require studies or reports. In addition, the Act and the financial 
crisis focused the SEC's efforts more directly on enhancing financial 
stability and the reduction of systemic risk.
    The SEC has made substantial progress implementing this agenda, 
even as we have continued our core responsibilities of pursuing 
securities violations, reviewing public company disclosures and 
financial statements, inspecting the activities of regulated entities, 
and maintaining fair and efficient markets, including enhancements to 
our equity market structure.
    Since I became SEC Chair in April of 2013, the Commission has 
focused on eight key areas addressed by the Dodd-Frank Act: credit 
rating agencies; asset-backed securities; municipal advisors; asset 
management, including regulation of private fund advisers; over-the-
counter derivatives; clearance and settlement; proprietary activities 
by financial institutions; and executive compensation. In furtherance 
of those regulatory objectives, the Commission has, to date, 
implemented new restrictions on the proprietary activities of financial 
institutions through the Volcker Rule, created a wholly new regulatory 
framework for municipal advisors, and advanced significant new 
standards for the clearing agencies that stand at the center of our 
financial system. We also have finalized critical Dodd-Frank Act rules 
intended to strengthen the integrity of credit ratings, reducing 
conflicts of interest in ratings and improving their transparency. We 
have adopted significantly enhanced disclosures for asset-backed 
securitizations and completed structural and operational reforms to 
address risks of investor runs in money market funds. We have pushed 
forward new rules for previously unregulated derivatives and begun 
implementing additional executive compensation disclosures. And we have 
put in place strong new controls on broker-dealers that hold customer 
assets, reduced reliance on credit ratings, and barred bad actors from 
private securities offerings. Since April 2013, the SEC has proposed or 
adopted nearly 20 significant Dodd-Frank Act rules, in addition to 
adopting structural reforms for money market funds, which were 
highlighted as a systemic vulnerability in the financial crisis. 
Attached as Appendix A is a detailed summary of the agency's required 
Dodd-Frank Act rulemaking, which reflects that the Commission has 
proposed or adopted rules with respect to approximately 90 percent of 
all of the provisions of the Dodd-Frank Act that mandate Commission 
rulemaking.
    We have worked closely with our fellow financial regulators to 
ensure that our financial regulatory system works together to protect 
against risks, both by promoting financial stability and supporting a 
sensible and integrated financial regulatory framework that works 
effectively for market participants. The Financial Stability Oversight 
Council (FSOC) established by the Dodd-Frank Act, in which I 
participate as a member, also serves an important role in this effort.
    While the SEC has made significant progress, more remains to be 
done on both our Dodd-Frank Act and Jumpstart Our Business Startups 
(JOBS) Act rulemakings, and we must continue our work with intensity. 
As we do so, we must be deliberate as we consider and prioritize our 
remaining mandates and deploy our broadened regulatory authority, 
supported by robust economic analysis. Progress will ultimately be 
measured based on whether we have implemented rules that create a 
strong and effective regulatory framework and stand the test of time 
under intense scrutiny in rapidly changing financial markets. Our 
responsibility is much greater than simply ``checking the box'' and 
declaring the job done. We must be focused on fundamental and lasting 
reform.
    As requested by the Committee, my testimony today will provide an 
overview of the Commission's Dodd-Frank Act implementation and discuss 
those rules that are yet to be completed.
Credit Ratings
    The Dodd-Frank Act requires the Commission to undertake a number of 
rulemakings related to nationally recognized statistical rating 
organizations (NRSROs). The Commission began the process of 
implementing these mandates with the adoption of a rule in January 2011 
\2\ requiring NRSROs to provide a description of the representations, 
warranties, and enforcement mechanisms available to investors in an 
offering of asset-backed securities, including how they differ from 
those of similar offerings. Last month, the Commission completed its 
required rulemaking for NRSROs by adopting rules requiring NRSROs to, 
among other things: (1) report on internal controls; (2) protect 
against potential conflicts of interest; (3) establish professional 
standards for credit analysts; (4) publicly provide--along with the 
publication of a credit rating--disclosure about the credit rating and 
the methodology used to determine it; and (5) enhance their public 
disclosures about the performance of their credit ratings. \3\ These 
rules create an extensive framework of robust reforms and will 
significantly strengthen the governance of NRSROs. The reforms will 
also significantly enhance the transparency of NRSRO activities and 
thereby promote greater scrutiny and accountability of NRSROs. 
Together, this package of reforms should improve the overall quality of 
NRSRO credit ratings and protect against the reemergence of practices 
that contributed to the recent financial crisis.
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     \2\ 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, pursuant to Section 939B of 
the Act, the Commission issued an amendment to 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.
     \3\ See Release No. 34-72936, ``Nationally Recognized Statistical 
Rating Organizations'' (August 27, 2014), http://www.sec.gov/rules/
final/2014/34-72936.pdf.
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    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; \4\ (2) a study on alternative compensation models for 
rating structured finance products, which was published in December 
2012; \5\ and (3) a study on NRSRO independence, which was published in 
November 2013. \6\ In response to the study on alternative compensation 
models for rating structured finance products, the Commission held a 
public roundtable in May 2013 to invite discussion regarding, among 
other things, the courses of action discussed in the report. The staff 
has considered the various viewpoints presented during discussion at 
the roundtable, as well as in the related public comment letters, and 
is discussing potential approaches with the Commission.
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     \4\ Credit Rating Standardization Study (September 2012), http://
www.sec.gov/news/studies/2012/939h_credit_rating_standardization.pdf. 
    \5\ Report to Congress on Assigned Credit Ratings (December 2012), 
http://www.sec.gov/news/studies/2012/assigned-credit-ratings-study.pdf.
     \6\ Report to Congress on Credit Rating Agency Independence Study 
(November 2013), http://www.sec.gov/news/studies/2013/credit-rating-
agency-independence-study-2013.pdf.
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    As required by the Dodd-Frank Act, the Commission established an 
Office of Credit Ratings (OCR) charged with administering the rules of 
the Commission with respect to NRSROs, promoting accuracy in credit 
ratings issued by NRSROs, and helping to ensure that credit ratings are 
not unduly influenced by conflicts of interest and that NRSROs provide 
greater disclosure to investors. As required by the Dodd-Frank Act, OCR 
conducts examinations of each NRSRO at least annually and the 
Commission makes available to the public an annual report summarizing 
the essential exam findings. The third annual report of the staff's 
examinations was published in December 2013. \7\
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     \7\ 2013 Summary Report of Commission Staff's Examinations of Each 
Nationally Recognized Statistical Rating Organization (December 2013), 
http://www.sec.gov/news/studies/2013/nrsro-summary-report-2013.pdf.
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    The Dodd-Frank Act also requires the SEC, to the extent applicable, 
to review its regulations that require use of credit ratings as an 
assessment of the creditworthiness of a security, remove these 
references, and replace them with appropriate standards of 
creditworthiness. The Commission has adopted final amendments that 
remove references to credit ratings from most of its rules and forms 
that contained such references, including rules adopted in December 
2013 removing references to credit ratings in certain provisions 
applicable to investment companies and broker-dealers, \8\ and in 
August 2014 new requirements to replace the credit rating references in 
shelf eligibility criteria for asset-backed security offerings with new 
shelf eligibility criteria. \9\
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     \8\ See Release No. 34-60789, ``References to Ratings of 
Nationally Recognized Statistical Rating Organizations'', (October 5, 
2009) (pre- Dodd-Frank Act adopting amendments to remove references to 
credit ratings in certain Commission rules) http://www.sec.gov/rules/
final/2009/34-60789.pdf; Release No. 33-9245, ``Security Ratings'', 
(July 27, 2011) (post- Dodd-Frank Act adopting amendments to remove 
references to credit ratings in certain Commission rules) http://
www.sec.gov/rules/final/2011/33-9245.pdf; Release No. 33-9506, 
``Removal of Certain References to Credit Ratings Under the Investment 
Company Act'', (December 27, 2013) (post- Dodd-Frank Act adopting 
amendments to remove references to credit ratings in certain Commission 
rules), http://www.sec.gov/rules/final/2013/33-9506.pdf; Release No. 
34-71194, ``Removal of Certain References to Credit Ratings Under the 
Securities Exchange Act of 1934'', (December 27, 2013) (post- Dodd-
Frank Act adopting amendments to remove references to credit ratings in 
certain Commission rules), http://www.sec.gov/rules/final/2013/34-
71194.pdf.
     \9\ See Release No. 34-72936, ``Nationally Recognized Statistical 
Rating Organizations'' (August 27, 2014), http://www.sec.gov/rules/
final/2014/34-72936.pdf.
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Asset-Backed Securities
    The Commission has completed implementing several significant 
provisions of the Dodd-Frank Act related to asset-backed securities 
(ABS), and I have focused the staff and Commission on finalizing the 
remaining mandates. Within a year of the enactment of the Act, the 
Commission adopted rules to implement Sections 943 and 945 of the Act. 
The rules implementing Section 943 require ABS issuers to disclose the 
history of repurchase requests received and repurchases made relating 
to their outstanding ABS. \10\ The rules implementing Section 945 
require an asset-backed issuer in offerings registered under the 
Securities Act of 1933 (Securities Act) to perform a review of the 
assets underlying the ABS that must be designed and effected to provide 
reasonable assurance that the prospectus disclosure about the assets is 
accurate in all material respects and disclose the nature of such 
review. \11\ Shortly after the 1-year anniversary of the Act, 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 ABS issuers and granted the 
Commission authority to issue rules providing for the suspension or 
termination of this duty to file reports. \12\
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     \10\ 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.
     \11\ 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.
     \12\ 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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    Just last month, the Commission adopted expansive new requirements 
for enhanced disclosures for ABS, including requiring standardized 
asset-level data for certain asset classes. \13\ For those asset 
classes, the new requirements implement Section 942(b) of the Act, 
which directed the Commission to adopt regulations to require asset-
level information to the extent necessary for investors to 
independently perform due diligence. The final rules require that 
prospectuses and ongoing reports of securities backed by assets related 
to real estate or automobiles, or backed by debt securities, contain 
detailed asset-level information about each of the assets in the pool. 
The Commission continues to consider whether asset-level disclosure 
would be useful to investors across other asset classes. The rules also 
provide investors with more time to consider transaction-specific 
information, including information about the pool assets. These 
measures should better protect investors in these markets by providing 
important data and other information that will allow investors to 
conduct diligence on asset-backed securities that is independent of a 
credit rating agency. Although not mandated by the Dodd-Frank Act, the 
staff continues to monitor the private placement securitization markets 
to determine whether they should recommend advancing similar measures 
for those markets.
---------------------------------------------------------------------------
     \13\ See Release No. 33-9638, ``Asset-Backed Securities Disclosure 
and Registration'' (August 27, 2014), http://www.sec.gov/rules/final/
2014/33-9638.pdf.
---------------------------------------------------------------------------
    In addition, the Commission is working with other Federal 
regulators to jointly develop risk retention rules, as required by 
Section 941 of the Act. These rules will address the appropriate 
amount, form, and duration of required risk retention for securitizers 
of ABS. In March 2011, the Commission joined its fellow regulators in 
proposing rules to implement Section 941 \14\ and, after careful 
consideration of the many comments received, in August 2013 reproposed 
these rules with several significant modifications. \15\ Together with 
the other agencies, we have made significant progress toward developing 
a final rule and we are nearing the final stages of that rulemaking.
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     \14\ See Release No. 34-64148, ``Credit Risk Retention'' (March 
30, 2011), http://www.sec.gov/rules/proposed/2011/34-64148.pdf. Section 
941 of the Act generally requires the Commission, the Federal Reserve 
Board, the Federal Deposit Insurance Corporation, the 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 ABS, transfers, sells, or conveys to a third party. 
It 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 15 U.S.C. 78o-11(c)(1)(A).
     \15\ See Release No. 33-34-70277, ``Credit Risk Retention'' 
(August 28, 2013), http://www.sec.gov/rules/proposed/2013/34-70277.pdf.
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    In September 2011, the Commission proposed a rule to implement 
Section 621 of the Act, which prohibits 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. \16\ The proposed rule would prohibit underwriters and other 
``securitization participants'' from engaging in such transactions with 
respect to both nonsynthetic and synthetic asset-backed securities, 
whether in a registered or unregistered offering. The proposal is not 
intended to prohibit legitimate securitization activities, and the 
Commission asked questions in the release to help strike an appropriate 
balance. The proposal generated substantial comment that included 
requests for significant alterations to the proposed rule, which the 
staff is carefully considering in preparing its recommendation for 
consideration by the Commission.
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     \16\ 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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Municipal Securities
    The Dodd-Frank Act imposed a new requirement that ``municipal 
advisors'' register with the SEC. This registration requirement applies 
to persons who provide advice to municipal entities or obligated 
persons on municipal financial products or the issuance of municipal 
securities, or who solicit municipal entities or obligated persons. 
\17\ In September 2013, the Commission adopted final rules for 
municipal advisor registration. \18\ The new registration requirements 
and regulatory standards aim to address problems observed with the 
conduct of some municipal advisors, including failure to place the duty 
of loyalty to their municipal entity client ahead of their own 
interests, undisclosed conflicts of interest, advice rendered by 
financial advisors without adequate training or qualifications, and 
``pay to play'' practices.
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     \17\ 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. See Release 
No. 34-62824, ``Temporary Registration of Municipal Advisors'', 
(September 1, 2010), http://www.sec.gov/rules/interim/2010/34-
62824.pdf. The Commission received over 1,200 confirmed registrations 
of municipal advisors pursuant to this temporary rule.
     \18\ See ``Registration of Municipal Advisors'', Release No. 34-
70462 (September 20, 2013), http://www.sec.gov/rules/final/2013/34-
70462.pdf. See also ``Registration of Municipal Advisors Frequently 
Asked Questions'' (issued on January 10, 2014, and last updated on May 
19, 2014), http://www.sec.gov/info/municipal/mun-advisors-faqs.pdf. The 
staff in the Office of Municipal Securities provided this interpretive 
guidance to address certain questions that arose from municipal market 
participants relating to the implementation of the final rules.
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    Municipal advisors were required to comply with the final rules as 
of July 1, 2014, \19\ and to register with the SEC using the final 
registration forms during a 4-month phased-in compliance period, which 
began on July 1, 2014. \20\ Except for certain personally identifiable 
information, the SEC municipal advisor registration information is 
available to the public through the SEC's Electronic Data Gathering, 
Analysis, and Retrieval (EDGAR) system Web site. \21\
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     \19\ See Release No. 34-71288, ``Registration of Municipal 
Advisors''; Temporary Stay of Final Rule, (January 13, 2014), http://
www.sec.gov/rules/final/2014/34-71288.pdf.
     \20\ The final rules require municipal advisors to register with 
the SEC by completing a Form MA and to provide information regarding 
natural persons associated with the municipal advisor and engaged in 
municipal advisory activities on such municipal advisor's behalf by 
completing a Form MA-I for each such natural person.
     \21\ To search by a municipal advisor company's name, see http://
www.sec.gov/edgar/searchedgar/companysearch.html.
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    In addition, Commission staff in August of this year launched an 
examination initiative to conduct focused, risk-based examinations of 
municipal advisors. \22\ These examinations will be specifically 
focused and shorter in duration than typical examinations. The 
initiative is designed both to provide targeted outreach to inform new 
municipal advisor registrants of their obligations as registered 
entities and to permit the Commission to examine a significant 
percentage of new municipal advisor registrants. Additionally, 
Commission staff will oversee the Financial Industry Regulatory 
Authority (FINRA) staff in its examinations of municipal advisors that 
are also FINRA members.
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     \22\ See ``Industry Letter for the Municipal Advisor Examination 
Initiative'' (August 19, 2014), available at: http://www.sec.gov/about/
offices/ocie/muni-advisor-letter-081914.pdf.
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    The Dodd-Frank Act also required the Commission to establish an 
Office of Municipal Securities (OMS), reporting directly to the Chair, 
to administer the rules pertaining to broker-dealers, municipal 
advisors, investors and issuers of municipal securities, and to 
coordinate with the Municipal Securities Rulemaking Board (MSRB) on 
rulemaking and enforcement actions. \23\ During its first 2 years of 
operations, OMS devoted its attention primarily to finalizing and 
implementing the municipal advisor registration rules, including 
providing interpretive guidance to market participants and 
participating in the review of municipal advisor registrations. Over 
the next year, OMS expects to continue to devote significant attention 
to implementing these final rules, to review a considerable number of 
rule filings by the MSRB related to municipal advisor regulation, and 
to coordinate with SEC examination staff in their examinations of 
municipal advisors. In addition, OMS also continues to monitor current 
issues in the municipal securities market (such as pension disclosure, 
accounting, and municipal bankruptcy issues) and to assist in 
considering further recommendations to the Commision with respect to 
disclosure, market structure, and price transparency in the municipal 
securities markets. \24\
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     \23\ See Section 979 of the Dodd-Frank Act.
     \24\ See recommendations in the ``Commission's Report on the 
Municipal Securities Market'' (July 31, 2012), http://www.sec.gov/news/
studies/2012/munireport073112.pdf.
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Private Fund Adviser Registration and Reporting
    Title IV of the Dodd-Frank Act directed the Commission to implement 
a number of provisions designed to enhance the oversight of private 
fund advisers, including registration of advisers to hedge funds and 
other private funds that were previously exempt from SEC registration. 
These provisions enable regulators to have a more comprehensive view of 
private funds and the investment advisers managing those assets.
    The SEC's implementation of required rulemaking under Title IV is 
complete. In June 2011, the Commission adopted rules requiring advisers 
to hedge funds and other private funds to register by March 2012, 
addressing what had once been a sizable gap in regulators' ability to 
monitor for systemic risk and potential misconduct. \25\ As a result of 
the Dodd-Frank Act and the SEC's new rules, the number of SEC-
registered private fund advisers has increased by more than 50 percent 
to 4,322 advisers. Even after accounting for the shift of mid-sized 
advisers to State registration pursuant to the Dodd-Frank Act, \26\ the 
total amount of assets managed by SEC-registered advisers has increased 
significantly from $43.8 trillion in April 2011 to $62.3 trillion in 
August 2014, while the total number of SEC-registered advisers has 
remained relatively unchanged from 11,505 to 11,405.
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     \25\ See Release No. IA-3221, ``Rules Implementing Amendments to 
the Investment Advisers Act of 1940'' (June 22, 2011), http://
www.sec.gov/rules/final/2011/ia-3221.pdf.
     \26\ Id.
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    For private fund advisers required to be registered with the 
Commission, pursuant to the Dodd-Frank Act the Commission adopted 
confidential systemic risk reporting requirements on Form PF in October 
2011 to assist the FSOC in systemic risk oversight. \27\ As required by 
the Act, Form PF was designed in consultation with FSOC, and the data 
filed on Form PF has been made available to the Office of Financial 
Research within the Department of the Treasury.
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     \27\ See Release No. IA-3308, ``Reporting by Investment Advisers 
to Private Funds and Certain Commodity Pool Operators and Commodity 
Trading Advisors on Form PF''; Joint Final Rule (October 21, 2011), 
http://www.sec.gov/rules/final/2011/ia-3308.pdf.
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    To date, approximately 2,700 investment advisers have filed Form PF 
reporting information on approximately 8,000 hedge funds, 70 liquidity 
funds, and 7,000 private equity funds. During the past year, the 
Commission's staff has focused its efforts on utilizing Form PF data in 
examinations and investigations of private fund advisers, using Form PF 
data in the Commission's risk monitoring activities, providing 
additional guidance to filers, and working with other Federal 
regulators and international organizations regarding issues relating to 
private fund advisers. As required by the Dodd-Frank Act, Commission 
staff transmitted an annual report to Congress this past August on 
these uses. \28\
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     \28\ See ``Annual Staff Report Regarding the Use of Data Collected 
from Private Fund Systemic Risk Reports'' (August 15, 2014), http://
www.sec.gov/reportspubs/special-studies/im-private-fund-annual-report-
081514.pdf.
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    During the past 2 years, Commission staff reviewed the Advisers Act 
and its rules and provided guidance regarding their application to 
private fund advisers, including guidance to clarify: the application 
of the custody rule when advisers to audited private funds utilize 
special purpose vehicles; \29\ how the custody rule applies to escrows 
utilized by private fund advisers upon the sale of a portfolio company; 
\30\ when an adviser to an audited private fund may itself maintain 
custody of private stock certificates instead of holding them at a 
third-party custodian; \31\ the definition of ``knowledgeable 
employees'' for purposes of the Investment Company Act; \32\ when 
certain private fund investors are ``qualified clients'' under the 
Advisers Act; \33\ and the application of the venture capital exemption 
in certain common scenarios. \34\
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     \29\ See ``IM Guidance Update 2014-08, Private Funds and the 
Application of the Custody Rule to Special Purpose Vehicles and 
Escrows'' (June 2014), http://www.sec.gov/investment/im-guidance-2014-
07.pdf.
     \30\ Id.
     \31\ See ``IM Guidance Update 2013-04, Privately Offered 
Securities under the Investment Advisers Act Custody Rule'' (August 
2013), http://www.sec.gov/divisions/investment/guidance/im-guidance-
2013-04.pdf.
     \32\ See ``SEC No-Action Letter, Managed Funds Association'' 
(February 6, 2014), http://www.sec.gov/divisions/investment/noaction/
2014/managed-funds-association-020614.htm.
     \33\ See ``IM Guidance Update 2013-10, Status of Certain Private 
Fund Investors as Qualified Clients'' (November 2013), http://
www.sec.gov/divisions/investment/guidance/im-guidance-2013-10.pdf.
     \34\ See ``IM Guidance Update, Guidance on the Exemption for 
Advisers to Venture Capital Funds'' (December 2013), http://
www.sec.gov/divisions/investment/guidance/im-guidance-2013-13.pdf.
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    In addition, I anticipate that in October 2014, Commission staff 
will conclude a 2-year initiative to conduct focused, risk-based exams 
of newly registered private fund advisers. These ``presence'' 
examinations have been shorter in duration and more streamlined than 
typical examinations, and have been designed both to engage with the 
new registrants to inform them of their obligations as registered 
entities and to permit the Commission to examine a higher percentage of 
new registrants. The initiative has included outreach, as well as 
examinations that have focused on five critical areas: (1) marketing; 
(2) portfolio management; (3) conflicts of interest; (4) safety of 
client assets; and (5) valuation. As of early September 2014, staff had 
completed approximately 340 examinations of newly registered private 
fund advisers, and over 40 additional examinations are underway.
Over-the-Counter Derivatives
    The Dodd-Frank Act established a new oversight regime for the over-
the-counter 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 and the end-user 
exemption; trade reporting and trade execution; the operation of 
clearing agencies, trade data repositories, and trade execution 
facilities; capital, margin, and segregation requirements and business 
conduct standards for dealers and major market participants; and public 
transparency for transactional information. Such rules are intended to 
achieve a number of goals, including:

    Facilitating the centralized clearing of security-based 
        swaps, whenever possible and appropriate, with the intent of 
        reducing counterparty and systemic risk;

    Increasing transparency for market participants and 
        regulators in their efforts to monitor the market and, as 
        appropriate, address risks to financial stability;

    Increasing security-based swap transaction disclosure;

    Reducing counterparty and systemic risk through capital, 
        margin and segregation requirements for nonbank dealers and 
        major market participants; and

    Addressing potential conflict of interest issues relating 
        to security-based swaps.

    Since I testified before this Committee last February, the 
Commission has proposed rules relating to books and records \35\ and 
proposed rules to enhance the oversight of clearing agencies deemed to 
be systemically important or that are involved in complex transactions, 
such as security-based swaps. \36\ With these steps, the Commission has 
now proposed all the core rules required by Title VII of the Dodd-Frank 
Act.
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     \35\ See ``Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and Broker-
Dealers; Capital Rule for Certain Security-Based Swap Dealers'', 
Release No. 34-71958 (April 17, 2014), http://www.sec.gov/rules/
proposed/2014/34-71958.pdf.
     \36\ See ``Standards for Covered Clearing Agencies'', Release No. 
34-71699 (March 12, 2014), http://www.sec.gov/rules/proposed/2014/34-
71699.pdf.
---------------------------------------------------------------------------
    Most recently, in June of this year, the Commission adopted the 
critical, initial set of cross-border rules and guidance, focusing on 
the swap dealer and major swap participant definitions. \37\ The rules 
and guidance explain when a cross-border transaction must be counted 
toward the requirement to register as a security-based swap dealer or 
major security-based swap participant. The rules also address the scope 
of the SEC's cross-border antifraud authority. In addition, the 
Commission adopted a procedural rule regarding the submission of 
``substituted compliance'' requests. This rule represents a major step 
in the Commission's efforts to establish a framework to address 
circumstances in which market participants may be subject to more than 
one set of comparable regulations across different jurisdictions.
---------------------------------------------------------------------------
     \37\ See Release No. 34-72474, ``Application of `Security-Based 
Swap Dealer' and `Major Security-Based Swap Participant' Definitions to 
Cross-Border Security-Based Swap Activities'' (June 25, 2014), http://
www.sec.gov/rules/final/2014/34-72472.pdf.
---------------------------------------------------------------------------
    These rules and guidance focus on a central aspect of the 
Commission's May 2013 comprehensive proposal regarding the application 
of Title VII to cross-border security-based swap transactions. \38\ The 
cross-border application of other substantive requirements of Title VII 
will be addressed in subsequent releases, resulting in final rules in a 
particular substantive area that apply to the full range of security-
based swap transactions, not just purely domestic ones. I believe that 
this integrated approach will reduce undue costs and provide a more 
orderly implementation process for both regulators and market 
participants. In addition, the Commission previously adopted a number 
of key definitional and procedural rules, provided a ``roadmap'' for 
the further implementation of its Title VII rulemaking, and took other 
actions to provide legal certainty to market participants during the 
implementation process.
---------------------------------------------------------------------------
     \38\ See Release No. 34-69490, ``Cross-Border Security-Based Swap 
Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms 
Relating to the Registration of Security-Based Swap Dealers and Major 
Security-Based Swap Participants'' (May 1, 2013), http://sec.gov/rules/
proposed/2012/34-68071.pdf.
---------------------------------------------------------------------------
    Commission staff also continues to work intensively on 
recommendations for final rules required by Title VII that have been 
proposed but not yet adopted. These final rules will address regulatory 
reporting and post-trade public transparency; \39\ security-based swap 
dealer and major security-based swap participant requirements, 
including business conduct and financial responsibility requirements; 
\40\ mandatory clearing, the end-user exemption and trade execution, 
and the regulation of clearing agencies and security-based swap 
execution facilities; \41\ and enforcement and market integrity, 
including swap-specific antifraud measures. \42\ In addition, I expect 
that the Commission will soon 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.
---------------------------------------------------------------------------
     \39\ 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. In 2013, the Commission reproposed 
Regulation SBSR. See Release No. 34-69490, ``Cross-Border Security-
Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules 
and Forms Relating to the Registration of Security-Based Swap Dealers 
and Major Security-Based Swap Participants'' (May 1, 2013), http://
www.sec.gov/rules/proposed/2013/34-69490.pdf; and Release No. 34-69491.
     \40\ 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 Dealers 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.
     \41\ 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.
     \42\ 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.
---------------------------------------------------------------------------
    In March 2012, the Commission adopted rules providing exemptions 
under the Securities Act of 1933, the Securities Exchange Act of 1934, 
and the Trust Indenture Act of 1939 for security-based swaps 
transactions involving certain clearing agencies satisfying certain 
conditions. 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.
Clearing Agencies
    Title VIII of the Dodd-Frank Act provides for increased regulation 
of financial market utilities \43\ (FMUs) and financial institutions 
that engage in payment, clearing, and settlement activities 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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     \43\ 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.''
---------------------------------------------------------------------------
Registration of Security-Based Swap Clearing Agencies
    There are now three clearing agencies registered with the 
Commission to clear security-based swaps, and Commission staff 
maintains regular channels of communication with those clearing 
agencies regarding their operations. In 2013, the Commission also 
amended its established rule filing procedures to accommodate the 
special circumstances of clearing agencies registered with both the 
Commission and the Commodity Futures Trading Commission (CFTC) to help 
ensure that the new regulatory regime for security-based swaps operates 
as intended and without undue burdens on dually registered security-
based swap clearing agencies. \44\
---------------------------------------------------------------------------
     \44\ See Release No. 34-69284, ``Amendment to Rule Filing 
Requirements for Dually-Registered Clearing Agencies'' (April 3, 2013), 
http://www.sec.gov/rules/final/2014/34-69284.pdf.
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Clearing Agency Standards
    To further the objectives of Title VIII and promote the integrity 
of clearing agency operations and governance, the Commission adopted 
rules in October 2012 requiring all registered clearing agencies to 
maintain certain standards with respect to risk management and certain 
operational matters. \45\ The rules also contain specific requirements 
for clearing agencies that perform central counterparty services, such 
as provisions governing credit exposures and the financial resources of 
the clearing agency, and establish record keeping and financial 
disclosure requirements for all registered clearing agencies.
---------------------------------------------------------------------------
     \45\ See Release No. 34-68080, ``Clearing Agency Standards'' 
(October 22, 2012), http://www.sec.gov/rules/final/2012/34-68080.pdf.
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    In March of this year, the Commission proposed a series of 
additional clearing agency standards. \46\ The proposed rules would 
establish a new category of ``covered clearing agency'' subject to 
enhanced standards. The comment period on the proposal closed in May 
2014, and Commission staff is preparing a recommendation to the 
Commission for final rules.
---------------------------------------------------------------------------
     \46\ See Release No. 34-71699, ``Standards for Covered Clearing 
Agencies'' (March 12, 2014), http://www.sec.gov/rules/proposed/2014/34-
71699.pdf.
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    The proposed rules benefited from consultations between the 
Commission staff and staffs of the CFTC and the Board of Governors of 
the Federal Reserve System (the ``Board''), and are designed to further 
strengthen the Commission's oversight of securities clearing agencies 
and promote consistency in the regulation of clearing organizations 
generally, thereby helping to ensure that clearing agency regulation 
reduces systemic risk in the financial markets.
Systemically Important Clearing Agencies
    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. SEC staff participates in the interagency committee established 
by FSOC to develop a framework for the designation of systemically 
important FMUs. In July 2012, FSOC designated six clearing agencies 
registered with the Commission as systemically important FMUs under 
Title VIII. \47\
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     \47\ 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.
---------------------------------------------------------------------------
    Title VIII also provides a framework for an enhanced supervisory 
regime for designated FMUs, including oversight in consultation with 
the Board and FSOC. The Commission is expected to consider regulations 
containing risk management standards for the designated FMUs it 
supervises, taking into consideration relevant international standards 
and existing prudential requirements for such FMUs. \48\ The Commission 
also is required to examine such FMUs annually, and to consider certain 
advance notices identifying changes to its rules, procedures, or 
operations that could materially affect the nature or level of risks 
presented by the FMU in consultation with the Board. \49\
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     \48\ See Section 805(a)(2) of the Dodd-Frank Act. Commission staff 
also worked jointly with the staffs of the CFTC and the Board to submit 
a report required under the Dodd-Frank Act to Congress in July 2011 
discussing recommendations regarding risk management supervision of 
clearing entities that are DFMUs. See also ``Risk Management 
Supervision of Designated Clearing Entities'', Report by the 
Commission, Board and CFTC to the Senate Committees on Banking, 
Housing, and Urban Affairs and Agriculture pursuant to Section 813 of 
Title VIII of the Dodd-Frank Act (July 2011), http://www.sec.gov/news/
studies/2011/813study.pdf.
     \49\ See Section 806(e)(4) of the Dodd-Frank Act.
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    In June 2012, the Commission adopted rules that establish 
procedures for how it will address advance notices of significant rule 
filings from the FMUs, \50\ and it has since considered a significant 
number of such notices. \51\ Commission staff also has completed the 
second series of annual examinations of the designated FMUs for which 
it acts as supervisory agency and recently initiated the third series 
of annual examinations.
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     \50\ 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.
     \51\ Advance notices are published on the Commission Web site at 
http://www.sec.gov/rules/sro.shtml.
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Volcker Rule
    On December 10, 2013, the Commission joined the Board, the Federal 
Deposit Insurance Corporation (FDIC), the Office of the Comptroller of 
the Currency (OCC) (collectively, the ``Federal banking agencies''), 
and the CFTC in adopting the same rule under the Bank Holding Company 
Act to implement Section 619 of the Dodd-Frank Act, known as the 
``Volcker Rule''. \52\
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     \52\ See Release No. BHCA-1, ``Prohibitions and Restrictions on 
Proprietary Trading and Certain Interests in, and Relationships With, 
Hedge Funds and Private Equity Funds'' (December 10, 2013), http://
www.sec.gov/rules/final/2013/bhca-1.pdf. The CFTC (CFTC) adopted the 
same rule on the same date. See http://www.cftc.gov/ucm/groups/public/
@newsroom/documents/file/federalregister121013.pdf. On January 14, 
2014, the Commission, together with the Federal banking agencies and 
the CFTC, approved a companion interim final rule that permits banking 
entities to retain interests in certain collateralized debt obligations 
backed primarily by trust preferred securities. See Release No. BHCA-2, 
``Treatment of Certain Collateralized Debt Obligations Backed Primarily 
by Trust Preferred Securities With Regard to Prohibitions and 
Restrictions on Certain Interests in, and Relationships With, Hedge 
Funds and Private Equity Funds'' (January 17, 2014), http://
www.sec.gov/rules/interim/2014/bhca-2.pdf.
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    Consistent with Section 619, the final rule generally restricts 
``banking entities''--including bank-affiliated, SEC-registered broker-
dealers, security-based swap dealers, and investment advisers--from 
engaging in proprietary trading, sponsoring hedge funds and private 
equity funds, or investing in such funds.
    As with any regulatory initiative of this scope and complexity, the 
final rule demands close attention to the nature and pace of 
implementation, particularly with respect to smaller banking entities. 
The Dodd-Frank Act provides a period for banking entities to bring 
their activities and investments into conformance with Section 619 that 
is scheduled to end on July 21, 2015. During the conformance period, 
the largest trading firms must begin to record and report certain 
quantitative measurements. The first of these data submissions were 
received on September 2. Staged implementation of metrics reporting and 
enhanced compliance standards will continue after the end of the 
conformance period based on size and activity thresholds. Among other 
benefits, this incremental approach will allow the agencies to review 
the data collection and revise or tailor its application, as 
appropriate.
    Currently, the regulatory agencies and banking entities are closely 
focused on implementation of the final rule. The collaborative 
relationships among the agencies that developed during the rulemaking 
process are carrying forward and are supporting closely coordinated 
staff guidance and action. The interagency working group meets 
regularly to discuss implementation issues including, among other 
things, coordinated responses to interpretive questions, technical 
issues related to the collection of metrics data, and approaches to 
supervising and examining banking entities. In response to banking 
entities' interpretive questions on the final rule, the staffs of the 
agencies have published coordinated responses to frequently asked 
questions on various aspects of the rule. As banking entities seek to 
comply with the final rule and request additional guidance, I expect 
the interagency group to continue working together in this manner, as 
well as in the coordination of examinations for compliance with the 
final rule.
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 
        shareholder advisory say-on-pay, say-on-frequency and ``golden 
        parachute'' votes on executive compensation. \53\ The 
        Commission also proposed rules to implement the Section 951 
        requirement that institutional investment managers report their 
        votes on these matters at least annually. \54\ Staff is working 
        on draft final rules for this remaining part of Section 951 for 
        the Commission's consideration in the near term.
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     \53\ 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.
     \54\ 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, by rule, to 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. \55\ To conform their 
        rules to the new requirements, national securities exchanges 
        that have rules providing for the listing of equity securities 
        filed proposed rule changes with the Commission. \56\ The 
        Commission issued final orders approving the proposed rule 
        changes in January 2013. \57\
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     \55\ See Release No. 33-9330, ``Listing Standards for Compensation 
Committees'' (June 20, 2012), http://www.sec.gov/rules/final/2012/33-
9330.pdf.
     \56\ 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).
     \57\ 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).

    Pay Ratio Disclosure. As required by Section 953(b) of the 
        Act, in September 2013, the Commission proposed rules that 
        would amend existing executive compensation rules to require 
        public companies to disclose the ratio of the compensation of a 
        company's chief executive officer to the median compensation of 
        its employees. \58\ The Commission has received over 128,000 
        comment letters on the proposal, including more than 1,000 
        unique comment letters. The staff is carefully considering 
        those comments and is preparing recommendations for the 
        Commission for a final rule.
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     \58\ See Release No. 33-9452, ``Pay Ratio Disclosure'' (September 
18, 2013), http://www.sec.gov/rules/proposed/2013/33-9452.pdf.

    Incentive-Based Compensation Arrangements. Section 956 of 
        the Dodd-Frank Act requires the Commission, along with multiple 
        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. \59\ The Commission has 
        received a significant number of comment letters on the 
        proposed rule, and I have asked the Commission staff to work 
        with their fellow regulators to develop a recommendation to 
        finalize rules to implement this provision.
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     \59\ See Release No. 34-64140, ``Incentive-Based Compensation 
Arrangements'', (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, and these rules are all 
        now effective. \60\
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     \60\ See Release No. 34-64140, ``Incentive-Based Compensation 
Arrangements'', (March 29, 2011), http://www.sec.gov/rules/proposed/
2011/34-64140.pdf.

    The Commission also is required by the Act to adopt several 
additional rules related to corporate governance and executive 
compensation, including rules mandating new listing standards relating 
to specified ``clawback'' policies, \61\ and new disclosure 
requirements about executive compensation and company performance, \62\ 
and employee and director hedging. \63\ The staff currently is 
developing recommendations for the Commission concerning the 
implementation of these provisions of the Act, which I expect to be 
taken up by the Commission in the near future.
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     \61\ See Section 954 of the Dodd-Frank Act.
     \62\ See Section 953(a) of the Dodd-Frank Act.
     \63\ See Section 955 of the Dodd-Frank Act.
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Broker-Dealer Audit Requirements
    The Dodd-Frank Act provided the Public Company Accounting Oversight 
Board (PCAOB) with explicit authority, among other things, to 
establish, subject to Commission approval, auditing standards for 
broker-dealer audits filed with the Commission. In August 2013, the 
Commission amended the broker-dealer financial reporting rule to 
require that broker-dealer audits be conducted in accordance with PCAOB 
standards and to more broadly provide additional safeguards with 
respect to broker-dealer custody of customer securities and funds. \64\
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     \64\ See Release No. 43-0073, ``Broker-Dealer Reports'' (August 
21, 2013), http://www.gpo.gov/fdsys/pkg/FR-2013-08-21/pdf/2013-
18738.pdf.
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Whistleblower Program
    Pursuant to Section 922 of the Dodd-Frank Act, the SEC established 
a whistleblower program to pay awards to eligible whistleblowers who 
voluntarily provide the agency with original information about a 
violation of the Federal securities laws that leads to a successful SEC 
enforcement action in which over $1 million in sanctions is ordered. As 
detailed in the SEC's Office of the Whistleblower third annual report 
to Congress, \65\ during FY2013 the Commission received 3,238 tips from 
whistleblowers in the United States and 55 other countries. The high 
quality information we have received from whistleblowers has allowed 
our investigative staff to work more efficiently and better utilize 
agency resources. Last fall, the Commission made its largest 
whistleblower award to date, awarding over $14 million to a 
whistleblower whose information led to an SEC enforcement action that 
recovered substantial investor funds, \66\ and this July we awarded 
more than $400,000 to a whistleblower who reported a fraud to the SEC 
after the company failed to address the issue internally. \67\ We 
expect future awards to further increase the visibility and 
effectiveness of this important enforcement initiative.
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     \65\ Annual Report on the Dodd-Frank Whistleblower Program Fiscal 
Year 2013 (November 2013), http://www.sec.gov/about/offices/owb/annual-
report-2013.pdf.
     \66\ See ``In the Matter of Claim for Award'', SEC Release No. 34-
70554 (September 30, 2013), http://www.sec.gov/rules/other/2013/34-
70554.pdf, and ``SEC Awards More Than $14 Million to Whistleblower'', 
SEC Release No. 2013-209 (October 1, 2013), http://www.sec.gov/News/
PressRelease/Detail/PressRelease/1370539854258.
     \67\ See ``In the Matter of Claim for Award'', SEC Release No. 34-
72727 (July 31, 2014), http://www.sec.gov/rules/other/2014/34-
72727.pdf, and ``SEC Announces Award for Whistleblower Who Reported 
Fraud to SEC After Company Failed To Address Issue Internally'', SEC 
Release No. 2014-154 (July 31, 2014), http://www.sec.gov/News/
PressRelease/Detail/PressRelease/1370542578457.
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    In addition, the Dodd-Frank Act expanded whistleblower protections 
by empowering the Commission to bring enforcement actions against 
employers that retaliate against whistleblowers. Earlier this year, we 
exercised this authority for the first time when we penalized a firm 
and its principal for retaliating against a whistleblower who reported 
potential securities violations to the SEC. \68\
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     \68\ See ``SEC Charges Hedge Fund With Conducting Conflicted 
Transactions and Retaliating Against Whistleblower'', SEC Release No. 
2014-118 (June 16, 2014), http://www.sec.gov/News/PressRelease/Detail/
PressRelease/1370542096307.
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Investment Advisers and Broker-Dealers' Standards of Conduct
    Section 913 of the Dodd-Frank Act granted the Commission broad 
authority to impose a uniform standard of conduct for broker-dealers 
and investment advisers when providing personalized investment advice 
about securities to retail customers. The question of whether and, if 
so, how to use this authority is very important to investors and the 
Commission.
    In January 2011, the Commission submitted to Congress a staff study 
required by Section 913 (the ``IA/BD Study''), which addressed the 
obligations of investment advisers and broker-dealers when providing 
personalized investment advice about securities to retail customers, 
and recommended, among other things, that the Commission exercise the 
discretionary rulemaking authority provided by Section 913. \69\ In 
March 2013, the Commission issued a public Request for Data and Other 
Information (Request) relating to the provision of retail investment 
advice and regulatory alternatives, which sought data to assist the 
Commission in determining whether to engage in rulemaking, and if so, 
what the nature of that rulemaking ought to be. \70\
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     \69\ 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.
     \70\ See ``Request for Data and Other Information: Duties of 
Brokers, Dealers, and Investment Advisers'' (March 1, 2013), http://
www.sec.gov/rules/other/2013/34-69013.pdf.
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    In order to more fully inform the Commission's decision on this 
matter, I directed the staff to evaluate all of the potential options 
available to the Commission, including a uniform fiduciary standard for 
broker-dealers and investment advisers when providing personalized 
investment advice to retail customers. As part of its evaluation, the 
staff has been giving serious consideration to, among other things, the 
IA/BD Study's recommendations, the views of investors and other 
interested market participants, potential economic and market impacts, 
and the information we received in response to the Request. I have 
asked the staff to make its evaluation of options a high priority.
    In addition to considering the potential options available to the 
Commission, Commission staff continues to provide regulatory expertise 
to Department of Labor staff as they consider potential changes to the 
definition of ``fiduciary'' under the Employee Retirement Income 
Security Act (ERISA). The staff and I are committed to continuing these 
conversations with the Department of Labor, both to provide technical 
assistance and information with respect to the Commission's regulatory 
approach and to discuss the practical effect on retail investors, and 
investor choice, of their potential amendments to the definition of 
``fiduciary'' for purposes of ERISA.
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. 
In December 2011, the Commission adopted final rules for the mine 
safety provision. \71\ In August 2012, the Commission adopted final 
rules for the disclosures relating to conflict minerals and payments by 
resource extraction issuers. \72\
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     \71\ See Release No. 33-9286, ``Mine Safety Disclosure'' (December 
21, 2011), http://www.sec.gov/rules/final/2011/33-9286.pdf.
     \72\ 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.
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    A lawsuit was filed challenging the resource extraction issuer 
rules, and in July 2013, the U.S. District Court for the District of 
Columbia vacated the rules. \73\ Since the court's decision, members of 
the Commission and the staff have met with interested parties and are 
considering comments submitted by stakeholders in order to formulate a 
recommendation for revised rules for the Commission's consideration.
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     \73\ See ``American Petroleum Institute, et al. v. Securities and 
Exchange Commission and Oxfam America Inc.'', No. 12-1668 (D.D.C. July 
2, 2013).
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    A lawsuit (NAM vs. SEC) also was filed challenging the conflict 
minerals rule, and in April 2014, the U.S. Court of Appeals for the 
D.C. Circuit upheld the rule against all challenges made under the 
Administrative Procedure Act and the Exchange Act, but held that a 
portion of the rule violated the First Amendment. \74\ Following the 
Court of Appeals decision in NAM, Commission staff issued a statement 
on April 29, 2014, that provides detailed guidance regarding compliance 
with those portions of the rule that were upheld, pending any further 
action by the Commission or the courts. On May 2, 2014, the Commission 
ordered a stay of the effective date for compliance with those portions 
of Rule 13p-1 and Form SD subject to the constitutional holding of the 
Court of Appeals. On May 29, 2014, the Commission filed a petition 
asking the Court of Appeals to hold the case for potential panel 
rehearing or rehearing en banc once the Court of Appeals issued a 
decision in another First Amendment case then pending before the en 
banc Court (American Meat Institute v. USDA). The intervenor in the NAM 
case, Amnesty International, also filed a petition for rehearing or 
rehearing en banc of the First Amendment portion of the panel opinion. 
The Court issued its en banc decision in American Meat Institute on 
July 29, 2014. On August 28, 2014, the Court ordered the appellants to 
file a response to both the SEC's and Amnesty International's petitions 
for rehearing en banc in NAM by September 12, 2014.
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     \74\ See ``National Association of Manufacturers, et al. v. 
Securities and Exchange Commission, et al.'', No. 13-5252 (D.C. Cir. 
April 14, 2014).
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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. \75\ The staff also 
currently is conducting a review of the accredited investor definition, 
as mandated by Section 413(b)(2)(A) of the Act.
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     \75\ 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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    In July 2013, the Commission implemented Section 926 of the Act by 
adopting final 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. \76\
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     \76\ See Release No. 33-9214, ``Disqualification of Felons and 
Other `Bad Actors' from Rule 506 Offerings'' (July 10, 2013), http://
www.sec.gov/rules/final/2013/33-9414.pdf.
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Office of Minority and Women Inclusion
    In July 2011, pursuant to Section 342 of the Dodd Frank Act, the 
SEC formally established its Office of Minority and Women Inclusion 
(OMWI). OMWI is responsible for matters related to diversity in 
management, employment, and business activities at the SEC. This 
includes developing standards for equal employment opportunity and 
diversity of the workforce and senior management of the SEC, the 
increased participation of minority-owned and women-owned businesses in 
the SEC's programs and contracts, and assessing the diversity policies 
and practices of entities regulated by the SEC.
    To improve diversity in our workforce and in SEC contracts, OMWI 
has deployed an outreach strategy where the SEC participates in 
minority- and women-focused career fairs, conferences, and business 
matchmaking events to attract diverse suppliers and job seekers to the 
SEC. As a result of its outreach efforts, as of FY2014 Q3, 31.9 percent 
of the total contract dollars awarded by the SEC were awarded to 
minority and women contractors, up from 28.7 percent awarded in FY2013. 
As of FY2014 Q3, 35.8 percent of new hires were minorities and 40.7 
percent were women, up from 33.5 percent minorities and 40.3 percent 
women hired in FY2013. OMWI and the Commission are committed to 
continuing to work proactively to increase the participation of 
minority-owned and women-owned businesses in our programs and 
contracting opportunities and to encourage diversity and inclusion in 
our workforce.
    OMWI also continues to make progress on the development of 
standards and policies relating to regulated entities and contracting. 
On October 23, 2013, pursuant to Section 342(b)(2)(C) of the Act, the 
SEC, along with the OCC, the Board, the FDIC, the National Credit Union 
Administration, and the Consumer Financial Protection Bureau, issued an 
interagency policy statement proposing joint standards for assessing 
the diversity policies and practices of the entities they regulate. 
\77\ The standards are intended to promote transparency and awareness 
of diversity policies and practices within federally regulated 
financial institutions. The public comment period for the policy 
statement ended on February 7, 2014, \78\ and after careful review and 
consideration of the more than 200 comment letters received, the OMWI 
Directors are currently drafting the final interagency policy 
statement. I anticipate that the final interagency policy statement 
will be circulated within the agencies for review and formal approval 
over the next few months.
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     \77\ See Release No. 34-70731, ``Proposed Interagency Policy 
Statement Proposing Joint Standards for Assessing the Diversity 
Policies and Practices of the Entities Regulated by the Agencies and 
Request for Comment'' (October 23, 2013) https://www.sec.gov/rules/
policy/2013/34-70731.pdf.
     \78\ See ``Public Comment on the Proposed Interagency Policy 
Statement Establishing Joint Standards for Assessing the Diversity 
Policies of Practices of Entities Regulated by the Agencies'', 
(December 19, 2013) https://www.sec.gov/rules/policy/2013/comments-
joint-standards-diversity.shtml.
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Customer Data Protection--Identity Theft Red Flags and Financial 
        Privacy Rules
    In April 2013, to implement Section 1088 of the Dodd-Frank Act, the 
SEC and the CFTC jointly adopted Regulation S-ID. \79\ Regulation S-ID 
requires certain regulated financial institutions such as broker-
dealers and registered investment advisers to adopt and implement 
identity theft programs. Specifically, the regulation requires covered 
firms to implement policies and procedures designed to:
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     \79\ See Release No. 34-69359, ``Identity Theft Red Flags Rules'' 
(April 10, 2013), https://www.sec.gov/rules/final/2013/34-69359.pdf. 
See also 17 CFR Part 248, Subpart C.

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    identify relevant types of identity theft red flags;

    detect the occurrence of those red flags;

    respond appropriately to the detected red flags; and

    periodically update the identity theft program.

    Regulation S-ID's requirements complement the SEC's other rules for 
protecting customer data. \80\
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     \80\ Regulation S-P requires broker-dealers, investment companies, 
and registered investment advisers to adopt and implement written 
policies and procedures to safeguard customer records and information. 
See Release 34-42974, ``Privacy of Consumer Financial Information'' 
(Regulation S-P) (June 22, 2000), https://www.sec.gov/rules/final/34-
42974.htm. See also 17 CFR Part 248, Subpart A.
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SEC Resources
    The SEC collects transaction fees that offset the annual 
appropriation to the SEC. Accordingly, regardless of the amount 
appropriated to the SEC, our funding level will not take resources from 
other agencies, nor will it have an impact on the Nation's budget 
deficit. Yet, since FY2012, the SEC has not received a significant 
increase in resources to permit the agency to bring on the additional 
staff needed to adequately carry out our mission.
    Our budgetary needs have, of course, been increased by the 
responsibilities added by the Dodd-Frank and JOBS Acts, but our 
significant budgetary gap and needs would remain had those extensive 
additional responsibilities not been added. There is an immediate and 
pressing need for significant additional resources to permit the SEC to 
increase its examination coverage of registered investment advisers so 
as to better protect investors and our markets. While the SEC makes 
increasingly effective and efficient use of its limited resources, we 
nevertheless were in a position to only examine 9 percent of registered 
investment advisers in fiscal year 2013. In 2004, the SEC had 19 
examiners per trillion dollars in investment adviser assets under 
management. Today, we have only eight. Additional resources are vital 
to increase exam coverage over investment advisers and other key areas, 
and also to bolster our core investigative, litigation, and analytical 
enforcement functions. It is also a high priority for us to continue 
the agency's investments in the technologies needed to keep pace with 
today's high-tech, high-speed markets.
    With respect to our new responsibilities, we need additional staff 
experts to focus on enforcement, examinations, and regulatory 
oversight. We must strengthen our ability to take in, organize, and 
analyze data on the new markets and entities under the agency's 
jurisdiction. The new responsibilities cannot be handled appropriately 
with the agency's existing resource levels without undermining the 
agency's other core duties, particularly as we turn from rule writing 
to implementation and enforcement of those rules.
    Also critical will be the SEC's continued use of the Reserve Fund, 
established under the Dodd-Frank Act. The SEC dedicated the Reserve 
Fund to critical IT upgrades, and, if funding permits, plans to 
continue investing in areas such as data analysis, EDGAR and sec.gov 
modernization, enforcement and examinations support, and business 
process improvements.
    If the SEC does not receive sufficient additional resources, the 
agency will be unable to fully build out its technology and hire the 
industry experts and other staff needed to oversee and police our areas 
of responsibility, especially in light of the expanding size and 
complexity of our overall regulatory space. Our Nation's markets are 
the safest and most dynamic in the world, but without sufficient 
resources, it will become increasingly difficult for our talented 
professionals to detect, pursue, and prosecute violations of our 
securities laws as the size, speed, and complexity of the markets grow 
around us.
Conclusion
    The Commission has made tremendous progress implementing the 
extensive rulemakings and other initiatives mandated by the Dodd-Frank 
Act to strengthen regulation and our financial system. As the 
Commission strives to complete the remaining work, I look forward to 
working with this Committee and others in the financial marketplace to 
adopt rules that protect investors, maintain fair, orderly and 
efficient markets, and facilitate capital formation--as we also 
undertake the necessary measures to enhance financial stability and 
limit potential systemic risks. Thank you for your support of the SEC's 
mission and for inviting me to share our progress with you. I look 
forward to answering your questions.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                PREPARED STATEMENT OF TIMOTHY G. MASSAD
              Chair, Commodity Futures Trading Commission
                           September 9, 2014
    Thank you Chairman Johnson, Ranking Member Crapo, and Members of 
the Committee. I am pleased to testify before you today on behalf of 
the Commission. This is my first official hearing as Chairman of the 
CFTC. It is truly an honor to serve as Chairman at this important time.
    I met and spoke with several Members of this Committee during the 
confirmation process, and I appreciated hearing your thoughts and 
suggestions during that time. I look forward to this Committee's input 
going forward.
    During the last 5 years, we have made substantial progress in 
recovering from the worst financial crisis since the Great Depression. 
The Dodd-Frank Act was a comprehensive response, and much has been 
accomplished in implementing it. The CFTC has largely completed the 
rulemaking stage of Dodd-Frank implementation. However, much work 
remains to finish the job Congress has given us.
    I look forward to working together with you, as well as my 
colleagues at the CFTC and others around the globe to ensure that our 
futures, swaps and options markets remain the most efficient and 
competitive in the world, and to protect the integrity of the markets.
The Significance of Derivatives Market Oversight
    Very few Americans participate directly in the derivatives markets. 
Yet these markets profoundly affect the prices we all pay for food, 
energy, and most other goods and services we buy each day. They enable 
farmers to lock in a price for their crops, utility companies or 
airlines to hedge the costs of fuel, and auto companies or soda 
bottlers to know what aluminum will cost. They enable exporters to 
manage fluctuations in foreign currencies, and businesses of all types 
to lock in their borrowing costs. In the simplest terms, derivatives 
enable market participants to manage risk.
    In normal times, these markets create substantial, but largely 
unseen, benefits for American families. During the financial crisis, 
however, they created just the opposite. It was during the financial 
crisis that many Americans first heard the word derivatives. That was 
because over-the-counter swaps--a large, unregulated part of these 
otherwise strong markets--accelerated and intensified the crisis like 
gasoline poured on a fire. The Government was then required to take 
actions that today still stagger the imagination: for example, largely 
because of excessive swap risk, the Government committed $182 billion 
to prevent the collapse of a single company--AIG--because its failure 
at that time, in those circumstances, could have caused our economy to 
fall into another Great Depression.
    It is hard for most Americans to fathom how this could have 
happened. While derivatives were just one of many things that caused or 
contributed to the crisis, the structure of some of these products 
created significant risk in an economic downturn. In addition, the 
extensive, bilateral transactions between our largest banks and other 
institutions meant that trouble at one institution could cascade 
quickly through the financial system like a waterfall. And, the opaque 
nature of this market meant that regulators did not know what was going 
on or who was at risk.
Responding to the Crisis--Enactment and Implementation of the Dodd-
        Frank Act
    The lessons of this tragedy were not lost on the leaders of the 
United States and the G20 Nations. They committed to bring the over-
the-counter swaps market out of the shadows. They agreed to do four 
basic things: require regulatory oversight of the major market players; 
require clearing of standardized transactions through regulated 
clearinghouses known as central counterparties or CCPs; require more 
transparent trading of standardized transactions; and require regular 
reporting so that we have an accurate picture of what is going on in 
this market.
    In the United States, these commitments were set forth in Title VII 
of the Dodd-Frank Act. Responsibility for implementing these 
commitments was given primarily to the CFTC. I would like to review 
where we stand in implementing the regulatory framework passed by 
Congress to bring the over-the-counter swaps market out of the shadows.
Oversight
    The first of the major directives Congress gave to the CFTC was to 
create a framework for the registration and regulation of swap dealers 
and major swap participants. The agency has done so. As of August 2014, 
there are 104 swap dealers and two major swap participants 
provisionally registered with the CFTC.
    We have adopted rules requiring strong risk management. We will 
also be making periodic examinations to assess risk and compliance. The 
new framework requires registered swap dealers and major swap 
participants to comply with various business conduct requirements.
    These include strong standards for documentation and confirmation 
of transactions, as well as dispute resolution processes. They include 
requirements to reduce risk of multiple transactions through what is 
known as portfolio reconciliation and portfolio compression. In 
addition, swap dealers are required to make sure their counterparties 
are eligible to enter into swaps, and to make appropriate disclosures 
to those counterparties of risks and conflicts of interest.
    As directed by Congress, we have worked with the SEC, other U.S. 
regulators, and our international counterparts to establish this 
framework. We will continue to work with them to achieve as much 
consistency as possible. We will also look to make sure these rules 
work to achieve their objectives, and fine-tune them as needed where 
they do not.
Clearing
    A second commitment of Dodd-Frank was to require clearing of 
standardized transactions at central counterparties. The use of CCPs in 
financial markets is commonplace and has been around for over 100 
years. The idea is simple: if many participants are trading 
standardized products on a regular basis, the tangled, hidden Web 
created by thousands of private two-way trades can be replaced with a 
more transparent and orderly structure, like the spokes of a wheel, 
with the CCP at the center interacting with other market participants. 
The CCP monitors the overall risk and positions of each participant.
    Clearing does not eliminate the risk that a counterparty to a trade 
will default, but it provides us various means to mitigate that risk. 
As the value of positions change, margin can be collected efficiently 
to ensure counterparties are able to fulfill their obligations to each 
other. And if a counterparty does default, there are tools available to 
transfer or unwind positions and protect other market participants. To 
work well, active, ongoing oversight is critical. We must be vigilant 
to ensure that CCPs are operated safely and deliver the benefits they 
are designed to provide.
    The CFTC was the first of the G20 Nations' regulators to implement 
clearing mandates. We have required clearing for interest rate swaps 
(IRS) denominated in U.S. dollars, Euros, Pounds and Yen, as well as 
credit default swaps (CDS) on certain North American and European 
indices. Based on CFTC analysis of data reported to swap data 
repositories, as of August 2014, measured by notional value, 60 percent 
of all outstanding transactions were cleared. This is compared to 
estimates by the International Swaps and Derivatives Association (ISDA) 
of only 16 percent in December 2007. With regard to index CDS, most new 
transactions are being cleared--85 percent of notional value during the 
month of August.
    Our rules for clearing swaps were patterned after the successful 
regulatory framework we have had in place for many years in the futures 
market. We do not require that clearing take place in the United 
States, even if the swap is in U.S. dollars and between U.S. persons. 
But we do require that clearing occurs through registered CCPs that 
meet certain standards--a comprehensive set of core principles that 
ensures each clearinghouse is appropriately managing the risk of its 
members, and monitoring its members for compliance with important 
rules.
    Fourteen CCPs are registered with the CFTC as derivatives clearing 
organizations (DCOs) either for swaps, futures, or both. Five of those 
are organized outside of the United States, including three in Europe 
which have been registered since 2001 (LCH.Clearnet Ltd.); 2010 (ICE 
Clear Europe Ltd); and 2013 (LCH.Clearnet SA). In some cases, a 
majority of the trades cleared on these European-based DCOs are for 
U.S. persons.
    At the same time, the CFTC has specifically exempted most 
commercial end users from the clearing mandate. We have been sensitive 
to Congress's directive that these entities, which were not responsible 
for the crisis and rely on derivatives primarily to hedge commercial 
risks, should not bear undue burdens in accessing these markets to 
hedge their risk.
    Of course, central clearing by itself is not a panacea. CCPs do not 
eliminate the risks inherent in the swaps market. We must therefore be 
vigilant. We must do all we can to ensure that CCPs have financial 
resources, risk management systems, settlement procedures, and all the 
necessary standards and safeguards consistent with the core principles 
to operate in a fair, transparent and efficient manner. We must also 
make sure that CCP contingency planning is sufficient.
Trading
    The third area for reform under Dodd-Frank was to require more 
transparent trading of standardized products. In the Dodd-Frank Act, 
Congress provided that certain swaps must be traded on a swap execution 
facility (SEF) or another regulated exchange. The Dodd Frank Act 
defined a SEF as ``a trading system or platform in which multiple 
participants have the ability to execute or trade swaps by accepting 
bids and offers made by multiple participants.'' The trading 
requirement was designed to facilitate a more open, transparent and 
competitive marketplace, benefiting commercial end users seeking to 
lock in a price or hedge risk.
    The CFTC finalized its rules for SEFs in June 2013. Twenty-two SEFs 
have temporarily registered with the CFTC, and two applications are 
pending. These SEFs are diverse, but each will be required to operate 
in accordance with the same core principles. These core principles 
provide a framework that includes obligations to establish and enforce 
rules, as well as policies and procedures that enable transparent and 
efficient trading. SEFs must make trading information publicly 
available, put into place system safeguards, and maintain financial, 
operational, and managerial resources to discharge their 
responsibilities.
    Trading on SEFs began in October of last year. Beginning February 
2014, specified interest rate swaps and credit default swaps must be 
traded on a SEF or another regulated exchange. Notional value executed 
on SEFs has generally been in excess of $1.5 trillion weekly.
    It is important to remember that trading of swaps on SEFs is still 
in its infancy. SEFs are still developing best practices under the new 
regulatory regime. The new technologies that SEF trading requires are 
likewise being refined. Additionally, other jurisdictions have not yet 
implemented trading mandates, which has slowed the development of 
cross-border platforms. There will be issues as SEF trading continues 
to mature. We will need to work through these to achieve fully the 
goals of efficiency and transparency SEFs are meant to provide.
Data Reporting
    The fourth Dodd-Frank reform commitment was to require ongoing 
reporting of swap activity. Having rules that require oversight, 
clearing, and transparent trading is not enough. We must have an 
accurate, ongoing picture of what is going on in the marketplace to 
achieve greater transparency and to address potential systemic risk.
    Title VII of the Dodd-Frank Act assigns the responsibility for 
collecting and maintaining swap data to swap data repositories (SDRs), 
a new type of entity necessitated by these reforms. All swaps, whether 
cleared or uncleared, must be reported to SDRs. There are currently 
four SDRs that are provisionally registered with the CFTC.
    The collection and public dissemination of swap data by SDRs helps 
regulators and the public. It provides regulators with information that 
can facilitate informed oversight and surveillance of the market and 
implementation of our statutory responsibilities. Dissemination, 
especially in real-time, also provides the public with information that 
can contribute to price discovery and market efficiency.
    While we have accomplished a lot, much work remains. The task of 
collecting and analyzing data concerning this marketplace requires 
intensely collaborative and technical work by industry and the agency's 
staff. Going forward, it must continue to be one of our chief 
priorities.
    There are three general areas of activity. We must have data 
reporting rules and standards that are specific and clear, and that are 
harmonized as much as possible across jurisdictions. The CFTC is 
leading the international effort in this area. It is an enormous task 
that will take time. We must also make sure the SDRs collect, maintain, 
and publicly disseminate data in the manner that supports effective 
market oversight and transparency. Finally, market participants must 
live up to their reporting obligations. Ultimately, they bear the 
responsibility to make sure that the data is accurate and reported 
promptly.
Our Agenda Going Forward
    The progress I have outlined reflects the fact that the CFTC has 
finished almost all of the rules required by Congress in the Dodd-Frank 
Act to regulate the over-the-counter swaps market. This was a difficult 
task, and required tremendous effort and commitment. My predecessor, 
Gary Gensler, deserves substantial credit for leading the agency in 
implementing these reforms so quickly. All of the Commissioners 
contributed valuable insight and deserve our thanks. But no group 
deserves more credit than the hardworking professional staff of the 
agency. It was an extraordinary effort. I want to publicly acknowledge 
and thank them for their contributions.
    The next phase requires no less effort. I want to highlight several 
areas going forward that are critical to realizing the benefits 
Congress had in mind when it adopted this new framework and to 
minimizing any unintended consequences.
Finishing and Fine-Tuning Dodd-Frank Regulations
    First, as markets develop and we gain experience with the new Dodd-
Frank regulations, I anticipate we will, from time to time, make some 
adjustments and changes. This is to be expected in the case of a reform 
effort as significant as this one. These are markets that grew to be 
global in nature without any regulation, and the effort to bring them 
out of the shadows is a substantial change. It is particularly 
difficult to anticipate with certainty how market participants will 
respond and how markets will evolve. At this juncture, I do not believe 
wholesale changes are needed, but some clarifications and improvements 
are likely to be considered.
    In fine-tuning existing rules, and in finishing the remaining rules 
that Congress has required us to implement, we must make sure that 
commercial businesses like farmers, ranchers, manufacturers, and other 
companies can continue to use these markets effectively. Congress 
rightly recognized that these entities stand in a different position 
compared to financial firms. We must make sure the new rules do not 
cause inappropriate burdens or unintended consequences for them. We 
hope to act on a new proposed rule for margin for uncleared swaps in 
the near future. On position limits, we have asked for and received 
substantial public comment, including through roundtables and face-to-
face meetings. This input has been very helpful enabling us to 
calibrate the rules to achieve the goals of reducing risk and improving 
the market without imposing unnecessary burdens or causing unintended 
consequences.
Cross-Border Regulation of the Swaps Market
    A second key area is working with our international counterparts to 
build a strong global regulatory framework. To succeed in accomplishing 
the goals set out in the G20 commitments and embodied in the Dodd-Frank 
Act, global regulators must work together to harmonize their rules and 
supervision to the greatest extent possible. Fundamentally, this is 
because the markets that the CFTC is charged to regulate are truly 
global. What happens in New York, Chicago, or Kansas City is 
inextricably interconnected with events in London, Hong Kong and Tokyo. 
The lessons of the financial crisis remind us how easy it is for risks 
embedded in overseas derivatives transactions to flow back into the 
United States. And Congress directed us to address the fact that 
activities abroad can result in importation of risk into the United 
States.
    This is a challenging task. Although the G20 Nations have agreed on 
basic principles for regulating over-the-counter derivatives, there can 
be many differences in the details. While many sectors of the financial 
industry are global in nature, applicable laws and rules typically are 
not. For example, no one would expect that the laws which govern the 
selling of securities, or the securing of bank loans, should be exactly 
the same in all the G20 Nations. While our goal should be 
harmonization, we must remember that regulation occurs through 
individual jurisdictions, each informed by its own legal traditions and 
regulatory philosophies.
    Our challenge is to achieve as consistent a framework as possible 
while not lowering our standards simply to reach agreement, thus 
triggering a ``race to the bottom.'' We must also minimize 
opportunities for regulatory arbitrage, where business moves to locales 
where the rules are weaker or not yet in place.
    The CFTC's adoption of regulations for systemically important CCPs 
is a useful model for success. Our rules were designed to meet the 
international standards for the risk management of systemically 
important CCPs, as evidenced by the Principles for Financial Market 
Infrastructures (PFMIs) published by the Bank of International 
Settlement's Committee on Payment and Settlement Systems and the 
Technical Committee of the International Organization of Securities 
Commissions, to which the Commission was a key contributor.
    Since the day I joined the CFTC, I have been focused on cross-
border issues. In my first month in office I went to Europe twice to 
meet with my fellow regulators, and I have been engaged in ongoing 
dialogue with them.
Robust Compliance and Enforcement
    A third major area is having robust compliance and enforcement 
activities. It is not enough to have rules on the books. We must be 
sure that market participants comply with the rules and fulfill their 
obligations. That is why, for example, several weeks ago we fined a 
large swap dealer for failing to abide by our data reporting rules.
    A strong compliance and enforcement function is vital to 
maintaining public confidence in our markets. This is critical to the 
participation of the many Americans who depend on the futures and swaps 
markets--whether they are farmers, oil producers or exporters. And even 
though most Americans do not participate directly in the futures and 
swaps markets, our enforcement efforts can help rebuild and maintain 
public confidence and trust in our financial markets.
    We must aggressively pursue wrongdoers, big or small, and 
vigorously fulfill our responsibility to enforce the regulations 
governing these markets. Our pursuit of those who have manipulated 
benchmarks like LIBOR, a key global benchmark underlying a wide variety 
of financial products and transactions, is a prime example of this 
principle in practice. So is our successful litigation against Parnon 
Energy and Arcadia, two energy companies that systematically 
manipulated crude oil markets to realize illicit profits.
    Dodd-Frank provided the Commission with a number of new statutory 
tools to ensure the integrity of our markets, and we have moved 
aggressively to incorporate these tools into our enforcement efforts. 
Our new antimanipulation authority gives us enhanced ability to go 
after fraud-based manipulation of our markets. We have put that 
authority to good use in a host of cases and investigations, including 
actions against Hunter Wise and a number of smaller firms for 
perpetrating precious metals scams. Congress also gave us new authority 
to attack specific practices that unscrupulous market participants use 
to distort the markets, such as ``spoofing,'' where a party enters a 
bid or offer with the intent to move the market price, but not to 
consummate a transaction. We used this new antispoofing provision to 
successfully prosecute Panther Energy for its spoofing practices in our 
energy markets.
    Going forward, protecting market integrity will continue to be one 
of our key priorities. Market participants should understand that we 
will use all the tools at our disposal to do so.
Information Technology and Data Management
    It is also vital that the CFTC have up to date information 
technology systems. Handling massive amounts of swaps data and 
effective market oversight both depend on the agency having up-to-date 
technology resources, and the staff--including analysts and economists, 
as well as IT and data management professionals--to make use of them. 
The financial markets today are driven by sophisticated use of 
technology, and the CFTC cannot effectively oversee these markets 
unless it can keep up.
    Cybersecurity is a related area where we must remain vigilant. As 
required by Congress, we have implemented new requirements related to 
exchanges' cybersecurity and system safeguard programs. The CFTC 
conducts periodic examinations that include review of cybersecurity 
programs put in place by key market participants, and there is much 
more we would like to do in this area. Going forward, the Commission's 
examination expertise will need to be expanded to keep up with emerging 
risks in information security, especially in the area of cybersecurity.
Resources and Budget
    All of these tasks represent the significant increases in 
responsibility that came with Dodd Frank. They require resources. But 
the CFTC does not have the resources to fulfill these tasks as well as 
all the responsibilities it had--and still has--prior to the passage of 
Dodd Frank. The CFTC is lucky to have a dedicated and resourceful 
professional staff. Although I have been at the agency a relatively 
short time, I am already impressed by how much this small group is able 
to accomplish. Still, as good as they are, the reality of our current 
budget is evident.
    I recognize that there are many important priorities that Congress 
must consider in the budgeting process. I appreciate the importance of 
being as efficient as possible. I have also encouraged our staff to be 
creative in thinking about how we can best use our limited resources to 
accomplish our responsibilities. We will keep the Teddy Roosevelt adage 
in mind, that we will do what we can, with what we have, where we are.
    But I hope to work with members of Congress to address our budget 
constraints. Our current financial resources limit our ability to 
fulfill our responsibilities in a way that most Americans would expect. 
The simple fact is that Congress's mandate to oversee the swaps market 
in addition to the futures and options markets requires significant 
resources beyond those the agency has previously been allocated. 
Without additional resources, our markets cannot be as well supervised; 
participants cannot be as well protected; market transparency and 
efficiency cannot be as fully achieved.
    Specifically, in the absence of additional resources, the CFTC will 
be limited in its ability to:

    Perform adequate examinations of market intermediaries, 
        including systemically important DCOs and the approximately 100 
        swap dealers that have registered with the Commission under the 
        new regulatory framework required by Dodd-Frank.

    Use swaps data to address risk in a marketplace that has 
        become largely automated, and to develop a meaningful 
        regulatory program that is required to promote price 
        transparency and market integrity.

    Conduct effective daily surveillance to identify the 
        buildup of risks in the financial system, including for 
        example, review of CFTC registrant activity reports submitted 
        by Commodity Pool Operators and banking entities, as well as to 
        monitor compliance with rules regarding prohibitions and 
        restrictions on proprietary trading.

    Investigate and prosecute major cases involving threats to 
        market integrity and customer harm and strengthen enforcement 
        activities targeted at disruptive trading practices and other 
        misconduct of registered entities such as precious metals 
        schemes and other forms of market manipulation.
Conclusion
    A few core principles must motivate our work in implementing Dodd-
Frank. The first is that we must never forget the cost to American 
families of the financial crisis, and we must do all we can to address 
the causes of that crisis in a responsible way. The second is that the 
United States has the best financial markets in the world. They are the 
strongest, most dynamic, most innovative, most competitive and 
transparent. They have been a significant engine of our economic growth 
and prosperity. Our work should strengthen our markets and enhance 
those qualities. We must be careful not to create unnecessary burdens 
on the dynamic and innovative capacity of our markets. I believe the 
CFTC's work can accomplish these objectives. We have made important 
progress but there is still much to do. I look forward to working with 
the Members of this Committee and my fellow regulators on these 
challenges.
    Thank you again for inviting me today. I look forward to your 
questions.
               RESPONSES TO WRITTEN QUESTIONS OF
            CHAIRMAN JOHNSON FROM DANIEL K. TARULLO

Q.1. Since the Volcker Rule was finalized last December, what 
has the Fed done with other regulators to coordinate its 
interpretation and enforcement, and how has the Interagency 
Working Group facilitated these efforts?

A.1. In pursuit of our goals for a consistent application of 
the Volcker Rule across banking entities, the Federal Reserve 
continues to work with the Office of the Comptroller of the 
Currency, Federal Deposit Insurance Corporation, Securities and 
Exchange Commission, and Commodity Futures Trade Commission 
(the Agencies). Staffs of the Agencies meet regularly to 
address key implementation and supervisory issues as they 
arise. An interagency group that includes staff from the 
Agencies reviews and discusses all substantive questions 
received. Two subcommittees of the interagency group have been 
established. One is developing a framework for coordinating 
examinations among the Agencies. The other addresses issues 
related to the required submission of metrics which certain of 
the largest firms began reporting in September.
    External guidance will be handled through agency-issued 
frequently asked questions (FAQs) and other forms of guidance 
as needed. Nine FAQs have been published to date that clarify 
particular provisions of the final rule, including the 
submission of metrics, expectations during the conformance 
period, the application of certain covered funds restrictions, 
and clarification regarding the annual CEO attestation.
    Staffs of the Agencies also continue to meet with and 
collect questions from banking entities under their respective 
jurisdictions, and banking entities may submit questions 
regarding matters of interest raised by the Volcker Rule to the 
Agencies. Staffs of the Agencies expect to continue to 
coordinate responding to matters that are of common interest in 
public statements, including through public responses to FAQs 
and in public guidance.
                                ------                                


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

Q.1. On September 3, the FRB, FDIC, and OCC issued final 
liquidity rules for large banks that will require more than 30 
U.S. banks to add a combined $100 billion more in liquid assets 
than they currently hold. A Fed economist said that the rule 
``will to some extent make credit a bit more costly.'' Has the 
FRB conducted a detailed analysis to determine exactly how much 
more costly credit will become as a consequence of this rule 
for both small businesses and individual consumers? If yes, 
please provide that analysis and the ensuing result. If not, 
please explain why the FRB did not undertake such analysis.

A.1. The economist who provided the referenced quote explained 
that the liquidity coverage ratio (LCR) could make lending 
incrementally more costly in the sense that the LCR standard 
would cause banks to hold more liquid balance sheets than 
without the LCR requirement. He also noted, however, that the 
increased liquidity will also make financial crises less likely 
to occur and less severe if they do. As we saw in 2007 to 2009, 
financial crises result in a sharp decline in credit 
availability and an increase in its cost, and viewed over time 
and on average, credit availability may increase and credit may 
be less costly as a result of the LCR. Indeed, that was a 
conclusion of the study on the likely impact of the LCR and new 
capital requirements, which was conducted by the Bank for 
International Settlements (with participation from Board 
economists) and released in August, 2010. \1\
---------------------------------------------------------------------------
     \1\ The protocol and additional information regarding the protocol 
is available on ISDA's Web site at http://www2.isda.org/functional-
areas/protocol-management/protocol/20.
---------------------------------------------------------------------------
    Over the past several years, Federal Reserve Board (Board) 
staff has observed a material improvement in the liquidity 
position of banks, with limited impact to the overall market 
because banks tended to take low-cost measures to improve their 
liquidity positions. For example, banks have improved 
collateral management and decreased the size of commitments to 
better reflect customer needs, two measures which incur minimal 
cost. Banks have also taken other actions such as improving the 
mix of liabilities to include more stable funding like retail 
deposits, which also has had limited impact on their cost of 
funding. We anticipate that banks will continue to take these 
and similar low-cost measures to improve their liquidity 
positions and eliminate the estimated shortfall.

Q.2. In your testimony you mention that global regulators are 
working on an ISDA protocol resolving the insolvency of a SIFI. 
Under such protocol, would U.S. market participants be 
potentially asked to waive their rights to protections afforded 
under U.S. law, such as netting and termination rights?

A.2. On November 12, 2014, the International Swaps and 
Derivatives Association (ISDA) issued for adoption by companies 
the ISDA 2014 Resolution Stay Protocol. \2\ The protocol amends 
the ISDA Master Agreement between parties adhering to the 
protocol to provide for a suspension of early termination 
rights and other remedies upon the commencement of certain 
resolution proceedings. These contractual amendments align with 
the provisions of the Federal Deposit Insurance Act and Title 
II of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act concerning stays of early termination rights in qualified 
financial contracts, but would apply those provisions to 
derivatives transaction counterparties that are not otherwise 
subject to U.S. law. Thus, the ISDA protocol will better 
effectuate U.S. law in the event of the resolution of a U.S. 
company operating cross-borders. Furthermore, the protocol 
amendments would create similar stays applicable to derivatives 
transactions if the parent or other affiliate of the adhering 
counterparty has entered into an orderly resolution proceeding 
under the U.S. Bankruptcy Code. The protocol would not affect 
the application of U.S. law to contracts in the United States 
or those involving U.S. parties, nor would it impact the 
jurisdiction of U.S. courts and Federal regulators.
---------------------------------------------------------------------------
     \2\ Ibid.

Q.3. The issue of FSOC accountability and transparency is one 
that I have raised numerous times. Given the magnitude of the 
regulatory burden and other costs imposed by a SIFI 
designation, it is imperative that the designation process be 
as transparent and objective as possible.
    Do you object to the public disclosure of your individual 
votes, including an explanation of why you support or oppose 
such designation?

A.3. I am not a member of the Financial Stability Oversight 
Council (FSOC), so I do not have a vote in the body.

Q.4. Will you commit to pushing for greater accountability and 
transparency reforms for FSOC? Specifically, will you commit to 
push the FSOC to allow more interaction with companies involved 
in the designation process, greater public disclosure of what 
occurs in FSOC principal and deputy meetings, publish for 
notice and comment any OFR report used for evaluating 
industries and companies, and publish for notice and comment 
data analysis used to determine SIFI designations? If you do 
not agree with these proposed reforms, what transparency and 
accountability reforms would you be willing to support?

A.4. On February 4, the FSOC approved a set of procedures for 
the designation process that are intended to supplement its 
rule and guidance. The changes are intended to bring more 
transparency to the process and provide companies that have 
passed the initial thresholds for consideration with the 
opportunity to engage with FSOC staff and the staff of member 
agencies at an early point in the process. As FSOC considers 
other potential changes to the process, the FSOC will need to 
balance the need for greater transparency with the need to 
protect information that is supervisory, proprietary, or 
otherwise confidential in nature. Public disclosure of such 
information could harm firms. Accordingly, the FSOC is careful 
to protect such information in providing a public basis 
statement that makes clear the basis for designation. The FSOC 
will also need to ensure that any changes to the process do not 
impinge on a free and frank deliberation within the FSOC as 
this is an important part of an effective designation process. 
The publicly available basis for the FSOC's determination 
contains an extensive explanation of the analysis the Council 
took into account when considering whether to designate a 
nonbank financial company for supervision by the Board.
    Finally, while the Office of Financial Research did not 
request comment on its asset manager study, the Securities and 
Exchange Commission received and published comments on the 
study that have been reviewed by staff at member agencies.

Q.5. In the July FSOC meeting, the Council directed staff to 
undertake a more focused analysis of industrywide products and 
activities to assess potential risks associated with the asset 
management industry.
    Does the decision to focus on ``products and activities'' 
mean that the FSOC is no longer pursuing designations of asset 
management firms?
    Did the FSOC vote on whether to advance the two asset 
management companies to Stage 3? If so, why was this not 
reported? If not, why was such a vote not taken in order to 
provide clarity to the two entities as well as the industry?

A.5. At its July 2014 meeting, the FSOC discussed its ongoing 
evaluation of the potential systemic threats posed by asset 
management firms and their activities. At the conclusion of 
that discussion, the FSOC directed staff to undertake a more 
focused analysis of these issues and, at its December public 
meeting, the FSOC issued a notice published in the Federal 
Register seeking public comment on potential risks to U.S. 
financial stability from asset management products and 
activities. The FSOC's work in this area is ongoing but still 
preliminary. The Board is committed to helping ensure that the 
Council updates the public about its work in this important 
area as it becomes possible to do so.
                                ------                                


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

Q.1. With the Volcker Rule, we finally learned the lessons from 
the bailout of Long-Term Capital Management and then the 2008 
financial crisis that we simply cannot afford to have big, 
systemically significant firms making big bets on the ups and 
downs of the market. Casino banking is over--if you stick to 
your guns and enforce the Rule.
    I deeply appreciate the hard work you did to getting to a 
final rule last December, and I recognize the hard work you are 
doing now to implement it. However, we are still at the 
beginning legs of the journey, and I believe in ``trust but 
verify''--which requires full, continued cooperation by our 
regulators and engagement with the public.
    During the financial crisis, we all saw the horrific 
results when different regulators saw only parts of the risks 
to some firms. There were too many regulatory silos, which do 
not work because firms do not function that way. You also need 
a complete picture of what is going on in any one institution 
and across different firms. Indeed, one of the least recognized 
benefits of the Volcker Rule is to force the regulators to pay 
attention, together, to trading activities, which have become 
so important at so many banks. But critically, this means all 
the regulators need full access to all collected data and 
information.
    In addition, accountability to the public through 
disclosure provides another layer of outside oversight and 
analysis, as well as equally importantly, public confidence 
that Wall Street reform is real.
    Based on the track record of various public disclosure 
mechanisms out there already--including for example, the CFTC's 
positions of traders--there is significant space for reasonably 
delayed disclosures of metrics data to enhance Volcker Rule 
accountability and public confidence. Now Treasury Deputy 
Secretary and then-Federal Reserve Governor Sarah Bloom Raskin 
highlighted disclosure in her statement on adoption of the 
final rule, and financial markets expert Nick Dunbar has 
similarly called for disclosure as a key tool. (See Nick 
Dunbar, ``Volcker Sunlights Should Be the Best Disinfectant'', 
July 25, 2014, http://www.nickdunbar.net/articles/volcker-
sunlight-should-be-the-best-disinfectant/.) The OCC's Quarterly 
Trading Activity Report may be a perfect venue to engage in 
this type of disclosure, provided it is expanded to cover the 
entire banking group.
    First, will each of you commit to working to ensure that 
each of your agencies has a complete picture of an entire 
firm's trading and compliance with the Volcker Rule, which can 
best be accomplished by having all data in one place so that 
all regulators have access to it?

A.1. Section 13 of the Bank Holding Company Act (BHC Act) 
allocates authority among the Office of the Comptroller of the 
Currency (OCC), Federal Deposit Insurance Corporation (FDIC), 
Federal Reserve, Securities and Exchange Commission (SEC) and 
Commodity Futures Trading Commission (CFTC) (the Agencies) with 
respect to banking entities for which each Agency is the 
primary Federal regulator. In light of how the statute 
allocates authority among the Agencies, the final rule 
implementing section 13 requires that each banking entity 
provide periodic reports of certain quantitative measurements 
to its primary Federal regulator. A frequently asked question 
issued by the Agencies in June 2014, explained that a trading 
desk that spans multiple legal entities must report the 
quantitative measurements to each of the Agencies with 
jurisdiction under section 13 of the BHC Act over any of the 
entities. \1\ The Agencies have been and continue to cooperate 
in reviewing the data submitted by firms.
---------------------------------------------------------------------------
     \1\ See http://www.federalreserve.gov/bankinforeg/volcker-rule/
faq.htm#2.
---------------------------------------------------------------------------
    While the Agencies do not currently have plans to have all 
the data in one place, the Federal Reserve intends to work with 
the other Agencies to coordinate supervision and enforcement of 
section 13 and implementing regulations. This coordination 
includes sharing the metrics data provided by banking entities 
under the final rule as appropriate.

Q.2. Second, are you committed to using disclosure to help 
advance compliance with and public trust from the Volcker Rule?

A.2. In the preamble of the final rule, the Agencies emphasized 
that the purpose of the quantitative measurements is not as a 
dispositive tool for determining compliance with the rule but 
rather would be used to monitor patterns and identify activity 
that may warrant further review. Banking entities that are 
subject to metrics reporting as of September 2014, generally 
have requested confidential treatment of the metrics data under 
the Freedom of Information Act as trade secrets and commercial 
or financial information obtained from a person that is 
privileged or confidential.
    The Agencies also indicated in the final rule that they 
intended to revisit the quantitative measurements in September 
2015, after having gained experience with the data. At that 
time, the Federal Reserve will consult with the other Agencies 
regarding the potential for release of aggregated data on a 
delayed basis that would not identify the trading positions of 
any individual firm.

Q.3. The success of the Volcker Rule over the long term will 
depend upon the commitment of regulators to the vision of a 
firewall between high risk, proprietary trading and private 
fund activities, on the one hand, and traditional banking and 
client-oriented investment services on the other hand. One of 
the most important parts of ensuring that vision is 
meaningfully implemented is the December 2013 final rule's 
application of its provisions at the ``trading desk'' level, 
defined as the ``smallest discrete unit of organization'' that 
engages in trading.
    Unfortunately, reports have emerged suggesting that banks 
are already attempting to combine and reorganize what had been 
separate trading desks into one ``trading desk'' for Volcker 
Rule purposes, as a way to game the metrics-based reporting 
essential to effective monitoring by regulators of each 
institution's compliance with the Volcker Rule. The OCC has 
already identified this risk in its Interim Examination 
Procedures, and attempted to limit such actions to instances 
where the desks were engaged in ``similar strategies,'' the 
combination has a ``legitimate business purpose,'' and the 
combination assists the firm to ``more accurately reflect the 
positions and fluctuations'' of its trading. I feel that the 
OCC's interim protections may not, however, be enough ensure 
compliance with the final rule.
    I am deeply concerned that combining or reorganizing 
trading desks would undermine the strength of the metrics-based 
oversight, particularly related to whether market-making is 
truly to serve near-term customer demand and whether hedging is 
truly that. To avoid obscuring evasion by changing the mixture 
and volume of the ``flow'' of trading that is reported by the 
``trading desk'' unit, I would suggest that examiners ought to 
strictly apply the final rule's approach to ``trading desk'' 
and apply the guidance set out by the OCC extremely narrowly, 
along with additional protections. For instance, ``similar 
strategies'' would need to include both the type of the trading 
(e.g., market-making) but also the same or nearly identical 
products, as well as be serving the same customer base, among 
other standards. As an example, if two desks traded in U.S. 
technology stocks and technology stock index futures, combining 
those into one desk might make sense, depending on other 
factors, such as where the desks were located and what 
customers they were serving. But combining, for example, 
various industry-specific U.S. equities desks that today are 
separate would not pass muster for complex dealer banks.
    It is also important to remember that an important 
supervisory benefit from implementing the Volcker Rule at a 
genuine trading desk level is that regulators will gain a much 
deeper, more granular understanding of the risks emanating the 
large banks' many different trading desks--the kind of risks 
that led one particular trading desk to become famous as the 
London Whale.
    When confronted with attempts to reorganize trading desks, 
regulators should look carefully at whether submanagement 
structures, bonus structures, or other indicia exist that would 
suggest that the reorganized ``trading desk'' is not actually 
the smallest discrete unit of organization contemplated by the 
final rule and essential to the metrics-based oversight system 
being developed.
    Will you commit to scrutinizing, for the purposes of the 
Volcker Rule, any reorganizations of trading desks as posing 
risks of evasion and will you commit to working jointly to 
clarify any guidance on the definition of trading desk for 
market participants?

A.3. The final rule implementing section 13 of the BHC Act 
applies various requirements to a trading desk of a banking 
entity and requires banking entities subject to quantitative 
measurements reporting under Appendix A of the final rule to 
report the required metrics for each trading desk. As you note, 
the final rule defines a ``trading desk'' to mean the smallest 
discrete unit of organization of a banking entity that 
purchases or sells financial instruments for the trading 
account of the banking entity or an affiliate thereof. \2\ In 
issuing the final rules, the Agencies explained that adopting 
an approach focused on the trading desk level would allow 
banking entities and the Agencies to better distinguish between 
permitted market making-related activities and trading that is 
prohibited by section 13 of the BHC Act and will thus prevent 
evasion of the statutory requirements. \3\
---------------------------------------------------------------------------
     \2\ See 12 CFR 248.3(e)(13).
     \3\ See 76 FR 5536 at 5591.
---------------------------------------------------------------------------
    As part of the supervisory process, the Federal Reserve 
intends to monitor how banking entities define a trading desk 
and to monitor any reorganizations of trading desks in order to 
avoid evasion of the requirements of section 13 and the final 
rule. The Federal Reserve will work with the other Agencies to 
clarify any guidance on the definition of trading desk if 
needed to address concerns about such reorganizations and 
evasion.

Q.4. Ensuring speedy compliance with the provisions of the 
Merkley-Levin Volcker Rule is a top priority for strong 
implementation. It has already been 4 years since adoption, and 
banks should be well on their way to conforming their trading 
and fund operations.
    However, as you know, we also provided for an additional 5 
years of extended transition for investments in ``illiquid 
funds,'' which were expected to include some types of private 
equity funds. We did this because some private equity funds, 
such as venture capital funds, do not usually permit investors 
to enter or exit during the fund's lifetime (usually 10 years 
or so) because of the illiquidity of those investments.
    As you know, the Federal Reserve Board's rule on the 
``illiquid funds'' extended transition interprets the statutory 
provision of a ``contractual commitment'' to invest as 
requiring a banking entity, where a contract permits divestment 
from a fund, to seek a fund manager's and the limited partners' 
consent to exit a fund. The rule, however, provides for the 
Board to consider whether the banking entity used reasonable 
best efforts to seek such consent but that an unaffiliated 
third party general partner or investors made unreasonable 
demands.
    I strongly support the Board's desire to implement the 
Volcker Rule in a speedy manner. In addition, the Board's 
approach in the final conformance rule goes a long way to 
ensuring that the illiquid funds extended transition only be 
available for investments in truly illiquid funds, and not a 
way to avoid divestment of hedge funds and private equity 
funds.
    At the same time, we designed the provision to provide for 
a smooth wind-down for illiquid funds. Indeed, I am sensitive 
to the legitimate business needs of firms seeking to comply 
with the Volcker Rule while maintaining relationships with 
important customers to whom they may seek to provide 
traditional banking services.
    Accordingly, I would urge the Board to clarify that a 
banking entity's requirement to make ``reasonable efforts'' to 
exercise its contractual rights to terminate its investment in 
an illiquid fund could be satisfied, for example, by a 
certification by the banking entity (a) that the banking 
entity's exit from the fund would be extraordinary from the 
perspective of how most investors enter or exit the fund (i.e., 
the investment contract does not routinely or ordinarily 
contemplate entry or exit, and/or such other indicia as are 
necessary to help distinguish between illiquid private equity 
funds and other funds, like hedge funds, that ordinarily and 
routinely permit investor redemptions), (b) that inquiring with 
third-party fund managers and limited partners regarding 
termination would result in a significant detriment to the 
business of the banking entity and (c) that the banking entity 
believes that the divestment would result in losses, 
extraordinary costs, or otherwise raise unreasonable demands 
from the third-party manager relating to divestment (or the de 
facto equivalent thereto).
    Such a certification from the banking entity, along with 
the language of the relevant fund agreements and such other 
requirements as the Board determines appropriate, would obviate 
the need to seek consent from third-party fund managers. Have 
you considered clarifying this in a FAQ?

A.4. A number of commenters have requested that the Federal 
Reserve modify the meaning of what is ``necessary to fulfill a 
contractual obligation'' of the banking entity under the 
Board's 2011 conformance rule. The Federal Reserve is 
considering these comments in light of the requirements of 
section 13. The Federal Reserve will consider your comments 
regarding a potential certification for illiquid funds in 
determining what next steps to take on these matters.

Q.5. We've recently seen reports that the largest Wall Street 
banks are nominally ``deguaranteeing'' their foreign affiliates 
in order to avoid coverage under U.S. regulatory rules, 
especially those related to derivatives. This 
``deguaranteeing'' appears to be based on a fiction that U.S. 
banks do not actually guarantee the trading conducted by 
foreign subsidiaries, and hence would not be exposed to any 
failure by the foreign subsidiary.
    Can you comment on that, and specifically, whether you 
believe that U.S. bank or bank holding company could be exposed 
to losses from--or otherwise incur liability related to--a 
foreign affiliate's trading even when no explicit guarantee to 
third parties exists. Please specifically address whether an 
arrangement, commonly known as a ``keepwell,'' provided by the 
U.S. parent or affiliate to the foreign affiliate potentially 
could create such exposure--and specifically, liability--for 
the U.S. entity.

A.5. As a general matter, the Federal Reserve engages in 
consolidated supervision and regulation of bank holding 
companies (BHCs) and banks. Most of the Federal Reserve's BHC 
regulations apply on a consolidated basis; accordingly, removal 
of any BHC parent guarantees of, or keepwell arrangements with, 
foreign subsidiaries have little or no effect on the BHC's 
consolidated risk-based capital, leverage, and liquidity 
requirements. In other words, for most of our key BHC 
regulations, we generally treat the assets, liabilities, and 
exposures of a BHC's foreign subsidiaries as owned by the BHC, 
whether or not there is an explicit guarantee by the BHC parent 
of the assets, liabilities, or exposures of the foreign 
subsidiary. Our basic supervisory stance is to require a BHC to 
manage its own risks as well as the risks of all of its 
domestic and foreign consolidated subsidiaries.
    With respect to rules related to derivatives transactions, 
in September 2014, the prudential regulators (including the 
OCC, the Federal Reserve, the FDIC, the Farm Credit 
Administration, and the Federal Housing Finance Agency) 
released a proposed rule for margin requirements for covered 
swap entities. Covered swap entities are defined to mean 
entities registered as swap dealers or major swap participants 
with the CFTC, or registered as security-based swap dealers or 
major security-based swap participants with the SEC and that 
are regulated by one of the prudential regulators.
    The proposed rule addressed the cross-border application of 
the margin requirements, including the treatment of guarantees. 
In particular, the proposal stated that the requirements would 
not apply to any foreign noncleared swap of a foreign covered 
swap entity. To qualify as a foreign noncleared swap eligible 
for this exclusion, no guarantor of either party's obligations 
under the swap could be a U.S. entity. Moreover, the proposed 
rule also provided that certain covered swap entities may be 
eligible for substituted compliance, whereby they could comply 
with the swap margin rules of another jurisdiction instead of 
the U.S. rule if the prudential regulators made a comparability 
determination. The proposal explicitly provided that a covered 
swap entity was eligible for substituted compliance only if the 
covered swap entity's obligations under the swap were not 
guaranteed by a U.S. entity.

Q.6. Moreover, please comment on whether the size and 
importance to the U.S. parent or affiliate of the foreign 
affiliate's activities could itself create an implied guarantee 
such that the U.S. firm would have major reputational or 
systemic risk reasons to prevent the foreign affiliate from 
incurring significant losses or even failing--similar to 
rescues that occurred during the financial crisis of entities 
that were supposed to be bankruptcy remote.

A.6. Please see response to Question 5 above. As noted above, 
the Federal Reserve generally takes a consolidated approach to 
supervision regardless of the size or importance of the U.S. 
entity.

Q.7. Finally, many of these foreign bank subsidiaries are so-
called ``Edge Act'' corporations, which I understand are 
consolidated with the insured depository subsidiary for many 
purposes. Please comment on whether there is any chance that 
losses in these Edge Act corporations, particularly losses in 
their derivatives operations, could impact the deposit 
insurance fund.

A.7. The potential for losses at subsidiaries to affect the 
operations of a parent BHC or bank, and in turn affect the 
deposit insurance fund, is one of the important reasons why the 
Federal Reserve takes a consolidated approach to supervision 
and regulation of BHCs and banks. Elimination of guarantees and 
keepwell arrangements between a bank and its Edge Act 
subsidiary would not affect our supervision of the BHC, the 
bank, or the Edge Act corporation, nor would it change the 
bank's capital or liquidity requirements.

Q.8. There have been several recent stories in Reuters that 
highlight how some large bank holding companies continue to be 
engaged deeply in the investment and trading in physical 
commodities--ownership of oil trains and natural gas plants 
businesses.
    Are you concerned about the continued expansion by some of 
our largest bank holding companies into activities? Can you 
provide an update on the status of your physical commodities 
review, and whether you intend to at least ensure that short 
term trading in physical commodities are covered by appropriate 
limits, protections, and prohibitions against conflicts of 
interest?

A.8. In January 2014, the Federal Reserve Board (Board) invited 
public comment through an advance notice of proposed rulemaking 
(ANPR) on a range of issues related to the commodities 
activities of financial holding companies. The scope of our 
ongoing review covers commodities activities and investments 
under section 4(k) complementary authority, merchant banking 
authority, and section 4(o) grandfather authority. Recently, 
some of the financial holding companies engaged in physical 
commodities activities have publicly indicated that they are 
reducing or terminating some of these activities.
    As the ANPR explains, we are exploring what further 
prudential restrictions or limitations on the ability of 
financial holding companies to engage in commodities-related 
activities are warranted to mitigate the risks associated with 
these activities. Such additional restrictions could include 
reductions in the maximum amount of assets or revenue 
attributable to such activities, increased capital or insurance 
requirements on such activities, and prohibitions on holding 
specific types of physical commodities that pose undue risk to 
the company. We also are exploring what restrictions or 
limitations on investments made through the merchant banking 
authority would appropriately address those or similar risks.
    In response to the notice, the Board received 184 unique 
comments and more than 16,900 form letters. Commenters included 
Members of Congress, individuals, public interest groups, 
academics, end users, banks, and trade associations. The 
comments present a range of views and suggested Board actions--
from no action to prohibiting trading or ownership of 
commodities associated with catastrophic risk, strengthening 
prudential safeguards (such as reducing caps on the amount of 
permitted activities), strengthening risk-management practices, 
enhancing public disclosure, requiring additional capital, 
increasing regulatory coordination, and developing risk-
management best practices. The Board has been reviewing the 
comments and considering what steps would be appropriate to 
address the risks posed by physical commodities activities.
                                ------                                


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

Q.1. In June 2013, the FSOC voted to designate AIG, GE Capital, 
and Prudential as nonbank SIFIs. Shortly thereafter, in July 
2013, the Financial Stability Board, of which the Federal 
Reserve is an influential member, voted to designate AIG, 
Prudential, and MetLife as systemically important. What 
warranted the immediate designation of AIG and Prudential and 
the substantial delay in designating MetLife?

A.1. Under the Dodd-Frank Wall Street and Consumer Protection 
Act (Dodd-Frank Act), the Financial Stability Oversight Council 
(FSOC) may only designate financial companies that are not bank 
holding companies. MetLife was a U.S. bank holding company 
until February 14, 2013. On that date, it received the required 
approvals from both the Federal Deposit Insurance Corporation 
and the Federal Reserve Board (Board) to deregister as a bank 
holding company. These approvals followed the completed sale of 
MetLife Bank's depository business to General Electric Capital 
Corporation (GECC) on January 11, 2013.
    Because MetLife--unlike AIG, GECC, and Prudential--was a 
bank holding company until February 2013, FSOC's designation 
process for MetLife trailed that of AIG, GECC, and Prudential.

Q.2. It makes logical sense for national Governments to conduct 
their own reviews of potentially systemically important firms 
within their countries before voting to designate them as such 
at an international body. However, this was not the case with 
MetLife. Why did the Fed vote first to designate MetLife as a 
SIFI at the FSB before voting to designate MetLife as a 
domestic nonbank SIFI?

A.2. As noted in the prior response, because MetLife was a bank 
holding company until February 2013, the FSOC designation 
process for MetLife was delayed. Moreover, it is important to 
note that the Financial Stability Board's (FSB) process for 
identifying global systemically important insurers (G-SIIs) is 
independent from the FSOC's designation process. Among other 
differences, the FSB and FSOC have different designation 
frameworks and standards. In addition, any standards adopted by 
the FSB, including designation of an entity as a global 
systemically important financial institution (G-SIFI), are not 
binding on the Board or any other agency of the U.S. 
Government, or any U.S. companies. Thus, FSB designation of an 
entity as a nonbank SIFI does not automatically result in the 
Board becoming the entity's prudential regulator. Under the 
Dodd-Frank Act, the FSOC is responsible for deciding whether a 
nonbank financial company should be regulated and supervised by 
the Board, based on its assessment of the extent to which the 
failure, material distress, or ongoing activities of that 
entity could pose a risk to the U.S. financial system.

Q.3. What analysis and review did the Federal Reserve conduct 
prior to supporting the FSB's July 2013 designation of MetLife, 
AIG, and Prudential?

A.3. The methodology for identifying G-SIIs was developed by 
the International Association of Insurance Supervisors (IAIS). 
The IAIS' assessment methodology identifies five categories to 
measure relative systemic importance: (1) nontraditional 
insurance and noninsurance activities, (2) interconnectedness, 
(3) substitutability, (4) size, and (5) global activity. Within 
these five categories, there are 20 indicators, including: 
intrafinancial assets and liabilities, gross notional amount of 
derivatives, Level 3 assets, nonpolicyholder liabilities and 
noninsurance revenues, derivatives trading, short term funding 
and variable insurance products with minimum guarantees. The 
initial assessment methodology involved three steps: (1) the 
collection of data, (2) a methodical assessment of that data, 
and (3) a supervisory judgment and validation process. 
Documents associated with the development of the methodology 
were reviewed by Board staff.

Q.4. What analysis and review did the Federal Reserve conduct 
on MetLife after July 2013 but before the recent FSOC vote on 
designation?

A.4. The FSOC's analysis is based on a broad range of 
quantitative and qualitative information available to the FSOC 
through existing public and regulatory sources, and information 
submitted by MetLife. The analysis is tailored, as appropriate, 
to address company-specific risk factors, including but not 
limited to, the nature, scope, size, scale, concentration, 
interconnectedness, and mix of the activities of MetLife. Board 
staff, along with the staffs other FSOC member agencies and 
offices, contributed to this analysis.

Q.5. What kind of contact have you or your colleagues at the 
Federal Reserve had with the FSB as it relates to reviewing 
asset managers?

A.5. The FSB, in consultation with the International 
Organization of Securities Commissions (IOSCO), is currently 
developing methodologies to identify systemically important 
nonbank noninsurer (NBNI) firms. The purpose of this exercise 
is to fulfill a request by the G20 Leaders to identify threats 
to global financial stability that could arise from the 
material financial distress or failure of NBNI firms, mirroring 
a process for identifying global systemically important banks 
and insurers. \1\ The Board is participating in this process, 
along with other U.S. agencies.
---------------------------------------------------------------------------
     \1\ See paragraph 70 of the G20 Leaders' Declaration from the St. 
Petersburg Summit, September 2013: https://www.g20.org/sites/default/
files/g20_resources/library/Saint_
Petersburg_Declaration_ENG_0.pdf.
---------------------------------------------------------------------------
    Earlier this year, the FSB issued a consultative document 
on ``Assessment Methodologies for Identifying Non-Bank Non-
Insurer (NBNI) Global Systemically Important Financial 
Institutions.'' \2\ It proposed assessing the systemic 
importance of NBNI firms with reference to a set of five 
factors: size; interconnectedness; substitutability; complexity 
and global activities. These factors are broadly consistent 
with those that have been used in the identification of 
globally significant banks and insurers. For practical reasons, 
the FSB also proposed using a ``materiality threshold'' of $100 
billion in net assets under management (AUM) to limit the set 
of firms for which detailed data on these five factors would be 
collected. (Hedge funds would be subject to an additional 
threshold of $400 to $600 billion in gross notional exposure.) 
NBNI firms that are considered potentially systemically 
important by their national supervisors could be added to the 
assessment pool, even when they fall below this threshold.
---------------------------------------------------------------------------
     \2\ The consultation paper is available for download at: http://
www.financialstabilityboard.org/wp-content/uploads/r_140108.pdf.
---------------------------------------------------------------------------
    In its consultation paper, the FSB sought comments on the 
merits of the proposed threshold, and solicited proposals for 
alternative practicable screening mechanisms. The comments 
received, including those from many U.S. firms and industry 
associations, will be an important input that will help refine 
the assessment methodologies. \3\ Moreover, there will continue 
to be significant input from U.S. agencies before an assessment 
methodology is approved by the FSB. U.S. agencies are also 
active participants in IOSCO. This work is ongoing and has yet 
to reach any conclusions.
---------------------------------------------------------------------------
     \3\ Responses to the consultation paper are available for download 
at: http://www.iosco.org/library/
index.cfm?section=pubdocs&publicDocID=435.
---------------------------------------------------------------------------
    It is important to note that any standards adopted by the 
FSB, including designation of an entity as a G-SIFI, are not 
binding on the Board or any other agency of the U.S. 
Government, or any U.S. companies. Under the Dodd-Frank Act, 
the FSOC is responsible for deciding whether a nonbank 
financial company should be regulated and supervised by the 
Board, based on its assessment of the extent to which the 
failure, material distress, or ongoing activities of that 
entity could pose a risk to the U.S. financial system. 
Moreover, the Board would only adopt FSB regulatory standards 
after following the well-established rulemaking protocols under 
U.S. law, which include a transparent process for proposal 
issuance, solicitation of public comments, and rule 
finalization.
    As stated above, the purpose of the FSB exercise is to 
identify threats to global financial stability that could arise 
from the material financial distress or failure of NBNI firms. 
It is possible that the FSB may decide that, at present, none 
of these firms poses such a threat. However, in the event that 
financial stability risks are identified by the FSB, and U.S. 
authorities agree with this identification, the FSOC has a 
range of policies options at its disposal. These include 
communicating such risks in its annual report to Congress; 
recommending that existing primary regulators apply heightened 
standards and safeguards; and designating individual firms as 
``systemically important financial institutions,'' thereby 
subjecting them to supervision and regulation by the Board. The 
appropriate response will depend upon the nature of the risks 
identified, and will seek to maximize net benefits to the 
economy.
    This past July, the FSOC directed staff to ``undertake a 
more focused analysis of industrywide products and activities 
to assess potential risks associated with the asset management 
industry.'' The FSOC's work program is complementary to that of 
the FSB--in both cases, the purpose is to identify metrics that 
can be used across the industry to feed into an assessment of 
financial stability risks generated by asset management funds 
and activities. There is ample opportunity for mutually 
beneficial information sharing in these processes.

Q.6. How does the FSOC's new approach with respect to asset 
managers affect the United States' input into the same process 
with respect to the FSB?

A.6. Please see the response to Question 5.

Q.7. The FSB has proposed a ``materiality threshold'' of $100 
billion in assets under management (AUM), which would capture 
only U.S. mutual funds, and no funds from other countries. Did 
you and do you continue to support a $100 billion AUM test for 
materiality?

A.7. Please see the response to Question 5.

Q.8. Because this test disproportionately affects U.S. funds, 
doesn't it put them at a disadvantage vis-a-vis their 
international competitors?

A.8. Please see the response to Question 5.

Q.9. Does it seem at all inconsistent to you that the FSOC went 
ahead with designating nonbank firms as SIFIs before knowing 
what regulatory framework would be applied once designated?

A.9. The Dodd-Frank Act authorizes the FSOC to make a 
determination as to whether the material financial distress of 
a nonbank financial company could pose a threat to U.S. 
financial stability; the nature of the enhanced prudential 
standards to be applied to a company if the FSOC determines 
that the company could pose such a threat is a separate process 
conducted by the Board. Under section 113 of the Dodd-Frank 
Act, the FSOC is required to consider a specific set of factors 
when determining whether a nonbank financial company should be 
designated by the FSOC for supervision by the Board. There is 
no requirement in section 113 or elsewhere for the FSOC to 
consider the standards to be applied to nonbank financial 
companies designated for supervision by the Board (designated 
firms). The FSOC has not found that its conclusion of whether a 
company's material financial risk could pose a threat to U.S. 
financial stability required a determination beforehand as to 
how enhanced prudential standards would apply to the company.
    Section 165 of the Dodd-Frank Act establishes mandated 
enhanced prudential standards that must be applied to any 
nonbank financial company designated by the FSOC. Section 
165(a)(2) requires the Board to tailor prudential standards for 
a designated firm as appropriate in light of any predominant 
line of business and activities of the firm, among other 
factors. Consistent with section 165, the Board has chosen not 
to adopt a universal, one-size-fits-all regulation governing 
all designated firms. Instead, the Board has chosen to apply 
enhanced prudential standards to designated firms individually 
through an order or rule following an evaluation of the 
business model, capital structure, and risk profile of each 
designated firm. This individualized approach allows the Board 
to tailor its supervision and adapt standards as appropriate to 
each designated firm.

Q.10. How do we know if the systemic risks perceived by the 
FSOC can be effectively addressed through designation, if the 
Federal Reserve and the FSOC don't currently know how they plan 
to regulate these entities?

A.10. The application of enhanced prudential standards by the 
Board to designated firms will mean that these firms must meet 
new capital and liquidity standards which aim to decrease the 
risk they may pose to U.S. financial stability. As described in 
response to Question 9 above, the Board is committed to 
tailoring the application of such standards to designated firms 
to best address the unique business model, capital structure, 
risk profile, and systemic footprint of each designated firm 
before crafting the applicable enhanced prudential standards. 
We believe this individualized approach will allow us to best 
address and ameliorate any risks they pose to the financial 
system.

Q.11. Has the Federal Reserve already thought about how to 
regulate nonbank SIFIs? If so, when will the Fed articulate 
this framework to the public and the entities subject to 
regulation?

A.11. As described in response to Questions 9 and 10 above, the 
precise details of the frameworks for nonbank SIFIs will be 
informed by analysis of the capital structures, financial 
activities, riskiness, and complexity of these firms, along 
with other relevant risk-related factors. For example, with 
regard to the development of enhanced prudential standards for 
designated firms that are insurance companies, the Board began 
a quantitative impact study (QIS) to evaluate the potential 
effects of its capital framework on designated firms that are 
substantially engaged in insurance underwriting activities. We 
will use the results of the QIS to inform the design of an 
appropriate framework for these firms that respects the 
realities of insurance activities.
    With regard to GECC, the remaining designated firm, the 
Board proposed for public comment in November 2014, a 
comprehensive set of enhanced prudential standards for the 
firm. The comment period closed in February, and staff is 
analyzing comments received. We expect to have these frameworks 
in place as soon as practicable.

Q.12. Given the recent decision by FSOC to take a new approach 
with respect to asset managers, should Congress expect the FSOC 
to take a similar approach with respect to insurance companies?
    If so, what impact will this have on insurance companies 
already designated by FSOC?
    If not, doesn't this exemplify quite a bit of 
methodological inconsistency, subjecting some nonbank firms to 
certain kinds of reviews, while subjecting other firms to 
different reviews?

A.12. Under the Dodd-Frank Act, the FSOC has a variety of 
authorities to address risks to financial stability from the 
nonbanking firms. These authorities include designating nonbank 
financial companies for supervision by the Federal Reserve 
Board as well as making recommendations to existing primary 
regulators to apply new or heightened standards and safeguards 
to the financial activities or practices of such firms.
    In exercising this authority, the FSOC, to date, has 
designated four nonbank financial companies based on a 
consideration of the statutory factors as applied to each 
individual company's unique business model as well as its 
leverage, liabilities, activities, and interconnectedness to 
the financial system, among other factors. In the event that 
the material financial distress of a nonbank financial company 
would pose a threat to U.S. financial stability, it is 
appropriate for the FSOC to designate that firm as systemically 
important, as FSOC has determined in the case of three 
insurance companies--AIG, Prudential, and MetLife.
    With regard to asset managers, the FSOC is currently 
studying the relationship of the asset management industry 
generally to U.S. financial stability, including analysis of 
potential risks such as the transmission of the material 
financial distress of an asset manager to the broader financial 
system. At its December 2014 public meeting, the FSOC issued a 
notice published in the Federal Register seeking public comment 
on potential risks to U.S. financial stability from asset 
management products and activities. The FSOC's work in this 
area is ongoing and no determinations have been made at this 
time.

Q.13. A number of ABS classes, including securitized auto and 
credit card loans, were denied any HQLA status in the recently 
finalized LCR rule. What was your reasoning for this?

A.13. The banking agencies that issued the liquidity coverage 
ratio (LCR) rule analyzed and considered many asset classes for 
treatment as high-quality liquid assets (HQLA) in the LCR. 
Evidence from the 2007 to 2009 financial crisis and the period 
following indicates that the market demand for securitization 
issuances can decline rapidly during a period of stress and may 
not rapidly recover. The ability to monetize these 
securitization issuances through or in the repurchase market 
may be limited in a period of stress. Ultimately, a number of 
types of asset-backed securities (ABS), including securitized 
auto and credit card loans, were not treated as HQLA under the 
final rule because the banking agencies concluded that as an 
asset class, they are not sufficiently liquid, particularly 
during times of stress.

Q.14. Because many of the banks that need to comply with the 
LCR comprise a significant number of the investors in these 
ABS, will denying HQLA status to ABS increase borrowing costs 
for consumers and small businesses? Was a cost-benefit analysis 
conducted on this particular provision of the rule? Would you 
be open to sharing that analysis, on this provision or on the 
rule as a whole, with Congress?

A.14. We do not believe that demand for private label ABS will 
be materially affected by the LCR; nor do we believe that the 
borrowing costs to consumers and small businesses will be 
materially affected by the non-HQ LA status of private label 
ABS in the LCR. In this regard, it is important to note that 
the LCR contains provisions that provide favorable treatment to 
borrowings from retail and small business customers as compared 
to borrowings from large businesses. In addition, the banking 
agencies reviewed investments in ABS by banking organizations 
subject to the LCR final rule and found that ABS holdings by 
these firms comprise a limited amount of the total ABS market.
    In developing and finalizing the LCR rule, the banking 
agencies considered the various benefits and costs associated 
with the LCR, including the potential economic impact of asset 
classes being treated or not treated as HQLA and the potential 
impact of the rule as a whole on mitigating systemic risk. We 
also took into account a 2010 study by the Bank for 
International Settlements, which was contributed to by the U.S. 
banking agencies, on the long-term economic impact of stronger 
liquidity and capital requirements for banks. The study 
suggested that over time and on average, credit availability 
would increase and credit would be less costly due to the 
likelihood that such regulations will make future financial 
crisis less likely and less severe.

Q.15. Additionally, the finalized LCR rule confers no HQLA 
status to private-label mortgage-backed securities while 
conferring GSE-guaranteed mortgage-backed securities Level 2A 
HQLA status. Republicans and Democrats are committed to 
attracting more private capital to housing finance. To what 
extent did you consider the ramifications of this decision as 
it relates to broader housing finance reform?

A.15. Data indicates that Government-sponsored enterprise (GSE) 
guaranteed mortgage-backed securities (MBS) have been and 
continue to be very liquid instruments, which is the basis for 
their treatment as Level 2A HQLA (subject to operational and 
other requirements) in the LCR issued by the banking agencies. 
In contrast, evidence from the 2007 to 2009 financial crisis 
and the period following indicates that the market demand for a 
variety of private label securitization issuances can decline 
rapidly during a period of stress, and that such demand may not 
rapidly recover. The banking agencies determined that private-
label MBS do not exhibit the through-the-cycle liquidity 
characteristics necessary to be included as HQLA under the 
final rule, and as noted in response to Question 14 above, we 
considered the costs and benefits of treating privatelabel MBS 
as HQLA in developing and finalizing the LCR. Like other assets 
not treated as HQLA that are nevertheless permissible 
investments, we believe banking organizations will continue to 
invest in these types of assets in order to meet the demands of 
their customers and benefit from the yields these investments 
offer.

Q.16. Doesn't the disparate treatment of PLMBS and GSE MBS 
direct more funding into GSE-guaranteed mortgages and make it 
harder for private capital (without Government guarantees from 
the GSEs, FHA, VA, or USDA) to re-enter the market?

A.16. We recognize the importance of private capital as a 
source of funding to the U.S. residential mortgage markets and 
note that the LCR rule does not prohibit banking organizations 
from continuing to invest in private label MBS. In recognition 
of the fact that many types of permissible investments for 
banking organizations may not be readily liquid during times of 
financial stress, the LCR requires banking organizations to 
meet the proposed liquidity requirements with assets that have 
historically been a reliable source of liquidity in the United 
States during times of stress. As discussed above, the banking 
agencies determined that private label MBS did not meet this 
standard. The agencies do not anticipate, however, that the 
exclusion of this asset class from HQLA will significantly 
deter investment by banking organizations in these assets.
                                ------                                


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

Q.1. The Federal Reserve's earliest regulatory proposals 
setting requirements for Savings and Loan Holding Companies 
recognized a difference between top-tier holding companies that 
are insurance companies themselves and shell-holding companies 
carrying out a broad range of financial activities outside of 
the regulated insurance umbrella, such as AIG. This distinction 
seems appropriate.
    Do you see any compelling reason to change capital rules 
for top-tier insurance SLHCs in the U.S. from those currently 
utilized under State law?

A.1. Section 171 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the Dodd-Frank Act) requires, in part, 
that the Federal Reserve Board (Board) establish consolidated 
minimum risk-based and leverage requirements for depository 
institution holding companies, which includes Savings and Loan 
Holding Companies (SLHCs), and nonbank financial companies 
supervised by the Board. Thus, section 171 of the Dodd-Frank 
Act requires the Board to establish consolidated requirements 
for these firms at the holding company level, in contrast to 
the capital requirements that are imposed under individual 
State insurance laws on insurance companies on a stand-alone, 
legal entity basis.
    In June 2012, the Board proposed changes to its regulatory 
capital framework that would, in part, establish consolidated 
capital requirements for savings and loan holding companies, 
including those with substantial insurance underwriting 
activity (insurance SLHCs). In finalizing the framework in July 
2013, the Board excluded insurance SLHCs from application of 
the revised capital rule pending further consideration of 
whether and how the proposed requirements should be modified 
for these companies. The Board has been working to develop a 
revised regulatory capital framework for insurance SLHCs that 
appropriately addresses the risks to capital adequacy on a 
consolidated level, not just at the level covered by the State 
insurance laws. In October 2014, the Federal Reserve began a 
quantitative impact study (QIS) to evaluate the potential 
effects of its revised regulatory capital framework on 
insurance SLHCs and nonbank financial companies supervised by 
the Board that engage substantially in insurance underwriting 
activity. The Board is conducting the QIS to inform the design 
of an appropriate capital framework for these firms.

Q.2. The Fed is tasked with developing capital rules for both 
insurance-based SLHCs and SIFIs. What differences do you see 
between SLHCs and SIFIs, and how will the capital rules reflect 
these differences? Do your international efforts for globally 
systemic firms have any influence on your development of 
capital rules for insurance-based SLHCs?

A.2. While the capital standards applied to insurance-based 
SLHCs and nonbank financial companies supervised by the Board 
will respect the realities of insurance activities, the precise 
details of the standards will be informed by analysis of the 
capital structures, financial activities, riskiness, and 
complexity of these two sets of firms, along with other 
relevant risk-related factors. To the extent that there are 
similarities in these areas between insurance-based SLHCs and 
nonbank financial companies, elements of the capital standards 
applied to them would likely be similar. Where differences 
exist, the standards would be tailored to take into account the 
unique characteristics of these firms' insurance operations.
    The Board's understanding of these two sets of firms has 
been informed by work in a number of different areas, including 
what has been learned through the Board's supervision of 
insurance-based SLHCs over the past 3 years, the Board's 
membership in the International Association of Insurance 
Supervisors, the Board's discussions with State insurance 
commissioners, and the QIS described in response to Question 1. 
We are committed to developing capital requirements that are 
appropriate for the business mixes, risk profiles, and systemic 
footprints of these two sets of firms.
                                ------                                


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

Q.1. The issue of FSOC accountability and transparency is one 
that I have raised numerous times. Given the magnitude of the 
regulatory burden and other costs imposed by a SIFI 
designation, it is imperative that the designation process be 
as transparent and objective as possible.
    Do you object to the public disclosure of your individual 
votes, including an explanation of why you support or oppose 
such designation?
    Will you commit to pushing for greater accountability and 
transparency reforms for FSOC? Specifically, will you commit to 
push the FSOC to allow more interaction with companies involved 
in the designation process, greater public disclosure of what 
occurs in FSOC principal and deputy meetings, publish for 
notice and comment any OFR report used for evaluating 
industries and companies, and publish for notice and comment 
data analysis used to determine SIFI designations? If you do 
not agree with these proposed reforms, what transparency and 
accountability reforms would you be willing to support?

A.1. I am committed to a designation process that is fair, that 
provides appropriate levels of transparency, and that is based 
on an objective analysis and consideration of the statutory 
factors set forth by Congress in the Dodd-Frank Act. The 
current designations process, which the Council published for 
notice and comment, includes various mechanisms to promote 
accountability and to provide companies the ability to interact 
and respond to a proposed designation prior to any final action 
by the Council. In particular, the Stage 3 phase of the 
designation process is iterative providing extensive 
opportunities for the company to interact with staff conducting 
the analysis and to present information and data that the 
company believes is relevant for FSOC's analysis. For example, 
for one of the companies that has been designated, the FSOC 
spent almost a year conducting its analysis after beginning its 
engagement with the company, and the Council considered more 
than 200 data submissions from the company that totaled over 
6,000 pages. Staff of FSOC members and member agencies had 
contact with the company at least 20 times, including seven 
meetings with senior management and numerous other telephone 
meetings. The FSOC's evaluation, which considered the company's 
views and information, culminated in a detailed and lengthy 
analysis (over 200 pages) that the FSOC shared with the company 
following the proposed designation and before a vote by the 
Council on a final designation.
    The Council's public basis document, which is part of the 
record whenever the Council decides to designate a company, 
provides a public record of the views of Council members. 
Specifically, the public basis document, which is posted to the 
Council's Web site, reflects the views by the assenting Council 
members for the designation, with any dissenting views recorded 
as part of the public record.
    The FSOC recently issued responses to frequently asked 
questions about the designation process to provide greater 
clarity and transparency on the current process. The Council 
has also discussed various changes proposed by stakeholders, 
Members of Congress, and other interested parties that could 
enhance the current process. Such changes could include, for 
example, earlier notification of companies that they are under 
review. At the Council's direction, the FSOC's Deputies 
Committee has recently held meetings with various stakeholders 
to solicit their views and feedback on steps that the Council 
could take to provide additional transparency and engagement 
during the various phases of the designation process. The 
Council intends to have further discussions on this issue at 
its upcoming meetings.
    More broadly, the Council has taken steps to increase the 
overall transparency of Council actions, including providing 
more detail in Council minutes and publishing Council meeting 
agendas a week in advance, except in exigent circumstances.

Q.2. In the July FSOC meeting, the Council directed staff to 
undertake a more focused analysis of industrywide products and 
activities to assess potential risks associated with the asset 
management industry.
    Does the decision to focus on ``products and activities'' 
mean that the FSOC is no longer pursuing designations of asset 
management firms?
    Did the FSOC vote on whether to advance the two asset 
management companies to Stage 3? If so, why was this not 
reported? If not, why was such a vote not taken in order to 
provide clarity to the two entities as well as the industry?

A.2. At its recent meetings, the FSOC discussed the Council's 
various work streams related to asset managers, including its 
work related to analyzing industrywide and firm-specific risks. 
Based on those discussions, the Council has agreed to undertake 
a more focused analysis of industrywide products and 
activities. The objective of this work is to inform the 
Council, about what, if any, additional policy actions by FSOC 
or its members may be appropriate. The Dodd-Frank Act provides 
FSOC with a range of policy tools, including making 
recommendations to regulators and the industry in the FSOC's 
annual report, issuing formal recommendations to primary 
financial regulatory agencies to apply new or heightened 
standards or safeguards, designating a nonbank financial 
company to be supervised by the Federal Reserve, or designating 
payment, clearing, or settlement activities as systemically 
important. It would be premature to determine which, if any, of 
these policy tools may be most appropriate until the Council's 
more in-depth analysis of the industry and its activities are 
completed. In light of these decisions, and pending the 
completion of these work streams, the Council has not voted on 
any action with respect to specific asset management firms.

Q.3. There has been much attention surrounding Operation Choke 
Point, a DOJ-led effort with your agencies participating. 
Unfortunately, this Operation has resulted in numerous 
legitimate small businesses losing access to basic banking 
services. I appreciate that your agencies have issued new 
guidance last month to address market uncertainty. It is my 
understanding that your agencies, as part of this Operation, 
refer cases to DOJ if you suspect a violation of the Financial 
Institutions Reform, Recovery, and Enforcement Act (FIRREA).
    Please provide the number of FIRREA referrals each of your 
agencies has made to DOJ as a part of Operation Choke Point.

A.3. The OCC is not a part of Operation Choke Point and has not 
made any referrals to DOJ as a part of Operation Choke Point.

Q.4. If your agency did not provide any FIRREA referrals to DOJ 
directly in connection with Operation Choke Point, how many 
FIRREA referrals has your agency provided to DOJ since DOJ 
commenced its Operation Choke Point?

A.4. The OCC expects that potential criminal violations and 
suspicious transactions that are indicative of money laundering 
or terrorist financing would be referred to the DOJ through the 
Suspicious Activity Reporting (SAR) system maintained by 
FinCEN. Most SARs are filed by the institutions themselves, 
although the OCC may also file SARs, e.g., where a bank fails 
to file, or files an incomplete or inaccurate SAR. Since 
December 2012, the OCC has filed nine SARs.
    The OCC may also reach out directly to DOJ to bring 
priority SARs to their attention. In addition, under the Equal 
Credit Opportunity Act (ECOA), the OCC is also required to make 
a referral to DOJ when it has a ``reason to believe'' that a 
bank has engaged in a pattern or practice of discrimination on 
a prohibited basis.
                                ------                                


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

Q.1. With the Volcker Rule, we finally learned the lessons from 
the bailout of Long-Term Capital Management and then the 2008 
financial crisis that we simply cannot afford to have big, 
systemically significant firms making big bets on the ups and 
downs of the market. Casino banking is over--if you stick to 
your guns and enforce the Rule.
    I deeply appreciate the hard work you did to getting to a 
final rule last December, and I recognize the hard work you are 
doing now to implement it. However, we are still at the 
beginning legs of the journey, and I believe in ``trust but 
verify''--which requires full, continued cooperation by our 
regulators and engagement with the public.
    During the financial crisis, we all saw the horrific 
results when different regulators saw only parts of the risks 
to some firms. There were too many regulatory silos, which do 
not work because firms do not function that way. You also need 
a complete picture of what is going on in any one institution 
and across different firms. Indeed, one of the least recognized 
benefits of the Volcker Rule is to force the regulators to pay 
attention, together, to trading activities, which have become 
so important at so many banks. But critically, this means all 
the regulators need full access to all collected data and 
information.
    In addition, accountability to the public through 
disclosure provides another layer of outside oversight and 
analysis, as well as equally importantly, public confidence 
that Wall Street reform is real.
    Based on the track record of various public disclosure 
mechanisms out there already--including for example, the CFTC's 
positions of traders--there is significant space for reasonably 
delayed disclosures of metrics data to enhance Volcker Rule 
accountability and public confidence. Now Treasury Deputy 
Secretary and then-Federal Reserve Governor Sarah Bloom Raskin 
highlighted disclosure in her statement on adoption of the 
final rule, and financial markets expert Nick Dunbar has 
similarly called for disclosure as a key tool. (See Nick 
Dunbar, ``Volcker Sunlights Should Be the Best Disinfectant'', 
July 25, 2014, http://www.nickdunbar.net/articles/volcker-
sunlight-should-be-the-best-disinfectant/.) The OCC's Quarterly 
Trading Activity Report may be a perfect venue to engage in 
this type of disclosure, provided it is expanded to cover the 
entire banking group.
    First, will you commit to working to ensure that each of 
your agencies has a complete picture of an entire firm's 
trading and compliance with the Volcker Rule, which can best be 
accomplished by having all data in one place so that all 
regulators have access to it?

A.1. We agree that it is important for regulators to have a 
complete picture of a firm's trading activities and Volcker 
compliance efforts. Toward this end, we are working closely 
with the other Volcker rulewriting agencies to coordinate our 
oversight across multiple legal entities. Coordinated oversight 
requires information sharing which in turn may require the 
agencies to enter into memoranda of understanding that will 
govern the sharing. We are currently working to put such 
memoranda in place where needed.

Q.2. Second, are you committed to using disclosure to help 
advance compliance with and public trust from the Volcker Rule?

A.2. We support appropriate public disclosures. For example, 
the revised market risk capital rule requires banks to publish 
data on their trading activities. We note that public 
disclosure must be consistent with the Trade Secrets Act and 
the Freedom of Information Act. Moreover, as we noted in the 
final rule, the purpose of the metrics is to flag activity that 
warrants further supervisory scrutiny. The metrics alone are 
not necessarily indicative of proprietary trading. As a result, 
the metrics data may not provide sufficient information to help 
the public identify proprietary trading.

Q.3. The success of the Volcker Rule over the long term will 
depend upon the commitment of regulators to the vision of a 
firewall between high risk, proprietary trading and private 
fund activities, on the one hand, and traditional banking and 
client-oriented investment services on the other hand. One of 
the most important parts of ensuring that vision is 
meaningfully implemented is the December 2013 final rule's 
application of its provisions at the ``trading desk'' level, 
defined as the ``smallest discrete unit of organization'' that 
engages in trading. Unfortunately, reports have emerged 
suggesting that banks are already attempting to combine and 
reorganize what had been separate trading desks into one 
``trading desk'' for Volcker Rule purposes, as a way to game 
the metrics-based reporting essential to effective monitoring 
by regulators of each institution's compliance with the Volcker 
Rule. The OCC has already identified this risk in its Interim 
Examination Procedures, and attempted to limit such actions to 
instances where the desks were engaged in ``similar 
strategies,'' the combination has a ``legitimate business 
purpose,'' and the combination assists the firm to ``more 
accurately reflect the positions and fluctuations'' of its 
trading. I feel the OCC's interim protections may not, however, 
be enough to ensure compliance with the final rule. I am deeply 
concerned that combining or reorganizing trading desks would 
undermine the strength of the metrics-based oversight, 
particularly related to whether market-making is truly to serve 
near-term customer demand and whether hedging is truly that. To 
avoid obscuring evasion by changing the mixture and volume of 
the ``flow'' of trading that is reported by the ``trading 
desk'' unit, I would suggest that examiners ought to strictly 
apply the final rule's approach to ``trading desk'' and apply 
the guidance set out by the OCC extremely narrowly, along with 
additional protections. For instance, ``similar strategies'' 
would need to include both the type of the trading (e.g., 
market-making) but also the same or nearly identical products, 
as well as by serving the same customer base, among other 
standards. As an example, if two desks traded in U.S. 
technology stocks and technology stock index futures, combining 
those into one desk might make sense, depending on other 
factors, such as where the desks were located and what 
customers they were serving. But combining, for example, 
various industry-specific U.S. equities desks that today are 
separate would not pass muster for complex dealer banks.
    It is also important to remember that an important 
supervisory benefit from implementing the Volcker Rule at a 
genuine trading desk level is that regulators will gain a much 
deeper, more granular understanding of the risks emanating the 
large banks' many different trading desks the kind of risks 
that led one particular trading desk to become famous as the 
London Whale. When confronted with attempts to reorganize 
trading desks, regulators should look carefully at whether 
submanagement structures, bonus structures, or other indicia 
exist that would suggest that the reorganized ``trading desk'' 
is not actually the smallest discrete unit of organization 
contemplated by the final rule and essential to the metrics-
based oversight system being developed.
    Will you commit to scrutinizing, for the purposes of the 
Volcker Rule, any reorganizations of trading desks as posing 
risks of evasion and will you commit to working jointly to 
clarify any guidance on the definition of trading desk for 
market participants?

A.3. Yes. As you noted, the OCC has been proactive on this 
issue, and we will continue to closely scrutinize any conduct 
that could indicate an attempt to evade the requirements of the 
Volcker Rule.

Q.4. Ensuring speedy compliance with the provisions of the 
Merkley-Levin Volcker Rule is a top priority for strong 
implementation. It has already been 4 years since adoption, and 
banks should be well on their way to conforming their trading 
and fund operations. However, as you know, we also provided for 
an additional 5 years of extended transition for investments in 
``illiquid funds,'' which were expected to include some types 
of private equity funds. We did this because some private 
equity funds, such as venture capital funds, do not usually 
permit investors to enter or exit during the fund's lifetime 
(usually 10 years or so) because of the illiquidity of those 
investments.
    As you know, the Federal Reserve Board's rule on the 
``illiquid funds'' extended transition interprets the statutory 
provision of a ``contractual commitment'' to invest as 
requiring a banking entity, where a contract permits divestment 
from a fund, to seek a fund manager's and the limited partners' 
consent to exit a fund. The rule, however, provides for the 
Board to consider whether the banking entity used reasonable 
best efforts to seek such consent but that an unaffiliated 
third party general partner or investors made unreasonable 
demands. I strongly support the Board's desire to implement the 
Volcker Rule in a speedy manner. In addition, the Board's 
approach in the final conformance rule goes a long way to 
ensuring that the illiquid funds extended transition only be 
available for investments in truly illiquid funds, and not a 
way to avoid divestment of hedge funds and private equity 
funds.
    At the same time, we designed the provision to provide for 
a smooth wind-down for illiquid funds. Indeed, I am sensitive 
to the legitimate business needs of firms seeking to comply 
with the Volcker Rule while maintaining relationships with 
important customers to whom they may seek to provide 
traditional banking services.
    Accordingly, I would urge the Board to clarify that a 
banking entity's requirement to make ``reasonable efforts'' to 
exercise its contractual rights to terminate its investment in 
an illiquid fund could be satisfied, for example, by a 
certification by the banking entity (a) that the banking 
entity's exit from the fund would be extraordinary from the 
perspective of how most investors enter or exit the fund (i.e., 
the investment contract does not routinely or ordinarily 
contemplate entry or exit, and/or such other indicia as are 
necessary to help distinguish between illiquid private equity 
funds and other funds, like hedge funds, that ordinarily and 
routinely permit investor redemptions), (b) that inquiring with 
third-party fund managers and limited partners regarding 
termination would result in a significant detriment to the 
business of the banking entity and (c) that the banking entity 
believes that the divestment would result in losses, 
extraordinary costs, or otherwise raise unreasonable demands 
from the third-party manager relating to divestment (or the de 
facto equivalent thereto).
    Such a certification from the banking entity, along with 
the language of the relevant fund agreements and such other 
requirements as the Board determines appropriate, would obviate 
the need to seek consent from third-party fund managers.
    Have you considered clarifying this in a FAQ?

A.4. By statute, the Board of Governors of the Federal Reserve 
System has sole authority to grant the special conformance 
period for illiquid funds, and, accordingly, we defer to the 
Board on this issue.

Q.5. We've recently seen reports that the largest Wall Street 
banks are nominally ``deguaranteeing'' their foreign affiliates 
in order to avoid coverage under U.S. regulatory rules, 
especially those related to derivatives. This 
``deguaranteeing'' appears to be based on a fiction that U.S. 
banks do not actually guarantee the trading conducted by 
foreign subsidiaries, and hence would not be exposed to any 
failure by the foreign subsidiary.
    Can you comment on that, and specifically, whether you 
believe that U.S. bank or bank holding company could be exposed 
to losses from--or otherwise incur liability related to--a 
foreign affiliate's trading even when no explicit guarantee to 
third parties exists. Please specifically address whether an 
arrangement, commonly known as a ``keepwell,'' provided by the 
U.S. parent or affiliate to the foreign affiliate potentially 
could create such exposure--and specifically, liability--for 
the U.S. entity.

A.5. There are a number of transactions and arrangements that 
could expose a U.S. bank or a bank holding company to losses 
from a foreign affiliate's trading activities. For example, as 
the OCC, the Federal Reserve Board, FDIC and Federal Housing 
Finance Agency noted in the joint proposed swaps margin rule, 
many swaps agreements contain cross-default provisions that 
give swaps counterparties legal rights against certain 
``specified entities,'' even when no explicit guarantee to a 
third party exists. See ``Margin and Capital Requirements for 
Covered Swaps Entities'', 79 FR 57348 (Sept. 24, 2014). In 
these arrangements, a swaps counterparty of a foreign 
subsidiary of a U.S. covered swap entity may have a contractual 
right to close out and settle its swaps positions with the U.S. 
entity if the foreign subsidiary of the U.S. entity defaults on 
its own swaps positions with the counterparty. While not 
technically a guarantee of the foreign subsidiary's swaps, 
these provisions may be viewed as reassuring counterparties to 
foreign subsidiaries that the U.S. bank stands behind its 
foreign subsidiaries' swaps. Other similar arrangements may 
include liquidity puts or keepwell agreements.
    In a keepwell agreement between a bank and an affiliate, a 
bank or holding company typically commits to maintain the 
capital levels or solvency of the affiliate. To the extent a 
foreign affiliate's trading activity reduces its capital or 
threatens its solvency, a keepwell agreement issued by a U.S. 
member bank could potentially expose the bank to losses.
    In addition, the Federal Reserve generally views a keepwell 
agreement between a member bank and its affiliate as similar in 
terms of credit risk to issuing a guarantee on behalf of an 
affiliate. See 67 Federal Register 76560, 76569 (Dec. 12, 
2002). 23A does not hinge on credit risk. Such an agreement 
would generally be subject to the quantitative and collateral 
restrictions in section 23A of the Federal Reserve Act. Under 
section 23A's quantitative limits, the maximum amount of 
covered transactions that a member bank may enter into with an 
affiliate, including guarantees issued on behalf of the 
affiliate, is 10 percent of the bank's capital. Accordingly, 
the quantitative limits would prohibit a keepwell agreement 
that is unlimited in amount. Even if the bank's obligations 
under the keepwell agreement is limited to less than 10 percent 
of the bank's capital, the collateral requirements in section 
23A, as amended by section 608 of Dodd-Frank, require that a 
bank's guarantee be secured by eligible collateral at all times 
the guarantee is in place.

Q.6. Moreover, please comment on whether the size and 
importance to the U.S. parent or affiliate of the foreign 
affiliate's activities could itself create an implied guarantee 
such that the U.S. firm would have major reputational or 
systemic risk reasons to prevent the foreign affiliate from 
incurring significant losses or even failing--similar to 
rescues that occurred during the financial crisis of entities 
that were supposed to be bankruptcy remote.

A.6. In the absence of an explicit guarantee, a U.S. bank or 
bank holding company ordinarily would not have a legal 
obligation to step in. Moreover, a bank's ability to provide 
assistance to a foreign affiliate would be limited under 
various laws including sections 23A and 23B of the Federal 
Reserve Act. For example, under section 23B, a member bank 
could not provide assistance to a foreign affiliate unless that 
assistance was provided to the affiliate on terms and under 
circumstances, including credit standards, that are 
substantially the same as a comparable transaction between a 
bank and a nonaffiliate. In addition, the requirement under 
section 23B also applies to certain transactions in which a 
member bank engages with an unaffiliated party where the 
transaction benefits an affiliate. It also applies to 
transactions with an unaffiliated party if an affiliate has a 
financial interest in the unaffiliated party or is a 
participant in the transaction.

Q.7. Finally, many of these foreign bank subsidiaries are so-
called ``Edge Act'' corporations, which I understand are 
consolidated with the insured depository subsidiary for many 
purposes. Please comment on whether there is any chance that 
losses in these Edge Act corporations, particularly losses in 
their derivatives operations, could impact the deposit 
insurance fund.

A.7. A bank's Edge Act subsidiaries are consolidated with the 
bank for financial reporting purposes under GAAP. However, 
accounting consolidation does not affect the bank's legal 
liability for its subsidiaries. Absent a guarantee or similar 
arrangement, the bank is not ordinarily liable for an Edge Act 
subsidiary's losses. See 12 U.S.C. 621 (shareholders in an Edge 
Act corporation are liable for the amount of their unpaid stock 
subscriptions). If an Edge Act subsidiary incurred losses in 
excess of the bank's equity investment, then the bank could 
place the subsidiary in bankruptcy (or a similar proceeding). 
Under GAAP, this would deconsolidate the subsidiary from the 
bank's balance sheet. In addition, Edge Act corporations 
generally may not take deposits in the United States, and the 
FDIC only insures U.S. deposits.
                                ------                                


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

Q.1. During the July 15th Semiannual Monetary Policy Report 
hearing with Chair Yellen, I outlined the importance for State 
and local governments of including municipal securities as 
``High Quality Liquid Assets'' in the Liquidity Coverage Ratio 
(LCR) rule proposed by the Federal Reserve, FDIC, and OCC. I 
was therefore disappointed to learn that municipal securities 
were excluded from eligibility when the rule was recently 
finalized, in spite of comments by the Federal Reserve 
suggesting municipal securities are sufficiently liquid and 
their inclusion as HQLA should be given additional 
consideration. I was also pleased to hear your responses during 
the hearing indicating you would be open to revising the 
inclusion of municipal securities as HQLA if additional 
analysis showed they had similar liquidity levels. As banks are 
now beginning the process of optimizing their balance sheets 
around the final LCR rule, it is important that the issue of 
municipal securities is addressed expeditiously to avoid an 
impact on this market.
    What is the timeline for issuing a proposal specific to 
municipal securities and the LCR, given that Federal Reserve 
Board staff analysis has demonstrated that some municipal 
securities are at least as liquid as corporate bonds that are 
included as HQLA?

A.1. The OCC looks forward to discussing with the Federal 
Reserve Board any additional research or specific proposals on 
the possibility of calibrating an LCR standard that 
differentiates certain municipal securities from others with 
broader illiquid characteristics. If such a standard is 
identified that is consistent with the liquidity risk 
management goals of the LCR rule, the OCC will work with the 
Federal Reserve Board and the Federal Deposit Insurance 
Corporation (FDIC) to adjust the rule accordingly. The OCC 
generally regards banks' investments in municipal securities as 
a prudent activity, in which banks have historically engaged 
for purposes of yield and community support, not for liquidity 
risk management. In fact, banks covered by the LCR rule have 
substantially increased their investments in municipal 
securities since the agencies issued the LCR proposal and final 
rule that did not include municipal securities as HQLA. Over 
the past year, LCR banks' percent increase in holdings of 
municipal securities is nearly double the percent increase in 
such holdings for the overall banking industry.
                                ------                                


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

Q.1. On the Liquidity Coverage Ratio (LCR) Rule: A number of 
ABS classes, including securitized auto and credit card loans, 
were denied any HQLA status in the recently finalized LCR rule. 
What was your reasoning for this?

A.1. Evidence from the 2007-2009 financial crisis and the 
period following indicates that the market demand for a variety 
of securitization issuances can decline rapidly during a period 
of stress and may not rapidly recover. ABS may be dependent on 
a diverse range of underlying asset classes, each of which may 
suffer from adverse effects during a period of significant 
stress. Furthermore, the characteristics of ABS securitization 
structures may be tailored to a limited range of investors. The 
ability to monetize these securitization issuances and whole 
loans through or in the repurchase market may be limited in a 
period of stress.
    Moreover, although certain ABS issuances, such as ABS 
backed by loans under the Federal Family Education Loan Program 
and residential mortgage-backed securities (RMBS) backed solely 
by securitized ``qualified mortgages'' or mortgages guaranteed 
by the Federal Housing Authority or the Department of Veterans 
Affairs, may have lower credit risk, the liquidity risk profile 
of such securities, including the inability to monetize the 
issuance during a period of stress, does not warrant treatment 
as HQLA. The ace notes that ABS and RMBS issuances have 
substantially lower trading volumes than MBS that are 
guaranteed by U.S. GSEs and demand for such securities has 
decreased, as shown by the substantial decline in the number of 
issuances since the recent financial crisis.

Q.2. Because many of the banks that need to comply with the LCR 
comprise a significant number of the investors in these ABS, 
will denying HQLA status to ABS increase borrowing costs for 
consumers and small businesses? Was a cost-benefit analysis 
conducted on this particular provision of the rule? Would you 
be open to sharing that analysis, on this provision or on the 
rule as a whole, with Congress?

A.2. The OCC reviewed investments in ABS by banks that need to 
comply with the LCR final rule and notes that holdings by these 
banks comprise less than 10 percent of the total ABS market as 
of the second quarter of 2014. Furthermore, the final rule does 
not prohibit covered companies from continuing to invest in 
ABS. Banks covered by the LCR rule generally have already 
adjusted their funding profile and assets in anticipation of 
the LCR requirement with little impact on the overall market. 
Moreover, because the LCR rule applies to a limited number of 
U.S. financial institutions, we do not expect a significant 
general increase in costs or prices for consumers. Therefore, 
we do not believe the final rule will have a significant impact 
on overall demand for ABS and increase the cost of funding.
    The OCC has analyzed the final rule, as a whole, under the 
factors set forth in the Unfunded Mandates Reform Act of 1995 
(UMRA) (2 U.S.C. 1532). For purposes of this analysis, the ace 
considered whether the final rule includes a Federal mandate 
that may result in the expenditure by State, local, and tribal 
governments, in the aggregate, or by the private sector, of 
$100 million or more (adjusted annually for inflation) in any 1 
year. The OCC's UMRA written statement is available at: http://
www.regulations.gov, Docket ID OCC-20130016.

Q.3. Additionally, the finalized LCR rule confers no HQLA 
status to private-label mortgage-backed securities while 
conferring GSE-guaranteed mortgage-backed securities Level 2A 
HQLA status. Republicans and Democrats are committed to 
attracting more private capital to housing finance. To what 
extent did you consider the ramifications of this decision as 
it relates to broader housing finance reform?

A.3. In identifying the types of assets that would qualify as 
HQLA in the final rule, the agencies considered the following 
categories of liquidity characteristics, which are generally 
consistent with those of the Basel III Revised Liquidity 
Framework: (a) risk profile; (b) market-based characteristics; 
and (c) central bank eligibility. The agencies continue to 
believe that private-label mortgage-backed securities do not 
meet the liquid and readily marketable standard in U.S. 
markets, and thus do not exhibit the liquidity characteristics 
necessary to be included as HQLA under the final rule. Evidence 
from the 2007-2009 financial crisis and the period following 
indicates that the market demand for a variety of 
securitization issuances can decline rapidly during a period of 
stress, and that such demand may not rapidly recover. In 
contrast, the OCC recognizes that some securities issued and 
guaranteed by U.S. GSEs consistently trade in very large 
volumes and generally have been highly liquid, including during 
times of stress.

Q.4. Doesn't the disparate treatment of PLMBS and GSE MBS 
direct more funding into GSE-guaranteed mortgages and make it 
harder for private capital (without Government guarantees from 
the GSEs, FHA, VA, or USDA) to reenter the market?

A.4. The agencies recognize the importance of capital funding 
to the U.S. residential mortgage markets and highlight that the 
final rule does not prohibit covered companies from continuing 
to invest in private label MBS. The agencies do not expect, and 
have not observed, that banking organizations base their 
investment decisions solely on regulatory considerations and do 
not anticipate that exclusion of this asset class from HQLA 
will significantly deter investment in these assets.
                                ------                                


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

Q.1. As we examine Wall Street regulation and soundness, it is 
critical that we be alert to outside threats as well. Over the 
past year, there have been a number of extensive cyberattacks 
on American companies, including large financial institutions. 
Combatting these transnational crimes requires cooperation 
across Government and industry.
    As I have previously asked both Secretary Lew and Chair 
Yellen--Do you pledge to make cybersecurity a priority?
    Do you believe FSOC can fulfill its statutory mandate to 
identify risks and respond to emerging threats to financial 
stability without making cybersecurity a priority?
    As a member of FSOC, can you identify any deficiencies in 
the U.S.'s ability to prevent cyberattacks that require 
Congressional action?
    What steps has FSOC taken to address the prevention of 
future cyberattacks on financial institutions, such as the 
recent breach at JPMorgan Chase?

A.1. As noted in my written testimony, the operational risks 
posed by cyberattacks is one of the most pressing concerns 
facing the financial services industry today. It is a priority 
that FSOC members share and is one of the emerging threats that 
the FSOC identified and discussed in its annual reports. FSOC 
provides a mechanism to achieve collaborative efforts to 
address emerging cyberthreats and has set forth specific 
recommendations to advance efforts on cybersecurity. For 
example, in its 2014 annual report, FSOC recommended that 
Treasury continue to work with regulators, other appropriate 
Government agencies and private sector financial entities to 
develop the ability to leverage insights from across the 
Government and other sources to inform oversight of the 
financial sector and to assist institutions, market utilities, 
and service providers that may be targeted by cyberincidents. 
The Council also recommended that financial regulators continue 
their efforts to assess cyber-related vulnerabilities facing 
their regulated entities, identify gaps in oversight that may 
need to be addressed, and to inform and raise awareness of 
cyber threats and incidents.
    Shoring up the industry's defenses against cyberthreats 
also is one of my key priorities as Comptroller and as chairman 
of the Federal Financial Institutions Examination Council 
(FFIEC). Combating the threats posed by such attacks requires 
ongoing vigilance and close cooperation and collaboration by 
regulators, law enforcement, and industry participants. To help 
foster such coordination, one of my first actions as chairman 
of the FFIEC was to call for the creation of the Cybersecurity 
and Critical Infrastructure Working Group (CCIWG). This group 
coordinates with intelligence, law enforcement, the Department 
of Homeland Security, and industry officials to provide member 
agencies with accurate and timely threat information.
    The FFIEC's CCIWG work is consistent with the FSOC's 
recommendations. A key activity of the working group is to 
monitor and issue alerts to the industry about emerging 
threats. Within its first year, this working group released 
joint statements on the risks associated with ``distributed 
denial of service'' attacks, automated teller machine 
``cashouts,'' and the wide-scale ``Heartbleed'' vulnerability. 
Last month, the group prepared and issued an alert to 
institutions about a material security vulnerability in Bourne-
again shell (Bash) system software widely used in servers and 
other computing devices that could allow attackers to access 
and gain control of operating systems. The joint statements and 
alerts outline the risks associated with the threats and 
vulnerabilities, the risk mitigation steps that financial 
institutions are expected to take, and additional resources to 
help institutions mitigate the risks. In addition to these 
actions, OCC staff and other CCIWG members work closely with 
law enforcement, Treasury, and other Government officials to 
share information about emerging threats on both a classified 
and unclassified basis. The threat of cyberattacks is not 
limited to large institutions. Earlier this year, the CCIWG 
hosted an industry webinar for over 5,000 community bankers to 
help raise the awareness of cybersecurity issues and steps that 
smaller banks can take to guard against such threats. The group 
recently conducted a cybersecurity assessment of over 500 
community institutions. The information from this assessment 
will help FFIEC members identify and prioritize actions that 
can enhance the effectiveness of cybersecurity-related guidance 
to community financial institutions.
    The CCIWG is also working to identify any gaps in the 
regulators' legal authorities, examination procedures and 
examiner training in connection with our supervision of the 
banking industry's cybersecurity readiness and its ability to 
address the evolving and increasing cyberthreats. If our work 
identifies gaps in our legal authorities that require 
Congressional action, we will be happy to share those with the 
Committee.
                                ------                                


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

Q.1. Last year, I wrote to the Office of the Comptroller of the 
Currency (OCC) regarding the implementation of rules and 
guidance regarding private flood insurance policies, as 
required under the Biggert-Waters Flood Insurance Reform Act. 
In passing that legislation, it was the intent of Congress to 
reaffirm existing law that lenders accept private flood 
insurance policies to provide more choices for consumers. The 
OCC, Federal Reserve, FDIC and several other agencies issued a 
guidance memo claiming private insurance provisions in Biggert-
Waters are not effective until final rulemaking. This has 
caused confusion among lenders who now routinely reject all 
private flood insurance policies.
    In response to my letter, the OCC wrote back explaining, 
``We expect to issue a proposed rule within the next several 
months.'' That was over a year ago I received that response and 
there is still no progress on this issue.
    I would like to receive a status update on the details 
about this proposed rule on private flood insurance and receive 
a timeline of when it will be issued.
    If there is not going to be regulations anytime soon, is 
there any way the OCC, FDIC, Federal Reserve can allow lenders 
to accept private flood insurance at their discretion without 
penalty until there is a final rule?
    Senator Tester and I have introduced legislation that would 
solve this problem by allowing private flood insurance to be 
sold if approved by State regulators. Would the OCC, FDIC, or 
Federal Reserve consider supporting a legislative solution to 
this problem instead of rulemaking?

A.1. Agency staffs are meeting regularly to draft rules that 
take into account the public comments received from our notice 
of proposed rulemaking implementing the Biggert-Waters Act and 
the many issues they raised. With respect to private flood 
insurance, commenters generally supported adding a provision to 
the final rule specifically permitting the discretionary 
acceptance of private flood insurance, and requested more 
guidance as to the statute's definition of private flood 
insurance. The agencies are working to determine the best way 
to provide this guidance in our rule.
    Until the agencies issue final rules, current law 
applicable to private insurance will continue to apply. Under 
current law, banks and thrifts may continue to accept private 
flood insurance in satisfaction of the National Flood Insurance 
Program (NFIP) requirements, without penalty, if certain 
conditions are met. \1\ The Biggert-Waters Act did not change 
the discretionary acceptance of private flood insurance, but 
merely mandated the acceptance of certain private policies that 
meet the statutory definition of ``private flood insurance.'' 
The agencies have consistently advised institutions that they 
may continue to accept such private flood insurance at this 
time, and that the requirement to accept private flood 
insurance that meets the Biggert-Waters definition is not 
effective until our final rule is issued. We specifically made 
these points in the preamble to our notice of proposed 
rulemaking. \2\
---------------------------------------------------------------------------
     \1\ In general, a lender may accept a private flood insurance 
policy that meets the criteria for a standard flood insurance policy 
(SFIP) set forth by FEMA in its former Mandatory Purchase of Flood 
Insurance Guidelines. To the extent a policy differs from a SFIP, a 
lender should carefully examine the differences before accepting the 
policy. See ``Loans in Areas Having Special Flood Hazards; Interagency 
Questions and Answers Regarding Flood Insurance'', 74 FR 35914 (July 
21, 2009). See also OCC regulations at 12 CFR 22.3, which require that 
a designated loan be covered by ``flood insurance'' without specifying 
that it be flood insurance provided under the NFIP or a private policy. 
Furthermore, the sample flood insurance notice included in Appendix A 
of part 22 includes language informing the borrower that flood 
insurance coverage may be available from private insurers that do not 
participate in the NFIP.
     \2\ See 78 FR 65108, at 65110 and 65114. (Oct. 30, 2013).
---------------------------------------------------------------------------
    We believe that a regulatory solution regarding private 
flood insurance is possible and that it is premature to pursue 
legislation such as the Heller-Tester bill.

Q.2. Recently, the Treasury Department indicated that the 
Financial Stability Oversight Council was switching the focus 
of its asset management examination toward activities and 
products rather than individual entities.
    Will you confirm that individual asset management companies 
are no longer being considered for possible systemically 
important designation?

A.2. At its recent meetings, the FSOC discussed the Council's 
various work streams related to asset managers, including its 
work related to analyzing industrywide and firm-specific risks. 
Based on those discussions, the Council agreed to undertake a 
more focused and fuller analysis of industrywide products and 
activities. The objective of this work is to inform the Council 
about what, if any, additional policy actions by FSOC or its 
members may be appropriate. The Dodd-Frank Act provides FSOC 
with a range of policy tools, including making recommendations 
to regulators and the industry in the FSOC's annual report, 
issuing formal recommendations to primary financial regulatory 
agencies to apply new or heightened standards or safeguards to 
an activity, designating a nonbank financial company to be 
supervised by the Federal Reserve, or designating payment, 
clearing, or settlement activities as systemically important. 
It would be premature to determine which, if any, of these 
policy tools may be most appropriate until the Council's more 
in-depth analysis of the industry and its activities is 
completed.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
             CHAIRMAN JOHNSON FROM RICHARD CORDRAY

Q.1. In your testimony before this Committee in June, you 
discussed the progress being made on coming up with a rural 
definition for the Bureau's mortgage rules. Can you provide an 
update on that process?

A.1. The Consumer Financial Protection Bureau (Bureau) has 
received extensive feedback on its definitions of 
``underserved'' and ``rural'' since it first interpreted the 
statutory term ``rural or underserved areas'' for purposes of 
its mortgage rules under Title XIV of the Dodd-Frank Wall 
Street Reform and Consumer Financial Protection Act. As you 
know, the Bureau amended the Ability-to-Repay Rule last year to 
provide a 2-year transition period, during which balloon loans 
made by small creditors and held in portfolio will be treated 
as Qualified Mortgages regardless of where a particular 
creditor originates mortgage loans. During this transition 
period, the Bureau committed to reviewing whether its 
definitions of ``rural'' and ``underserved'' should be 
adjusted. We committed to such a review to ensure that the 
Bureau's definitions reflect significant differences among 
geographic areas, to calibrate access to credit concerns, and 
to facilitate implementation and consumer protection as 
mandated by Congress. The Bureau expects to release in early 
2015 a notice of proposed rulemaking in connection with certain 
provisions that modify general requirements for small creditors 
that operate predominantly in ``rural or underserved'' areas, 
while it continues to assess possible additional guidance that 
would facilitate the development of automated underwriting 
systems for purposes of calculating debt-to-income ratios in 
connection with qualified mortgage determinations and other 
topics.

Q.2. Although the CFPB does not have examination authority over 
financial institutions with total assets of less than $10 
billion, its rules can have an impact on smaller institutions. 
Can you describe what you have done to ensure that the needs 
and concerns of community banks and credit unions are 
considered at the Bureau?

A.2. Community banks and credit unions play critical roles in 
ensuring a fair, transparent, and competitive marketplace for 
consumer financial products and services. They generally base 
their businesses on building personal, long-term customer 
relationships, and can be a lifeline to hard-working families.
    As you note, the Consumer Financial Protection Bureau 
(Bureau) has supervisory authority over depository institutions 
and credit unions with total assets of more than $10 billion 
and their respective affiliates, but other than the limited 
authority under the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the Dodd-Frank Act), the Bureau does not have 
supervisory authority regarding credit unions and depository 
institutions with total assets of $10 billion or less. Although 
the Bureau does not have regular contact with these 
institutions in its supervisory capacity, the Bureau takes 
steps to ensure that the agency considers the needs and 
concerns of community banks and credit unions.
    Before proposing certain rules that may have a significant 
impact on a substantial number of small entities, the Bureau 
convenes a Small Business Review Panel pursuant to the Small 
Business Regulatory Enforcement Fairness Act and meets with and 
gathers input from community banks and credit unions under $550 
million in assets. The Bureau also engages in other outreach 
efforts to gather feedback from community banks and credit 
unions, including holding roundtables and other outreach 
meetings and consulting with the financial regulatory agencies 
that have primary examination authority over such entities. In 
fact, the Bureau has met with representatives from community 
banks and credit unions in all 50 States.
    After issuing significant substantive regulations, the 
Bureau continues to support community banks and credit unions 
with their regulatory implementation and compliance efforts. 
For example, in connection with the new mortgage rules recently 
issued pursuant to Title XIV of the Dodd-Frank Act, the Bureau 
published small entity compliance guides and other support 
materials on its Web site, held educational webinars, and 
participated in numerous presentations and speaking events 
attended by community banks and credit unions.
    As you know, the Bureau also created the Community Bank 
Advisory Council and the Credit Union Advisory Council, at your 
and others' urging. Those councils, which consist of community 
bankers and credit union leaders from across the country, 
advise the Bureau on regulating consumer financial products or 
services and specifically share their unique perspectives and 
provide feedback on the Bureau's activities. The Bureau also 
established the Office of Financial Institutions and Business 
Liaison to ensure that the Bureau understands the needs and 
concerns of financial institutions, including community banks 
and credit unions.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM RICHARD CORDRAY

Q.1. The issue of FSOC accountability and transparency is one 
that I have raised numerous times. Given the magnitude of the 
regulatory burden and other costs imposed by a SIFI 
designation, it is imperative that the designation process be 
as transparent and objective as possible.
    Do you object to the public disclosure of your individual 
votes, including an explanation of why you support or oppose 
such designation?
    Will you commit to pushing for greater accountability and 
transparency reforms for FSOC? Specifically, will you commit to 
push the FSOC to allow more interaction with companies involved 
in the designation process, greater public disclosure of what 
occurs in FSOC principal and deputy meetings, publish for 
notice and comment any OFR report used for evaluating 
industries and companies, and publish for notice and comment 
data analysis used to determine SIFI designations? If you do 
not agree with these proposed reforms, what transparency and 
accountability reforms would you be willing to support?

A.1. The Financial Stability Oversight Council (Council) is 
firmly committed to conducting its business openly and 
transparently. For example, consistent with this commitment, 
the Council voluntarily solicited public comment three separate 
times on its process for designating nonbank financial 
companies. The Council published a final rule and interpretive 
guidance in 2012. As described in the rule and interpretive 
guidance, firms under review have extensive opportunities to 
engage with staff representing the Council members before any 
vote on a proposed designation. Before the Council votes on 
whether to make a proposed designation, the company is invited 
to submit information and meet with staff, and the Council 
carefully considers the submitted information and the views of 
the company. For example, for one of the companies that has 
been designated, the Council spent over a year conducting its 
analysis and considered more than 200 data submissions from the 
company that totaled over 6,000 pages. Council staff engaged 
with this company at least 20 times, including seven meetings 
with senior management and numerous other telephone meetings.
    After the Council votes to make a proposed designation, it 
provides the company with a detailed written explanation of the 
Council's basis. Before any decision to designate becomes 
final, the company has a right to a hearing to contest the 
proposed designation, for which the company can submit written 
materials. The company may also request an oral hearing. These 
procedures provide the company with an opportunity to respond 
directly to the specific information that the Council has 
considered. Of the three companies that the Council has 
designated, only one firm requested a hearing, and the Council 
heard directly from the company's representatives. The Council 
considered the information presented during this hearing in its 
evaluation of the company before a final designation was made.
    Although the Council is not subject to the Sunshine Act, it 
has voluntarily adopted nearly all of the statute's 
transparency-related provisions in its own transparency policy. 
For example, the Council opens meetings to the public whenever 
possible, publicly announces meetings and information about 
meeting agendas 1 week in advance, and publishes minutes that 
include a record of all votes. The minutes of the meetings 
describing the vote also detail the votes of individual members 
of the Council.
    Regarding the information used by the Council in its 
analysis, it is critical to recognize that much of this 
information contains supervisory and other market-sensitive 
data, including information about individual firms, 
transactions, and markets that may only be obtained if 
maintained on a confidential basis. Protection of this 
information is necessary in order to, among other things, 
prevent the disclosure of trade secrets and commercial or 
financial information obtained from the firm and to prevent 
potential destabilizing market speculation that could occur if 
that information were to be disclosed.

Q.2. In the July FSOC meeting, the Council directed staff to 
undertake a more focused analysis of industrywide products and 
activities to assess potential risks associated with the asset 
management industry.
    Does the decision to focus on ``products and activities'' 
mean that the FSOC is no longer pursuing designations of asset 
management firms?
    Did the FSOC vote on whether to advance the two asset 
management companies to Stage 3? If so, why was this not 
reported? If not, why was such a vote not taken in order to 
provide clarity to the two entities as well as the industry?

A.2. At its meeting on July 31, 2014, the Council discussed its 
ongoing assessment of potential industrywide and firm-specific 
risks to the United States' financial stability arising from 
the asset management industry and its activities. At that 
meeting, the Council directed staff to undertake a more focused 
analysis of industrywide products and activities to assess 
potential risks associated with the asset management industry. 
At its meeting on September 4, 2014, after discussing Council 
members' views of priorities for the analysis of potential 
risks associated with the asset management industry, the 
Council directed staff to further develop their detailed work 
plan for carrying out the analysis of industrywide products and 
activities. As the Council continues to review this industry, 
it is important to note that there are no predetermined 
outcomes. There are a number of options available if the 
Council identifies meaningful risks to United States' financial 
stability.

Q.3. I understand that the Department of Education (DOE) has 
been collaborating with the CFPB on a rulemaking for student 
bank accounts so I want to raise the same concerns with you 
that I raise in a letter to Secretary Duncan last month. 
Specifically, I am concerned that a final DOE rule that fails 
to take into account existing prudential and consumer finance 
regulations for the underlying banking products will create 
regulatory confusion and cause some financial institution to 
exit this market to the detriment of students.
    Please explain the scope and extent of CFPB's collaboration 
with the DOE on this rulemaking. Specifically, please explain 
how the CFPB has advised the DOE on ensuring that DOE's 
regulations are not in conflict with existing laws and 
guidance.
    Has the CFPB conducted any analysis on the cost and 
availability of credit and banking products to students as a 
result of the DOE's proposed rules? If not, why not and will 
the CFPB undertake such analysis at a future date?

A.3. The Consumer Financial Protection Bureau (Bureau) shares 
many of the concerns raised by the Government Accountability 
Office and the Department of Education's Inspector General, 
among others, about challenges in the market for student 
banking products, particularly financial products used to 
access Federal grants and scholarships.
    In 2012, the Federal Deposit Insurance Corporation (FDIC) 
reached a settlement with one of the largest participants in 
this market. Among other things, the FDIC found that Higher One 
was: charging student account holders multiple nonsufficient 
fund (NSF) fees from a single merchant transaction; allowing 
these accounts to remain in overdrawn status over long periods 
of time, thus allowing NSF fees to continue accruing; and 
collecting the fees from subsequent deposits to the students' 
accounts, typically funds for tuition and other college 
expenses. The settlement provides for $11 million in refunds to 
approximately 60,000 student victims, in addition to civil 
money penalties. \1\
---------------------------------------------------------------------------
     \1\ https://www.fdic.gov/news/news/press/2012/pr12092.html
---------------------------------------------------------------------------
    In July of this year, the Federal Reserve Board of 
Governors (Board) also issued a consent order to Cole Taylor 
Bank to address illegal conduct related to its partnership with 
Higher One. The order requires Cole Taylor Bank to cease its 
illegal conduct and pay a civil money penalty of approximately 
$3.5 million. The Board is also pursuing remedial actions 
against Higher One, including the payment of restitution for 
its past practices. Actions are also being pursued against 
another State member bank that has a similar arrangement with 
Higher One. \2\
---------------------------------------------------------------------------
     \2\ http://www.federalreserve.gov/newsevents/press/enforcement/
20140701b.htm
---------------------------------------------------------------------------
    On March 26, 2014, at the invitation of the Department of 
Education, the Bureau provided a technical presentation to the 
negotiated rulemaking committee established to consider 
regulations related to third-party disbursement of Federal 
student aid. The presentation was conducted at a public meeting 
hosted by the Department of Education. Written materials are 
available on both the Department of Education's and the 
Bureau's Web sites. \3\
---------------------------------------------------------------------------
     \3\ http://www.consumerfinance.gov/f/201403_cfpb_presentation-to-
department-education-rulemaking-committee.pdf
---------------------------------------------------------------------------
    One of the primary purposes of the Department of 
Education's consultation with the Bureau is to ensure that any 
potential regulations do not overlap or conflict with Federal 
consumer financial laws. As the Secretary considers any 
potential regulations, Department of Education staff solicited 
feedback from the Bureau on the applicability of certain 
Federal consumer financial laws on products heavily used in 
this marketplace, such as debit and prepaid cards. To date, the 
Department of Education has not proposed any regulations 
related to third-party disbursement of Federal student aid.
    However, in the Bureau's presentation to the Department of 
Education's negotiated rulemaking committee on March 26, 2014, 
Bureau staff shared relevant analysis at the request of the 
Department of Education to assess whether marketing 
partnerships between institutions of higher education and 
financial institutions increase availability of banking 
products to enrolled students.
    The Bureau, in coordination with the FDIC, analyzed the 
2011 National Survey of Unbanked and Underbanked Households, a 
supplement to the Census Bureau's Current Population Survey. 
The analysis suggests that almost all students without bank 
accounts have the ability to access one outside of any school 
marketing partnership, but have not yet done so or have chosen 
not to open one. Very few students (< 0.5 percent) are unable 
to open a bank account. Reasons include:

    Negative reporting to specialty credit bureaus due 
        to past issues (e.g., Chex Systems)

    Undocumented students who are unable or have not 
        obtained Individual Taxpayer Identification Numbers

    Suspicion of being a threat to national security or 
        engaging in money laundering

    The Bureau also looked at the student banking product 
offerings for many financial institutions with a national 
reach. Many of these financial institutions offer products to 
students at schools which do not have a marketing arrangement 
with a financial institution.
    This preliminary analysis suggests that students currently 
have choice in a competitive marketplace, even when their 
institution of higher education is not being paid to market a 
product for a particular financial institution.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                      FROM RICHARD CORDRAY

Q.1. On Data Gathering: In questions for the record following 
the Senate Committee on Banking, Housing, and Urban Affairs 
hearing on ``The Consumer Financial Protection Bureau's Semi-
Annual Report to Congress'', I noted that both the CFPB and the 
OCC had each gathered similar data from nine credit card 
issuers. I also noted that gathering data from ten issuers 
would have triggered an OMB review and a period for public 
comment. It would appear that the decision to gather data from 
nine issuers each and then share that data, as agreed to in a 
memorandum of understanding, was made to circumvent the 
important safeguards of OMB review and public comment.
    My question to you was ``With a data mining exercise of 
this size and scope, shouldn't it be reviewed and shouldn't the 
public have the opportunity to express their opinions on what 
is happening with their data?'' Unfortunately, your response 
that the ``Bureau made the determination that the PRA does not 
apply . . . '' did not directly address my question. Can you 
please provide a more thorough answer to my question? Does the 
CFPB believe that there is no value in being transparent and 
gathering public comment before a large-scale data collection 
effort begins?

A.1. The Consumer Financial Protection Bureau (Bureau) values 
transparency in its work. We have been open about the fact that 
we collect information on the credit card industry, and have 
been responsive to inquiries from Members of Congress and other 
oversight bodies about the nature of our credit card data 
collection. Please note that the Bureau's credit card database 
does not contain any directly identifying personal information 
such as name, address, social security number, or credit card 
account numbers.
    The Bureau has a robust Paperwork Reduction Act (PRA) 
program designed to ensure the transparency, quality, and 
economy of information gathered by the Bureau. This program 
includes reviewing potential data collections with the Office 
of Management and Budget (OMB), and providing public notice and 
seeking comment on the Bureau's proposed information 
collections as defined by the PRA.
    The Bureau, through its PRA Officer, recently consulted 
again with the OMB regarding the applicability of the PRA to 
the Bureau's ongoing collection of credit card information, and 
the Bureau's credit card data information-sharing agreement 
with the Office of the Comptroller of the Currency (OCC). 
Following its consultation with the Bureau, OMB has confirmed 
that the Bureau's data collection, including its information-
sharing agreement with the OCC, is in compliance with the PRA. 
In its written response to the Bureau, OMB states that the 
Bureau's credit card data collection effort ``is not covered by 
the Paperwork Reduction Act (PRA)'' (emphasis in original) and 
therefore does not require any additional action by the Bureau.

Q.2. In questions for the record following the Senate Committee 
on Banking, Housing, and Urban Affairs hearing on ``The 
Consumer Financial Protection Bureau's Semi-Annual Report to 
Congress, I asked the question, ``When the Bureau decides to 
publish a Bulletin, does it follow an established process?'' 
The answer I received stated that the Administrative Procedure 
Act does not apply to bulletins and that the CFPB values public 
input. Setting aside the APA, could you please elaborate on 
what process (either established or ad-hoc) the CFPB goes 
through when putting out a bulletin?

A.2. The Administrative Procedure Act (APA) sets out certain 
procedures that Federal agencies must follow when they take 
agency actions. When an agency promulgates a rule in certain 
cases, the APA requires the agency to issue a notice and 
solicit comments from the public about the proposed rule. The 
APA, however, does not impose a notice and comment requirement 
for a general statement of policy, an interpretive rule, or 
actions that do not constitute rules.
    Whether or not required by statute, the Bureau values 
public input in our formulation of policy, and engages 
stakeholders using a variety of mechanisms. For example, our 
staff engages in informal consultations with industry and other 
interested parties. The Bureau has also voluntarily provided 
notice and sought comment for various rules for which notice-
and-comment rulemaking were not required under the APA. We 
sometimes find, however, that a notice-and-comment process may 
not be the optimal process for a particular type of action we 
are considering. For example, in October 2013 the Bureau issued 
a bulletin explaining the meaning of certain provisions in its 
mortgage servicing rules. The Bureau issued that bulletin in 
response to requests from various stakeholders that we provide 
additional information about certain topics before the mortgage 
rules came into effect. Seeking notice and comment in that 
circumstance could have impaired our ability to provide needed 
information to the industry in sufficient time for them to use 
the information to comply with the mortgage rules that were 
about to take effect. In that situation, we determined that 
issuing a bulletin was the best option to address the 
industry's concerns.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
                      FROM RICHARD CORDRAY

Q.1. As we examine Wall Street regulation and soundness, it is 
critical that we be alert to outside threats as well. Over the 
past year, there have been a number of extensive cyberattacks 
on American companies, including large financial institutions. 
Combatting these transnational crimes requires cooperation 
across Government and industry.
    As I have previously asked both Secretary Lew and Chair 
Yellen--Do you pledge to make cybersecurity a priority?

A.1. Yes, the Consumer Financial Protection Bureau (Bureau) 
continues to be committed to cybersecurity in its operations 
and as cybersecurity relates to the Bureau's mission and 
purview. We also carry that commitment to our work with the 
Financial Stability Oversight Council and the Federal Financial 
Institutions Examinations Council.

Q.2. Do you believe FSOC can fulfill its statutory mandate to 
identify risks and respond to emerging threats to financial 
stability without making cybersecurity a priority?

A.2. The Financial Stability Oversight Council (Council) 
recognizes the importance of cybersecurity as a priority in the 
means and methods by which the Council meets its statutory 
mandates to identify and monitor risks to the United States' 
financial system. In the Council's 2014 Annual Report, the 
Council reported that the vulnerabilities posed by cross-sector 
dependencies and interconnected systems across firms, markets, 
and service providers can lead to significant cybersecurity 
risks. The Council recommended in the report that Treasury 
continue to work with the public and private sector, as 
appropriate, to work toward developing methods to manage risk. 
The Council also recommended that regulatory agencies continue 
to promote awareness and assess the use by regulated entities 
of both regulatory as well as nonregulatory methods to support 
risk management, including the National Institute of Standards 
and Technology (NIST) Cybersecurity Framework. \1\ While the 
report recommends that financial regulators continue to assess 
cyber-related vulnerabilities facing regulated entities and 
identify gaps in oversight that need to be addressed, the 
Council also noted the role that the private sector plays in 
supporting the cybersecurity posture of the national 
infrastructure.
---------------------------------------------------------------------------
     \1\ http://www.nist.gov/cyberframework/

Q.3. As a member of FSOC, can you identify any deficiencies in 
the U.S.'s ability to prevent cyberattacks that require 
---------------------------------------------------------------------------
Congressional action?

A.3. The Council has recognized the importance of removing 
legal barriers to information sharing between public and 
private sector partners to enhance overall awareness of 
cyberthreats, vulnerabilities, and attacks, including through 
Congress' passage of comprehensive cybersecurity legislation.

Q.4. What steps has FSOC taken to address the prevention of 
future cyberattacks on financial institutions, such as the 
recent breach at JPMorgan Chase?

A.4. The vulnerabilities posed by cross-sector dependencies and 
interconnected systems across firms, markets, and service 
providers can lead to significant cybersecurity risks. These 
risks could impact economic security, demanding a coordinated 
and collaborative Governmentwide commitment and partnership 
with the private sector to promote infrastructure security and 
resilience.
    The Council has recommended that the Treasury continue to 
work with regulators, other appropriate Government agencies, 
and private sector financial entities to develop the ability to 
leverage insights from across the Government and other sources 
to inform oversight of the financial sector and to assist 
institutions, market utilities, and service providers that may 
be targeted by cyber incidents. The Council has recommended 
that regulators continue to undertake awareness initiatives to 
inform institutions, market utilities, service providers, and 
other key stakeholders of the risks associated with cyber 
incidents, and assess the extent to which regulated entities 
are using applicable existing regulatory requirements and 
nonregulatory principles, including the National Institute of 
Standards and Technology (NIST) Cybersecurity Framework.
    The Council has recommended that financial regulators 
continue their efforts to assess cyber-related vulnerabilities 
facing their regulated entities and identify gaps in oversight 
that need to be addressed. The Council has also recognized the 
overarching contribution the private sector makes to 
infrastructure cybersecurity and urges continued expansion of 
this work to engage institutions of all sizes and their service 
providers.
    The Council has recommended that the Finance and Banking 
Information Infrastructure Committee, financial institutions, 
and financial sector coordinating bodies establish, update, and 
test their crisis communication protocols to account for cyber 
incidents and enable coordination, and with international 
regulators where warranted, to assess and share information.
    As previously noted, the Council has recognized the 
importance of removing legal barriers to information sharing 
between public and private sector partners to enhance overall 
awareness of cyberthreats, vulnerabilities, and attacks, 
including through Congress' passage of comprehensive 
cybersecurity legislation.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                      FROM RICHARD CORDRAY

Q.1. Recently, the Treasury Department indicated that the 
Financial Stability Oversight Council was switching the focus 
of its asset management examination toward activities and 
products rather than individual entities.
    Will you confirm that individual asset management companies 
are no longer being considered for possible systemically 
important designation?

A.1. At its meeting on July 31, 2014, the Financial Stability 
Oversight Council (Council) discussed its ongoing assessment of 
potential industrywide and firm-specific risks to the United 
States' financial stability arising from the asset management 
industry and its activities. At that meeting, the Council 
directed staff to undertake a more focused analysis of 
industrywide products and activities to assess potential risks 
associated with the asset management industry. At its meeting 
on September 4, 2014, after discussing Council members' views 
of priorities for the analysis of potential risks associated 
with the asset management industry, the Council directed staff 
to further develop their detailed work plan for carrying out 
the analysis of industrywide products and activities. As the 
Council continues to review this industry, it is important to 
note that there are no predetermined outcomes. There are a 
number of options available if the Council identifies 
meaningful risks to the United States' financial stability.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM MARY JO WHITE

Q.1. The issue of FSOC accountability and transparency is one 
that I have raised numerous times. Given the magnitude of the 
regulatory burden and other costs imposed by a SIFI 
designation, it is imperative that the designation process be 
as transparent and objective as possible.
    Do you object to the public disclosure of your individual 
votes, including an explanation of why you support or oppose 
such designation?

A.1. As I have previously stated publicly, I support FSOC's 
efforts to enhance transparency surrounding the nonbanking 
designation process. These efforts are ongoing. In addition, as 
discussed in the meeting minutes from the October 6, 2014, FSOC 
meeting, the Council has asked staff to review and evaluate 
certain potential process changes to the nonbanks designation 
process. See http://www.treasury.gov/initiatives/fsoc/council-
meetings/Documents/
October%206,%202014%20(Meeting%20Minutes).pdf. We are actively 
engaged in these discussions and look forward to considering 
the staff's recommendations.

Q.2. Will you commit to pushing for greater accountability and 
transparency reforms for FSOC? Specifically, will you commit to 
push the FSOC to allow more interaction with companies involved 
in the designation process, greater public disclosure of what 
occurs in FSOC principal and deputy meetings, publish for 
notice and comment any OFR report used for evaluating 
industries and companies, and publish for notice and comment 
data analysis used to determine SIFI designations? If you do 
not agree with these proposed reforms, what transparency and 
accountability reforms would you be willing to support?

A.2. As discussed above, FSOC staff is in the midst of a 
process to review and evaluate changes to the nonbanks 
designation process. The process includes continuing to reach 
out to the financial industry, the advocacy community, and 
others for input. See http://www.treasury.gov/initiatives/fsoc/
council-meetings/Documents/
November%2012,%202014,%20Outreach%20Engagement.pdf. As I have 
previously said publicly, I support the effort on enhancing the 
Council's transparency, public disclosures, and engagement with 
nonbank companies under consideration for designation. At the 
same time, the nonbank designation process requires 
consideration of sensitive company information. Any approach 
must balance these competing interests.

Q.3. In the July FSOC meeting, the Council directed staff to 
undertake a more focused analysis of industrywide products and 
activities to assess potential risks associated with the asset 
management industry.
    Does the decision to focus on ``products and activities'' 
mean that the FSOC is no longer pursuing designations of asset 
management firms?

A.3. Although the FSOC has not designated any investment 
adviser as systemically important, it has not stated that it 
will no longer consider asset management companies for 
designation. However, as your question notes, the FSOC did 
state in the readout of the July 31, 2014, FSOC meeting 
available at http://www.treasury.gov/initiatives/fsoc/council-
meetings/Documents/July%2031%202014.pdf that the FSOC has 
directed staff to undertake a more focused analysis of 
industrywide products and activities to assess potential risks 
associated with the asset management industry. On December 18, 
2014, FSOC released a notice seeking public comment regarding 
potential risks to U.S. financial stability from asset 
management products and activities.

Q.4. Did the FSOC vote on whether to advance the two asset 
management companies to Stage 3? If so, why was this not 
reported? If not, why was such a vote not taken in order to 
provide clarity to the two entities as well as the industry?

A.4. All Council votes are announced publicly. See, e.g., 
http://www.treasury.gov/initiatives/fsoc/council-meetings/
Documents/August%2019,%202014,%20Notational%20Vote.pdf. Under 
its current guidance, the Council does not disclose the 
identities of firms under consideration for designation unless 
and until a final designation is made.

Q.5. At a Senate Banking Committee hearing in July about the 
role of regulation in shaping equity market structure, market 
participants expressed concerns regarding the stability, 
resiliency and undue complexity of the equity markets resulting 
from the SEC's ``one size fits all'' set of regulations.
    Given your June speech as well as the comments made by 
other Commissioners, what does the SEC plan to do to address 
such concerns and when can we expect such SEC action?

A.5. I agree that one market structure does not fit all. I have 
emphasized the importance of accounting for the varying nature 
of companies and products, with a particular sensitivity to the 
needs of smaller companies. To this end, the SEC published an 
order in June 2014 directing the exchanges and FINRA to submit 
a tick size pilot plan that is designed to gather and evaluate 
data related to whether wider tick sizes would benefit small 
capitalization companies and their investors. At the conclusion 
of the pilot, the exchanges and FINRA would complete and submit 
a data driven impact assessment to the Commission. The 
exchanges and FINRA have filed a plan in response to the June 
2014 order that was published for public comment in November 
2014. The comment period has now closed and we have received 
several thoughtful and substantive letters from commenters. We 
are actively considering these comments in evaluating how to 
proceed with this initiative.
    I also have directed the staff to develop recommendations 
for the Commission to address a range of market structure 
issues, including potential initiatives to address disruptive 
trading practices and to enhance transparency of institutional 
order routing practices and ATS operations. In addition, I have 
directed the staff to explore whether changes to the current 
market structure are warranted for smaller companies, such as 
affording more flexibility to exchanges that are targeted 
specifically toward the needs of smaller companies. In 
developing rulemaking initiatives, I anticipate that the staff 
and Commission will carefully consider the varying nature of 
companies and markets and whether any potential regulatory 
requirements should be tailored to reflect these differences.

Q.6. Additionally, what does the SEC expect to accomplish in 
this space by the end of the year and what review is the SEC 
undertaking in terms of the fixed income market, specifically 
municipal and corporate debt market?

A.6. The staff is advancing all of the equity market structure 
rulemakings I directed in my June speech, with a focus in the 
near-term on enhancements to our core regulatory tools of 
registration and firm oversight. In particular, we are making 
significant progress on rules to clarify the status of 
unregistered active proprietary traders to subject them to our 
rules as dealers and to eliminate an exception from FINRA 
membership requirements for dealers that trade in off-exchange 
venues. In addition, we recently have established the Market 
Structure Advisory Committee to aid us in evaluating more 
fundamental questions in equity market structure.
    As you know, the U.S. regulatory regime also assigns 
important responsibilities to the SROs, which work in close 
coordination with the Commission to determine the optimal 
market structure for the equity markets. Since my speech in 
June, the SROs have made significant progress in addressing 
equity market structure concerns. These steps include: (i) 
enhancing the technological resilience of the consolidated 
market data systems and other critical market infrastructure; 
(ii) publicly disclosing how and for what purpose the SROs are 
using consolidated and direct market data feeds; (iii) 
improving the consolidated market data feeds by adding new time 
stamps for when a trading venue processed the display of an 
order or execution of a trade; (iv) providing greater public 
disclosure of trading volume by alternative trading systems; 
and (v) comprehensively reviewing exchange order types and how 
they operate in practice. SEC staff is now reviewing the 
results of SRO order type audits.
    With respect to fixed income, the Commission recently 
approved a new MSRB rule to require municipal securities 
dealers to seek best execution of retail customer orders for 
municipal securities. We also are committed to working closely 
with FINRA and the MSRB to encourage their development of 
further guidance on best execution of trades in both the 
municipal and corporate debt markets. In addition, FINRA and 
the MSRB recently published regulatory notices requiring better 
disclosures of pricing information for certain same-day 
principal trades.
    These steps are related to a broader initiative that I have 
asked the staff to undertake to enhance the public availability 
of pre-trade pricing information in the fixed income markets. 
This initiative would potentially require the public 
dissemination of the best prices generated by electronic 
systems, such as alternative trading systems and other 
electronic dealer networks, in the corporate and municipal bond 
markets. This potentially transformative change would broaden 
access to pricing information that today is available only to 
select parties.

Q.7. It was reported in the press the week of September 8th 
that the SEC is preparing additional disclosure rules as well 
as stress test rules for asset managers. What is the expected 
timeline for such new rules and how would they work together 
with the recent money market fund rules that the SEC adopted 
this summer?

A.7. Staff from the Division of Investment Management has been 
developing a set of rulemaking recommendations for Commission 
consideration to strengthen our efforts to address the 
increasingly complex portfolio composition and operations of 
today's asset management industry. The recommendations will 
include reporting and disclosure enhancements and new stress 
testing requirements, as well as several additional 
initiatives. I outlined these initiatives in a recent speech. 
See http://www.sec.gov/News/Speech/Detail/Speech/1370543677722.
    The Commission regularly evaluates and enhances its 
regulations to address risks, such as the money market fund 
reforms that required enhanced reporting and provided new tools 
to address certain risks of those funds. The new staff 
recommendations the staff is considering would complement the 
Commission's money market fund reforms, but it is not expected 
that they would include changes specific to money market funds.

Q.8. Chair White, I have repeatedly stated that the SEC and 
CFTC need to move in a more coordinated fashion with respect to 
Dodd-Frank implementation and cross-border initiatives for 
derivatives. In a hearing in February, I asked you and then-
Acting Chairman Mark Wetjen about their efforts to ensure 
coordination on the remaining Title VII rulemakings, and they 
responded that the two agencies are continually in discussions 
and that coordination is a priority for both agencies. What 
specific progress has your agency made in this venue since 
February, and what key obstacles still exist?

A.8. Since I became Chair in April 2013, I have prioritized the 
coordination between the SEC and CFTC at both the senior staff 
level and principal level. In addition to numerous staff 
consultations, Chairman Massad and I frequently consult on a 
range of issues, including implementation under the Dodd-Frank 
Act of the rules governing derivatives. Our close coordination 
with the CFTC is not new. In particular, the SEC has been 
consulting over the past several years with the CFTC on our 
respective approaches to the application of Title VII. For our 
part, since February, the SEC has proposed rules relating to 
books and records and proposed rules to enhance the oversight 
of clearing agencies deemed to be systemically important or 
that are involved in complex transactions, such as security-
based swaps. In June of this year, we adopted a critical, 
initial set of cross-border rules and guidance, focusing on the 
swap dealer and major swap participant definitions. Most 
recently, on January 14, we adopted 21 new rules that would 
increase transparency and provide enhanced reporting 
requirements in the security-based swap market. In connection 
with all of these actions, we have benefited greatly from our 
consultations and coordination with the CFTC.
    For example, in connection with our final cross-border 
rules adopted in June, we and the CFTC discussed and compared 
our respective approaches to the registration and regulation of 
foreign entities engaged in cross-border swap and security-
based swap transactions involving U.S. persons to determine 
where those approaches converge and diverge. The results are 
reflected in the final rules we adopted in June, which brought 
the Commission's cross-border framework to the same place as 
the CFTC in key respects. As those final rules illustrate, we 
recognize the importance of consistency. At the same time, the 
Dodd-Frank Act gave the CFTC and the SEC different statutory 
authority for addressing activity that occurs outside the 
United States. In particular, Dodd-Frank included in the 
Commodity Exchange Act a focus on activities outside the United 
States that ``have a direct and significant connection with 
activities in, or effect on, commerce of the United States.'' 
The Dodd-Frank Act did not include a similar focus in the 
Securities Exchange Act.
    As the Commission proceeds with finalizing the Title VII 
rules, including the cross-border application of those rules, I 
and my staff intend to continue working closely with the CFTC 
to reduce divergence where possible, where reasonable in light 
of our different markets, and where consistent with our 
statutory authority.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                       FROM MARY JO WHITE

Q.1. Chair White, investor protection was one of the most 
significant issues contemplated in Dodd-Frank, including the 
direction given to the SEC to examine the standards of care for 
broker-dealers and investment advisors in providing investors 
advice. I know we've had many conversations about the 
importance of the SEC and the DOL harmonizing a Fiduciary 
standard for broker-dealers.
    Can you provide us with an update on where the SEC is in 
regards to a fiduciary duty rule?

A.1. As you know, the question of whether and, if so, how to 
use the authority provided under Section 913 of the Dodd-Frank 
Act is very important to investors and the Commission. Whenever 
you have substantially similar services regulated differently, 
I believe you should carefully consider whether the 
distinctions make sense from both the perspective of investors 
and strong or optimal regulation, and if not, what to do about 
it. I have directed the staff to evaluate all of the potential 
options available to the Commission on this matter, including 
whether to impose a uniform fiduciary standard on broker-
dealers and investment advisers when providing personalized 
investment advice to retail customers.
    At the same time, the staff continues to provide regulatory 
expertise to Department of Labor (DOL) staff as they consider 
potential changes to the definition of ``fiduciary'' under the 
Employee Retirement Income Security Act (ERISA). While we are 
separate and distinct agencies, I understand the importance of 
consistency and the impact the DOL's rulemaking may have on SEC 
registrants, particularly broker-dealers. Accordingly, the 
staff and I are committed to continuing these conversations 
with the DOL, both to provide technical assistance and 
information with respect to the Commission's regulatory 
approach and to discuss the practical effect on retail 
investors, and investor choice, of DOL's potential amendments 
to the definition of ``fiduciary'' for purposes of ERISA.

Q.2. One other quick question and I apologize that it's JOBS 
Act related, not Dodd-Frank related: Do you have a timeframe 
for finalizing Reg A+ rules?

A.2. While we are unable to provide a specific date for the 
adoption of final rules, the Commission has included the 
adoption of the Regulation A+ rules on its most recent 
Regulatory Flexibility Act agenda, which covers the period from 
November 2014 to October 2015. Finalizing the rules mandated by 
the Dodd-Frank and JOBS Acts, including Regulation A+, remains 
a top priority for the Commission.
    To date, the Commission has received more than 100 comment 
letters on the Regulation A+ rule proposal. These commenters 
have expressed a variety of different views on how the 
Commission should implement Regulation A+, including the 
proposed approach to state securities law registration and 
qualification requirements and other important aspects of the 
rulemaking. The staff is carefully reviewing the comments as it 
works to develop recommendations for final rules for the 
Commission's consideration. In addition, the staff is closely 
monitoring the development and implementation of the North 
American Securities Administrators Association's multistate 
coordinated review program for Regulation A offerings.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                       FROM MARY JO WHITE

Q.1. With the Volcker Rule, we finally learned the lessons from 
the bailout of Long-Term Capital Management and then the 2008 
financial crisis that we simply cannot afford to have big, 
systemically significant firms making big bets on the ups and 
downs of the market. Casino banking is over--if you stick to 
your guns and enforce the Rule.
    I deeply appreciate the hard work you did to getting to a 
final rule last December, and I recognize the hard work you are 
doing now to implement it. However, we are still at the 
beginning legs of the journey, and I believe in ``trust but 
verify''--which requires full, continued cooperation by our 
regulators and engagement with the public.
    During the financial crisis, we all saw the horrific 
results when different regulators saw only parts of the risks 
to some firms. There were too many regulatory silos, which do 
not work because firms do not function that way. You also need 
a complete picture of what is going on in any one institution 
and across different firms. Indeed, one of the least recognized 
benefits of the Volcker Rule is to force the regulators to pay 
attention, together, to trading activities, which have become 
so important at so many banks. But critically, this means all 
the regulators need full access to all collected data and 
information.
    In addition, accountability to the public through 
disclosure provides another layer of outside oversight and 
analysis, as well as equally importantly, public confidence 
that Wall Street reform is real.
    Based on the track record of various public disclosure 
mechanisms out there already--including for example, the CFTC's 
positions of traders--there is significant space for reasonably 
delayed disclosures of metrics data to enhance Volcker Rule 
accountability and public confidence. Now Treasury Deputy 
Secretary and then-Federal Reserve Governor Sarah Bloom Raskin 
highlighted disclosure in her statement on adoption of the 
final rule, and financial markets expert Nick Dunbar has 
similarly called for disclosure as a key tool. (See Nick 
Dunbar, ``Volcker Sunlights Should Be the Best Disinfectant'', 
July 25, 2014, http://www.nickdunbar.net/articles/volcker-
sunlight-should-be-the-best-disinfectant/.) The OCC's Quarterly 
Trading Activity Report may be a perfect venue to engage in 
this type of disclosure, provided it is expanded to cover the 
entire banking group.
    First, will each of you commit to working to ensure that 
each of your agencies has a complete picture of an entire 
firm's trading and compliance with the Volcker Rule, which can 
best be accomplished by having all data in one place so that 
all regulators have access to it?

A.1. The final rule is largely constructed around the trading 
desk, with many of the rule's requirements applying at that 
level. Importantly, the definition of trading desk is based on 
the operational functionality of banking entities' trading 
activities, and the final rule recognizes that a trading desk 
may book positions in different affiliated legal entities. 
Under the final rule, if a trading desk spans more than one 
affiliated legal entity, each agency with regulatory authority 
over a relevant legal entity under section 13(b)(2)(B) of the 
Bank Holding Company Act will have access to records and data 
regarding the trading desk. For example, if a market-making 
desk manages positions booked in two affiliated entities, a 
banking entity must be able to provide supervisors or examiners 
of any agency that has regulatory authority over the banking 
entity pursuant to section 13(b)(2)(B) of the Bank Holding 
Company Act with records, promptly upon request, that identify 
any related positions held at an affiliated entity that are 
being included in the trading desk's financial exposure for 
purposes of the market-making exemption. Similarly, metrics 
data for a trading desk is generally provided to each agency 
with regulatory authority over any legal entity in which the 
trading desk books trades, although a few firms have determined 
to provide all metrics data to all relevant agencies. As a 
result, in most cases, metrics data for a particular trading 
desk is provided to multiple agencies.
    Given the rule's focus on activity at the trading desk 
level, the metrics are designed to help identify activity that 
may warrant further review to determine whether an individual 
trading desk is complying with the rule. As discussed in the 
preamble to the final rule, the agencies will be revisiting the 
metrics requirement based on data collected by September 30, 
2015. This review process will enable us to assess the utility 
of the metrics, including how they can better foster compliance 
with the final rule and support agency monitoring and 
enforcement efforts.

Q.2. Are you committed to using disclosure to help advance 
compliance with and public trust from the Volcker Rule?

A.2. Metrics data required under the rule is not intended alone 
to show compliance with the prohibition on proprietary trading 
or related exemptions. Instead, this data is intended to be 
used to identify activities that may warrant further review by 
examiners. The agencies have committed to review the metrics 
reporting requirement, based on data received through September 
30, 2015. As part of that process, we should consider whether 
there is any aggregate information derived from the metrics 
that might be meaningfully disclosed to the public.

Q.3. The success of the Volcker Rule over the long term will 
depend upon the commitment of regulators to the vision of a 
firewall between high risk, proprietary trading and private 
fund activities, on the one hand, and traditional banking and 
client-oriented investment services on the other hand. One of 
the most important parts of ensuring that vision is 
meaningfully implemented is the December 2013 final rule's 
application of its provisions at the ``trading desk'' level, 
defined as the ``smallest discrete unit of organization'' that 
engages in trading.
    Unfortunately, reports have emerged suggesting that banks 
are already attempting to combine and reorganize what had been 
separate trading desks into one ``trading desk'' for Volcker 
Rule purposes, as a way to game the metrics-based reporting 
essential to effective monitoring by regulators of each 
institution's compliance with the Volcker Rule. The OCC has 
already identified this risk in its Interim Examination 
Procedures, and attempted to limit such actions to instances 
where the desks were engaged in ``similar strategies,'' the 
combination has a ``legitimate business purpose,'' and the 
combination assists the firm to ``more accurately reflect the 
positions and fluctuations'' of its trading. I feel that the 
OCC's interim protections may not, however, be enough ensure 
compliance with the final rule.
    I am deeply concerned that combining or reorganizing 
trading desks would undermine the strength of the metrics-based 
oversight, particularly related to whether market-making is 
truly to serve near-term customer demand and whether hedging is 
truly that. To avoid obscuring evasion by changing the mixture 
and volume of the ``flow'' of trading that is reported by the 
``trading desk'' unit, I would suggest that examiners ought to 
strictly apply the final rule's approach to ``trading desk'' 
and apply the guidance set out by the OCC extremely narrowly, 
along with additional protections. For instance, ``similar 
strategies'' would need to include both the type of the trading 
(e.g., market-making) but also the same or nearly identical 
products, as well as be serving the same customer base, among 
other standards. As an example, if two desks traded in U.S. 
technology stocks and technology stock index futures, combining 
those into one desk might make sense, depending on other 
factors, such as where the desks were located and what 
customers they were serving. But combining, for example, 
various industry-specific U.S. equities desks that today are 
separate would not pass muster for complex dealer banks.
    It also is important to remember that an important 
supervisory benefit from implementing the Volcker Rule at a 
genuine trading desk level is that regulators will gain a much 
deeper, more granular understanding of the risks emanating the 
large banks' many different trading desks--the kind of risks 
that led one particular trading desk to become famous as the 
London Whale.
    When confronted with attempts to reorganize trading desks, 
regulators should look carefully at whether submanagement 
structures, bonus structures, or other indicia exist that would 
suggest that the reorganized ``trading desk'' is not actually 
the smallest discrete unit of organization contemplated by the 
final rule and essential to the metrics-based oversight system 
being developed.
    Will you commit to scrutinizing, for the purposes of the 
Volcker Rule, any reorganizations of trading desks as posing 
risks of evasion and will you commit to working jointly to 
clarify any guidance on the definition of trading desk for 
market participants?

A.3. Yes, I agree that the trading desk structure is a core 
component of the final rule, and preventing evasion in this 
area is critical. Since many of the rule's proprietary trading 
and compliance provisions are built around the trading desk, 
improperly constructed trading desks could lead to outcomes 
that are counter to the goals of section 13 of the Bank Holding 
Company Act and the final rule. As a result, we will closely 
focus on potentially unsuitable interpretations of the 
definition of trading desk. To the extent additional guidance 
on the definition of trading desk is needed, we will work 
together with our fellow regulators to develop and implement 
that guidance.

Q.4. Ensuring speedy compliance with the provisions of the 
Merkley-Levin Volcker Rule is a top priority for strong 
implementation. It has already been four years since adoption, 
and banks should be well on their way to conforming their 
trading and fund operations.
    However, as you know, we also provided for an additional 
five years of extended transition for investments in ``illiquid 
funds,'' which were expected to include some types of private 
equity funds. We did this because some private equity funds, 
such as venture capital funds, do not usually permit investors 
to enter or exit during the fund's lifetime (usually 10 years 
or so) because of the illiquidity of those investments.
    As you know, the Federal Reserve Board's rule on the 
``illiquid funds'' extended transition interprets the statutory 
provision of a ``contractual commitment'' to invest as 
requiring a banking entity, where a contract permits divestment 
from a fund, to seek a fund manager's and the limited partners' 
consent to exit a fund. The rule, however, provides for the 
Board to consider whether the banking entity used reasonable 
best efforts to seek such consent but that an unaffiliated 
third party general partner or investors made unreasonable 
demands.
    I strongly support the Board's desire to implement the 
Volcker Rule in a speedy manner. In addition, the Board's 
approach in the final conformance rule goes a long way to 
ensuring that the illiquid funds extended transition only be 
available for investments in truly illiquid funds, and not a 
way to avoid divestment of hedge funds and private equity 
funds.
    At the same time, we designed the provision to provide for 
a smooth wind-down for illiquid funds. Indeed, I am sensitive 
to the legitimate business needs of firms seeking to comply 
with the Volcker Rule while maintaining relationships with 
important customers to whom they may seek to provide 
traditional banking services.
    Accordingly, I would urge the Board to clarify that a 
banking entity's requirement to make ``reasonable efforts'' to 
exercise its contractual rights to terminate its investment in 
an illiquid fund could be satisfied, for example, by a 
certification by the banking entity (a) that the banking 
entity's exit from the fund would be extraordinary from the 
perspective of how most investors enter or exit the fund (i.e., 
the investment contract does not routinely or ordinarily 
contemplate entry or exit, and/or such other indicia as are 
necessary to help distinguish between illiquid private equity 
funds and other funds, like hedge funds, that ordinarily and 
routinely permit investor redemptions), (b) that inquiring with 
third-party fund managers and limited partners regarding 
termination would result in a significant detriment to the 
business of the banking entity and (c) that the banking entity 
believes that the divestment would result in losses, 
extraordinary costs, or otherwise raise unreasonable demands 
from the third-party manager relating to divestment (or the de 
facto equivalent thereto).
    Such a certification from the banking entity, along with 
the language of the relevant fund agreements and such other 
requirements as the Board determines appropriate, would obviate 
the need to seek consent from third-party fund managers. Have 
you considered clarifying this in a FAQ?

A.4. While the Agencies acted together in adopting the final 
rule and are continuing to work closely together with regard to 
the implementation of the Volcker Rule, the Federal Reserve 
Board alone is authorized under section 13 of the Bank Holding 
Company Act to grant extensions to the conformance period 
provided by section 13.

Q.5. We've recently seen reports that the largest Wall Street 
banks are nominally ``deguaranteeing'' their foreign affiliates 
in order to avoid coverage under U.S. regulatory rules, 
especially those related to derivatives. This 
``deguaranteeing'' appears to be based on a fiction that U.S. 
banks do not actually guarantee the trading conducted by 
foreign subsidiaries, and hence would not be exposed to any 
failure by the foreign subsidiary.
    Can you comment on that, and specifically, whether you 
believe that U.S. bank or bank holding company could be exposed 
to losses from--or otherwise incur liability related to--a 
foreign affiliate's trading even when no explicit guarantee to 
third parties exists. Please specifically address whether an 
arrangement, commonly known as a ``keepwell,'' provided by the 
U.S. parent or affiliate to the foreign affiliate potentially 
could create such exposure--and specifically, liability--for 
the U.S. entity.
    Moreover, please comment on whether the size and importance 
to the U.S. parent or affiliate of the foreign affiliate's 
activities could itself create an implied guarantee such that 
the U.S. firm would have major reputational or systemic risk 
reasons to prevent the foreign affiliate from incurring 
significant losses or even failing--similar to rescues that 
occurred during the financial crisis of entities that were 
supposed to be bankruptcy remote.
    Finally, many of these foreign bank subsidiaries are so-
called ``Edge Act'' corporations, which I understand are 
consolidated with the insured depository subsidiary for many 
purposes. Please comment on whether there is any chance that 
losses in these Edge Act corporations, particularly losses in 
their derivatives operations, could impact the deposit 
insurance fund.

A.5. We and our fellow regulators have been following closely 
the reports that at least some U.S. financial institutions have 
begun removing guarantees from some swap transactions of their 
foreign affiliates. The reports I have seen attribute the 
change, at least in part, to the cross-border guidance issued 
in July 2013 by the CFTC.
    The CFTC has apprised us of its efforts to monitor this 
shift in the marketplace, and we plan to continue discussions 
with the CFTC as they continue their efforts. We also are 
coordinating with the CFTC and other authorities in the U.S. 
and overseas to monitor changes to industry practices as 
regulations are implemented. More generally, as we move forward 
with the further adoption and implementation of the SEC's Title 
VII-related rules, we will pay close attention to the changing 
state of the OTC derivatives markets.
    With respect to your question regarding keepwells, the 
Commission's focus is on the substance of the agreement. The 
Commission's final rules require the foreign affiliate of a 
U.S. person to include in its de minimis calculation any 
security-based swap transaction arising out of its dealing 
activity to the extent that the transaction is subject to a 
recourse guarantee. This final rule clarifies that for these 
purposes a counterparty would have rights of recourse against 
the U.S. person ``if the counterparty has a conditional or 
unconditional legally enforceable right, in whole or in part, 
to receive payments from, or otherwise collect from, the U.S. 
person in connection with the security-based swap.'' To the 
extent that an agreement, such as a keepwell, gives rise to 
this type of conditional or unconditional legally enforceable 
right under a security-based swap against the U.S. person, the 
Commission would treat that agreement as a recourse guarantee.
    At the same time, the Commission recognizes that more 
general financial support arrangements, including certain 
keepwells (depending on their terms), also may pose risks to 
U.S. persons and potentially to the U.S. financial system, even 
if all recourse guarantees are removed from the foreign 
affiliate's transactions. U.S. entities that are affiliated 
with non-U.S. persons for reputational reasons may determine to 
support their non-U.S. affiliates at times of crisis. As 
reflected in your question, this reputational concern may be 
particularly strong in the case of a non-U.S. affiliate that 
holds significant assets or is otherwise important to the 
financial institution as a whole. To the extent that these new 
financial arrangements do not include a legally enforceable 
right of recourse against a U.S. person, our rules may not 
bring these affiliates within the SEC's regulatory oversight 
due to the limits of our statutory authority.
    Notwithstanding these limits, I believe that the risks to 
U.S. financial firms associated with the activities of these 
deguaranteed foreign affiliates should be addressed. While the 
SEC will continue to look into these developments and act where 
necessary and authorized to do so, these risks can also be 
addressed through other tools established by Congress, such as 
holding company oversight. By accounting for risks at the 
consolidated level, these tools address risks posed by 
guaranteed and nonguaranteed subsidiaries within U.S.-based 
financial groups, regardless of whether the subsidiaries are 
based in the United States or outside the United States. I and 
my staff recognize the need for continued close coordination 
across regulators, both in the U.S. and overseas, to address 
regulatory issues in this market.
    With respect to your question on ``Edge Act'' corporations, 
I would note that the Edge Act is administered by our 
colleagues at the Federal Reserve, and thus they would be in a 
better position to provide a definitive response, including how 
the Edge Act addresses any potential risks to domestic 
operations of insured depository institutions from the 
international operations of ``Edge Act'' corporations. However, 
to the extent that arrangements between ``Edge Act'' 
corporations and their affiliates give rise to legally 
enforceable rights of the type described above, the Commission 
would treat the arrangement as a recourse guarantee.

Q.6. The banking regulators made important progress in the past 
year in completing Dodd-Frank Wall Street reforms, especially 
in the realm of prudential banking oversight, but the pace of 
SEC rulemaking has not kept up.
    Can you please provide a rough timeframe for when you plan 
on completing the following rulemakings, all of which were due 
years ago:

    Section 621's prohibitions on designing asset-
        backed securities and betting on their failure,

    All compensation provisions,

    All security-based swaps reforms,

    Crowdfunding, Regulation A+, and investor 
        protection provisions of the JOBS Act, and

    Risk retention rules.

A.6. Since April 2013, the Commission has proposed or adopted 
over 25 substantive rules called for by the Dodd-Frank Act and 
other rules directly responding to the financial crisis. These 
actions include the Volcker rule and major reforms addressing 
money market funds, credit rating agencies, asset-backed 
securities, and security-based swaps, among others. Most 
recently, we adopted rules that would increase transparency and 
provide enhanced reporting requirements in the security-based 
swap market, and also adopted final rules for risk retention 
jointly with our fellow regulators.
    With these efforts, we have completed our rulemaking 
mandates in many of the central areas targeted by the Dodd-
Frank Act. And we have finalized nearly all of the more than 
two dozen studies and reports that it was directed to complete 
under these Acts.
    Some areas remain to complete--in security-based swaps and 
executive compensation in particular--and I expect that we will 
soon be making significant progress in both areas. It is 
important to finish these rules, as well as those required 
under Section 621, but we must take the time necessary to 
carefully consider all of the issues raised by commenters and 
perform rigorous economic analysis, which is critically 
important and helps inform and guide our rulemaking decisions.
    With respect to the JOBS Act, we have, since April 2013, 
either adopted or proposed all of the required rules, and we 
will soon be moving to adopt the most critical that remain to 
be finalized.

Q.7. In addition, the SEC's capital framework for broker-
dealers has remained unchanged after the financial crisis, 
despite its catastrophic failure and despite significant 
progress by other regulators on capital, leverage, and 
liquidity.
    When will your agency begin work on this important task?

A.7. Since the financial crisis, the Commission has taken a 
number of actions to strengthen broker-dealer financial 
responsibility requirements, including capital requirements. 
For example, in response to the crisis, the Commission staff 
began targeting the short-term funding activities of the larger 
broker-dealers, and in general these firms have extended the 
terms of their repurchase transactions under that enhanced 
focus. They also are required to apply greater capital charges 
for certain structured finance products.
    In addition, in 2012, the Commission proposed additional 
liquidity requirements for certain of the largest broker-
dealers as well as raising their minimum net capital 
requirements as part of its rulemaking to establish financial 
responsibility requirements for security-based swap dealers. 
\1\ Under the proposal, these broker-dealers would be required, 
among other things, to conduct a liquidity stress test at least 
monthly that takes into account certain assumed conditions 
lasting for thirty consecutive days and to establish a written 
contingency funding plan. \2\ Based on the results of the 
monthly liquidity stress test, the broker-dealers also would 
need to maintain at all times liquidity reserves comprised of 
unencumbered cash or U.S. Government securities. \3\ In 
addition to these proposals, the Commission staff is actively 
working on recommendations that would apply the proposed 
liquidity requirements to a broader range of broker-dealers and 
would impose a leverage ratio requirement for broker-dealers to 
complement existing leverage constraints in the rule. \4\
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     \1\ See ``Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap Participants 
and Capital Requirements for Broker-Dealers'', Exchange Act Release No. 
68071 (Oct. 18, 2012), 77 FR 70213 (Nov. 23, 2012).
     \2\ Id. at 70252-70253.
     \3\ Id.
     \4\ See, e.g., Chair Mary Jo White, Chairman's Address at SEC 
Speaks (Feb. 2014), available at http://www.sec.gov/News/Speech/Detail/
Speech/1370540822127 (``We will also increase our oversight of broker-
dealers with initiatives that will strengthen and enhance their capital 
and liquidity, as well as providing more robust protections and 
safeguards for customer assets''); Office of Management and Budget, 
Office of Information and Regulatory Affairs, Broker-Dealer Leverage 
Ratio, available at http://www.reginfo.gov/public/do/
eAgendaViewRule?pubId=201404&RIN=3235-AL50.
---------------------------------------------------------------------------
    In addition, in July 2013, the Commission adopted a set of 
amendments to the broker-dealer financial responsibility rules 
(including the broker-dealer net capital rule). \5\ Among other 
things, these amendments require broker-dealers to document 
their risk management procedures, report on secured financing 
transactions, and take 100 percent capital charges relating to 
nonpermanent capital infusions. Also, in July 2013, the 
Commission adopted amendments to the broker-dealer reporting 
rule that, among other things, promote capital compliance. \6\ 
In particular, broker-dealers that carry customer securities 
and/or cash (which includes the largest broker-dealers) are 
required to annually file a ``compliance report'' in which they 
must state whether their internal controls over compliance with 
the financial responsibility rules (including the broker-dealer 
net capital rule) were effective during the most recently ended 
fiscal year. \7\ They cannot state that their internal controls 
were effective if there was a material weakness in the internal 
controls. In addition, the statements in the compliance report 
must be examined by an independent public accountant registered 
with the Public Company Accounting Oversight Board. \8\
---------------------------------------------------------------------------
     \5\ See ``Financial Responsibility Rules for Broker-Dealers, 
Exchange Act Release No. 70072'' (July 30, 2013), 78 FR 51824 (Aug. 21, 
2013).
     \6\ See ``Broker-Dealer Reports, Exchange Act Release No. 70073'' 
(July 30, 2013), 78 FR 70073 (Aug. 21, 2013).
     \7\ Id. at 51916-51920.
     \8\ Id. at 51928-51937.
---------------------------------------------------------------------------
    These activities reflect the Commission's ongoing efforts 
to ensure that the broker-dealer financial responsibility rules 
continue to achieve their objectives.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
                       FROM MARY JO WHITE

Q.1. As you know, during your nomination process, we discussed 
how you would handle potential conflicts of interest--or the 
appearance of conflicts of interest--between your 
responsibilities as Chair of the SEC and your husband's ongoing 
work as a partner representing financial institutions at the 
law firm of Cravath, Swaine & Moore LLP. I believe that 
conflicts of interest, or the appearance thereof, should not 
undermine the SEC's critical work enforcing our securities laws 
and regulating and supervising the securities industry.
    Now that you have been Chair for over a year, I'd like to 
revisit that discussion.
    Is there a written policy in place that governs when you 
must recuse yourself in any matter--enforcement, regulatory, 
supervisory, or otherwise--in which Cravath, Swaine & Moore is 
involved? If so, can you provide a copy of it? If not, do you 
have an informal policy in place, and can you describe it?
    Since you were confirmed as Chair of the SEC, have you 
recused yourself from any matter in which Cravath, Swaine & 
Moore was involved? If so, how many times have you recused 
yourself? Please categorize those recusals by the type of 
matter--enforcement, regulatory, supervisory, or other.

A.1. As part of my confirmation as Chair, I entered into an 
Ethics Agreement that governs my recusal from matters in which 
the law firm that employs my spouse, Cravath, Swaine & Moore 
LLP, represents a party. Such ethics agreements are entered 
into by all Commissioners to address a variety of potential 
conflicts of interest or other issues. My Ethics Agreement is 
public and was provided to the Senate Banking Committee as part 
of my confirmation, and is publicly available on the Office of 
Government Ethics Web site. My staff and I also follow 
procedures (which contain nonpublic and/or confidential client 
information) to determine whether recusals are appropriate. Out 
of the over a thousand Enforcement matters in which I have 
participated since becoming Chair, I have been recused from 
approximately 10 matters, as well as one nonenforcement matter, 
as a result of the participation of Cravath on behalf of a 
party. I have not been recused from any rulemakings.

Q.2. Last June, you announced that the SEC would seek more 
admissions of fault in its settlement agreements, rather than 
allowing settling parties to ``neither admit nor deny'' 
liability. Since that announcement, how many settlement 
agreements has the SEC entered into? In how many of those 
agreements did the SEC require an admission of fault? If those 
agreements including admissions of fault are not confidential, 
can you provide copies to my office?

A.2. As you indicate, in 2013 we made an important modification 
to our settlement practices, and we now demand an additional 
measure of public accountability through an acknowledgement of 
wrongdoing in certain of our cases, including from major 
financial institutions and senior executives. Under this 
policy, the Division of Enforcement now considers requiring 
admissions in cases where the violation of the securities laws 
includes particularly egregious conduct; where large numbers of 
investors were harmed; where the markets or investors were 
placed at significant risk; where the conduct obstructs the 
Commission's investigation; where an admission can send a 
particularly important message to the markets; or where the 
wrongdoer poses a particular future threat to investors or the 
markets.
    Additionally, we do not accept ``no admit, no deny'' 
settlements where a defendant has admitted relevant facts in a 
settlement with other criminal or civil authorities. This 
regularly occurs in connection with guilty pleas that arise 
from a parallel criminal investigation, which frequently are 
matters that we referred to a criminal prosecutor in which our 
own investigation assisted in securing a favorable resolution 
on the criminal side as well. Often in such cases a person 
allocutes to certain facts as part of a guilty plea, or is 
found guilty after trial, and the involvement of the criminal 
authorities in such cases may indicate that these cases involve 
particularly egregious misconduct. In such cases, our practice 
is to remove the ``no admit, no deny'' language from our 
settlement documents and incorporate a reference to the guilty 
plea or other resolution.
    In other cases, we have determined that it is appropriate 
to continue to settle on a ``no admit, no deny'' basis, as do 
other Federal agencies and regulators with civil enforcement 
powers. We made this decision because the practice allows us to 
get significant relief, eliminate litigation risk, return money 
to victims more expeditiously, and conserve our enforcement 
resources for other matters. That protocol too is a very 
important tool in a strong enforcement regime.
    From the time we instituted the admissions policy change 
through the end of September, the Commission settled 
approximately 520 enforcement actions. \1\ During that period, 
the Commission entered into settlements requiring admissions on 
a dozen occasions, including cases involving JPMorgan Chase and 
Bank of America, among others, as defendants. \2\ More 
recently, the Commission has entered into settlements requiring 
admissions in four additional cases, bringing the total to 16. 
Those settlement documents are public, and I have instructed my 
staff to contact your staff to provide copies of them to you. 
In addition, there have been dozens of SEC settlements in that 
period that settled without permitting defendants to include 
``no admit no deny'' language and that incorporated a reference 
to guilty pleas or other admissions made in non-SEC criminal or 
civil cases.
---------------------------------------------------------------------------
     \1\ This figure is an approximation. It excludes follow-on 
administrative proceedings (e.g., where someone is barred from the 
industry following the imposition of an injunction by a district court 
in an action brought by the Commission, which action would be counted 
separately). It also excludes cases against issuers who are delinquent 
in their filing obligations.
     \2\ Two of these occasions arose from the same matter, but 
occurred approximately 1 year apart.

Q.3. In Section 922 of Dodd-Frank, Congress directed the SEC to 
provide awards to whistleblowers whose assistance helped the 
SEC obtain monetary sanctions against a private party. The SEC, 
through its new Office of the Whistleblower, has already 
furnished several awards to whistleblowers. However, according 
to a recent Washington Post story, \3\ companies are using 
nondisclosure agreements and other tools to limit the ability 
of employees to go to the SEC after they have reported 
purported misconduct internally.
---------------------------------------------------------------------------
     \3\ Scott Higham, and Kaley Belval, ``Workplace Secrecy Agreements 
Appear To Violate Federal Whistleblower Laws'' (June 29, 2014), 
available at http://www.washingtonpost.com/investigations/workplace-
secrecy-agreements-appear-to-violate-federal-whistleblower-laws/2014/
06/29/d22c8f02-f7ba-11e3-8aa9-dad2ec039789_story.html.
---------------------------------------------------------------------------
    Under SEC Rule 21F-6 (17 CFR 240.21F-6), a whistleblower's 
``participation in internal compliance systems'' is a ``factor 
that may increase the amount of a whistleblower's award.'' 
Given concerns about companies using internal compliance 
systems to deter whistleblowing activity, why does the SEC give 
potential whistleblowers a financial incentive to report 
internally before coming to the SEC? More broadly, if the SEC 
believes that whistleblowers play an important enforcement 
role, why does it encourage employees not to blow the whistle 
and to instead report concerns internally?

A.3. Our whistleblower program is making significant 
contributions to the enforcement work of the Commission. In 
this past fiscal year, among other accomplishments, our program 
awarded nine whistleblowers approximately $35 million in the 
aggregate. In addition, the Commission made the first use of 
its authority to bring antiretaliation enforcement actions. As 
a result of the Commission's issuance of significant 
whistleblower awards, enforcement of the antiretaliation 
provisions, and protection of whistleblower confidentiality, 
the agency has continued to receive an increasing number of 
whistleblower tips. In Fiscal Year 2014, our whistleblower 
office received over 3,600 whistleblower tips, a more than 20 
percent increase in the number of whistleblower tips in just 2 
years. The program has thus been an early success, and as 
awareness of the program increases, it should continue to be an 
important part of our enforcement efforts.
    With respect to your question regarding corporate 
compliance programs, as you note, Rule 21F-6 provides that, in 
determining the size of a whistleblower award, the Commission 
will assess whether, and the extent to which, the whistleblower 
participated in internal compliance systems. Among other 
considerations, internal reporting may increase the size of an 
award, while interfering with established compliance procedures 
may decrease the size of an award. However, Rule 21F-5 states 
that discretion remains with the Commission, and Rule 21F-6 
states in part that the Commission ``may consider [the 
enumerated factors] in relation to the unique facts and 
circumstances of each case'' (emphases added).
    The Commission's rules give discretion to each 
whistleblower to decide how best to report suspected 
wrongdoing: he or she may report internally before going to the 
Commission, may go directly to the Commission right away, or 
may report to both simultaneously. In other words, he or she 
does not lose eligibility for an award by reporting internally. 
And it is not the case that anyone who first comes directly to 
the Commission necessarily will receive a lower award as a 
result of not having participated in his or her employer's 
internal compliance systems. \4\
---------------------------------------------------------------------------
     \4\ In its Adopting Release, the Commission stated:

        [A] whistleblower would not be penalized for not satisfying any 
one of the positive factors. For example, a whistleblower who provides 
the Commission with significant information about a possible securities 
violation and provides substantial assistance in the Commission action 
or related action could receive the maximum award regardless of whether 
the whistleblower satisfied other factors such as participating in 
internal compliance programs. In the end, we anticipate that the 
determination of the appropriate percentage of a whistleblower award 
will involve a highly individualized review of the facts and 
circumstances surrounding each award using the analytical framework set 
forth in the final rule.
    Implementation of the Whistleblower Provisions of Section 21F of 
the Securities Exchange Act of 1934, at 124, available at http://
www.sec.gov/rules/final/2011/34-64545.pdf.
---------------------------------------------------------------------------
    This rule was passed in 2011 following a robust debate over 
the question of whether an SEC whistleblower should be required 
to first report internally to be eligible for an award. The 
Commission declined to require an internal report, but did 
provide that making an internal report could be weighed as a 
factor to potentially increase the size of an award. This 
decision was driven by several considerations. It is a simple 
fact that, as an agency with limited resources, the SEC needs 
to leverage its resources by promoting stronger internal 
compliance. That has long been an emphasis and priority of the 
SEC, as it has with other Federal agencies. The Commission 
concluded that a strong whistleblower program can and should 
coexist with credible, robust internal reporting mechanisms. 
The objective was to support effective internal controls while 
not requiring a whistleblower to choose between internal and 
external reporting. This rule should create an incentive for 
companies to take a fresh look at their compliance systems to 
make them as strong and transparent as possible. Had the 
Commission not provided some incentive for internal compliance 
reporting, companies might not have thought it worth the time 
and expense to bolster their internal functions under the 
assumption that their employees would never report internally.
    With respect to your reference to nondisclosure agreements, 
I share your concerns about any misuse of employee 
confidentiality, severance, and other kinds of agreements to 
hinder an employee's ability to report potential wrongdoing to 
the Commission. To address issues such as this, the Commission 
adopted Rule 21F-17(a), which makes it an independent violation 
of the Commission's rules for any person to ``take any action 
to impede an individual from communicating directly with the 
Commission staff about a possible securities law violation, 
including enforcing, or threatening to enforce, a 
confidentiality agreement . . . with respect to such 
communications.'' This rule provides the Commission with 
express authority to take action whenever we find that 
otherwise legitimate employment agreements are being used in a 
manner that discourages or curtails employee whistleblowing.
    Commission staff is focused on cases in which the use of 
confidentiality or other agreements may violate this Commission 
rule, and will continue to concentrate on practices that may 
result in silencing employees from reporting securities 
violations to the Commission by threatening liability or 
employee discipline. In appropriate cases, I expect the 
Commission will bring enforcement actions under Rule 21F-17(a).

Q.4. Additionally, do you believe the SEC has sufficient 
authority to issue a rule banning efforts to curtail 
evidentiary disclosures to the Commission, as undertaken 
through job perquisites, personnel actions such as termination, 
lawsuits seeking damages, or any other form of retaliation? If 
so, please cite and describe those sources of authority. If 
not, please describe what additional statutory authority is 
needed.

A.4. Yes, at this time we believe we have sufficient authority, 
and we have implemented that authority by passing Rule 21F-
17(a). It provides in part as follows (emphasis added):

        No person may take any action to impede an individual 
        from communicating directly with the Commission staff 
        about a possible securities law violation, including 
        enforcing, or threatening to enforce, a confidentiality 
        agreement . . . with respect to such communications.

    By prohibiting ``any action'' that could curtail 
evidentiary disclosures to the Commission, this rule provides 
the Commission with the broadest authority and most effective 
tool possible to deter the kinds of conduct described in your 
question. Although I cannot comment on any specific ongoing 
investigation, enforcing this provision is a high priority for 
our whistleblower program.

Q.5. Large brokers and other financial intermediaries are 
taking advantage of individual mutual fund investors by 
charging them excessive fees for administrative and 
distribution activities. Rule 12b-1 fees, account management 
charges, and revenue-sharing payments are extracting billions 
of dollars each year out of the pockets of the 96 million 
individual investors who rely on mutual funds for their savings 
goals. I understand that the SEC is gathering information about 
some or all of these mutual fund administrative and 
distribution fees. What is the status of this investigation and 
does the SEC plan on taking action to reduce these fees?

A.5. The staff of the Commission currently is engaged in a 
series of risk-targeted examinations of investment companies, 
advisers, and intermediaries designed to gather information on 
current fee practices related to distribution and 
administrative services provided to funds. These examinations 
are ongoing, with more than a dozen major market participants 
already examined. The staff has reviewed the size and purpose 
of administrative, distribution, and revenue sharing payments 
at these firms, how they were negotiated, and how they are 
disclosed to investors as well as the funds' directors, among 
many other issues. These exams already have resulted in certain 
of the targeted firms changing some of their practices to the 
benefit of investors. This particular series of examinations is 
expected to be completed in the near future, and the results of 
the exams will inform any policy changes that the Commission 
may undertake to address issues with distribution and 
administrative fee payments made by funds and advisers to 
intermediaries.

Q.6. The mutual fund industry has evolved into a ``pay to 
play'' business model in which brokers and other intermediaries 
are compensated handsomely to sell certain funds to their 
customers, despite the merits of investing in these funds. As 
an example, revenue-sharing payments from fund management 
companies are being paid to intermediaries based on the amount 
of fund shares sold to investors. These payments are not 
disclosed properly to mutual fund investors because the 
payments are not being made directly from fund assets. Do you 
believe this is a problem? If so, what steps can the SEC take 
to ensure that both funds and their intermediaries are 
specifically disclosing the amount of these payments and their 
potential impact on fund performance?

A.6. While not disclosed in the same way as fees deducted 
directly from fund assets, the Commission requires that the 
existence of revenue sharing payments and the nature and extent 
of the conflicts they present be disclosed to investors. 
Intermediaries can make these disclosures through several 
channels, such as fund prospectuses and other disclosure 
documents. Nonetheless, I share the concern about the 
effectiveness of such disclosure and the impact of revenue 
sharing on fund recommendations by intermediaries. As 
previously noted, the staff of the Commission currently is 
engaged in an ongoing series of examinations with a focus on 
revenue sharing practices, including how they are negotiated 
and disclosed. I expect that the results of these examinations 
will be used to inform policy changes that the Commission might 
take to address any problems identified, including potential 
disclosure reforms.

Q.7. A mutual fund investor receives a prospectus that 
describes the terms and conditions of investing in each fund 
regulated by the SEC. These terms and conditions--which include 
a number of protections and benefits for investors--are not 
being applied uniformly to mutual fund investors because more 
than 50 percent of fund shares are traded using omnibus 
accounts. An intermediary holding customer shares in an omnibus 
account does not provide underlying investor information to a 
fund for prospectus compliance purposes. Mutual funds are, 
therefore, not able to ensure that frequent trading rules, 
sales load discounts and other investor-friendly policies in 
the prospectus are available to investors who invest through 
these third-party accounts. Do you believe this is a problem? 
If so, what can the SEC do to ensure that investors who 
purchase mutual fund shares through brokers and other 
intermediaries are treated the same as investors who invest 
directly, with regard to prospectus terms and conditions?

A.7. Funds have a number of ways to assure themselves of 
compliance with prospectus terms and conditions for 
shareholders investing through omnibus accounts. These include 
third party audits of intermediaries, certifications, 
questionnaires, on-site reviews, and independently developed 
compliance tools such as the Statement on Standards for 
Attestation Engagements (SSAE) No. 16 and the Financial 
Intermediary Controls and Compliance Assessments (FICCA).
    Even with these tools, compliance in an omnibus account 
environment can pose difficulties for funds and their 
directors. As noted above, the staff is engaged in a series of 
exams on distribution and administration fees which have 
included an exploration of issues related to compliance through 
omnibus accounts. The results of these exams should help better 
inform the Commission of any issues in omnibus account 
compliance, and I expect will be used to inform any policy 
changes that the Commission might take to address any problems 
identified.

Q.8. Public companies are not currently required to report 
their political spending to shareholders. Academics who have 
studied this issue have shown that public companies spend 
significant amounts of shareholder money on politics, but that 
it is impossible to know how much money companies are spending, 
or who is benefiting from that spending. \5\ I believe that 
public companies should not be able to spend huge sums of 
shareholder money on political communication without informing 
investors, and that it is appropriate for the SEC, whose core 
mission is to protect investors, to issue a rule on this 
matter.
---------------------------------------------------------------------------
     \5\ Lucian A. Bebchuk and Robert J. Jackson, Jr., ``Shining a 
Light on Corporate Political Spending'', 101 GEO. L.J. 923, 925 (2013).
---------------------------------------------------------------------------
    To date, a petition for SEC rulemaking on corporate 
political spending disclosure has generated more than one 
million comments--most of which support a disclosure rule. 
Despite that overwhelming public support, last December, the 
SEC removed from its regulatory agenda a proposed rule to 
require public companies to disclose political spending.
    In January, I joined Senator Menendez and other Senators in 
a letter asking you when the SEC planned to move forward with a 
disclosure rule for corporate political spending. Although I 
appreciated the response I received from you in February, you 
did not indicate when the SEC planned to address this issue.
    Please detail what the Commission has done this year to 
look into implementing a corporate political spending 
disclosure rule. Please also state when the Commission plans to 
initiate a rulemaking proceeding, and when it intends to 
complete that rulemaking proceeding.

A.8. As I indicated in my February 28, 2014, letter to you, I 
recognize the public interest in the topic of mandated 
corporate political spending disclosure. And as I noted in my 
testimony last September, a number of companies--including a 
significant percentage of the companies in the S&P 100--are 
voluntarily providing public disclosures for political 
contributions. Shareholders also can, and do, submit 
shareholder proposals on the topic for inclusion in companies' 
proxy materials, and a number of these proposals have been 
voted on by shareholders. With respect to a consideration of a 
mandatory disclosure rule, in light of the numerous rulemakings 
and other initiatives mandated for the SEC by the Dodd-Frank 
Wall Street Reform and Consumer Protection Act and the 
Jumpstart Our Business Startups Act, as well as the need to act 
on pressing issues such as money market fund reform and 
strengthening the technology infrastructure of the U.S. 
securities markets, the Commission and its staff have focused 
on implementing these rules during the last year and have not 
devoted resources to a consideration of a corporate political 
spending disclosure rule. As indicated by the Regulatory 
Flexibility Act agenda published in the fall of this year, I 
expect that completion of the remaining statutorily-mandated 
rulemakings and projects will continue to be a primary focus of 
the Commission's agenda for the upcoming year, along with 
rulemakings that seek to enhance our equity market structure 
and risk monitoring and regulatory safeguards for the asset 
management industry.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
                       FROM MARY JO WHITE

Q.1. As we examine Wall Street regulation and soundness, it is 
critical that we be alert to outside threats as well. Over the 
past year, there have been a number of extensive cyberattacks 
on American companies, including large financial institutions. 
Combatting these transnational crimes requires cooperation 
across Government and industry.
    As I have previously asked both Secretary Lew and Chair 
Yellen--Do you pledge to make cybersecurity a priority?

A.1. I fully agree with your concerns about cyber risks. 
Cybersecurity has been, and will continue to be, a priority for 
the SEC and for me personally. Our efforts and initiatives 
related to cybersecurity span multiple divisions and offices, 
including the Divisions of Trading and Markets, Investment 
Management, Enforcement, the Office of Compliance Inspections 
and Examination (OCIE), the Office of Credit Ratings, and the 
Division of Corporation Finance. They include the following:

    In 2014, OCIE's examination priorities included a 
        focus on technology, including cybersecurity 
        preparedness. As part of this effort, OCIE issued a 
        Risk Alert on April 15, 2014, to provide additional 
        information concerning its cybersecurity initiative. 
        The initiative was designed to assess cybersecurity 
        preparedness in the securities industry and to obtain 
        information about the industry's recent experiences 
        with certain types of cyberthreats. On January 13, 
        2015, OCIE announced that its 2015 Examination 
        Priorities again include examination of broker-dealers' 
        and investment advisers' cybersecurity compliance and 
        controls, and also announced that it would expand this 
        initiative to cover transfer agents.

    In the spring of 2014, the SEC hosted a 
        cybersecurity roundtable to encourage a discussion of 
        sharing of information and best practices in this area. 
        Participants included representatives from industry, 
        law enforcement, the legal community and the SEC.

    At my direction, in the summer of 2014, the staff 
        formed a Cybersecurity Working Group to facilitate 
        communication within the SEC on issues relating to 
        cybersecurity and keep abreast of cybersecurity issues 
        and trends relevant to the securities industry. This 
        group assists the SEC's divisions and offices by 
        providing a forum for sharing information and 
        coordinating activities relating to cybersecurity.

    The Division of Corporation Finance issued staff 
        cybersecurity guidance in 2011 setting forth the 
        staff's views on how existing disclosure requirements 
        under the Federal securities laws apply to 
        cybersecurity risks and cyber incidents. Since issuing 
        the guidance, the staff has routinely evaluated public 
        company disclosures, including cybersecurity 
        disclosure, and issued comments to elicit better 
        compliance with applicable disclosure requirements when 
        it believes material information may not have been 
        provided.

    Staff participate in interagency groups focused on 
        cybersecurity issues, including the Financial and 
        Banking Information Infrastructure Committee (FBIIC) 
        and the Interagency Cybersecurity Forum.

Q.2. Do you believe FSOC can fulfill its statutory mandate to 
identify risks and respond to emerging threats to financial 
stability without making cybersecurity a priority?

A.2. I agree that part of FSOC's role in identifying threats to 
the financial stability of the United States includes 
highlighting, identifying and analyzing the risks to 
cybersecurity. Each of FSOC's Annual Reports has identified 
cybersecurity as a focus for regulators and financial 
institutions. In its most recent Annual Report, published in 
June 2014, the Council provided a more detailed set of 
recommendations on cybersecurity issues. Among the 
recommendations in the 2014 Annual Report are:

    The Council recommends that regulators and other 
        agencies work with private sector financial 
        institutions to share insights from across the 
        Government and inform institutions, market utilities, 
        and service providers of the risks associated with 
        cyber incidents.

    The Council recommends that regulators assess the 
        extent to which regulated entities are employing 
        principles such as the National Institute of Standards 
        and Technology's Cybersecurity Framework.

    The Council recognizes the overarching contribution 
        of the private sector to cybersecurity infrastructure.

    The Council recommends the continued use of FBIIC 
        to establish, update, and test crisis communication 
        protocols, as well as the equivalents in the private 
        sector.

Q.3. As a member of FSOC, can you identify any deficiencies in 
the U.S.'s ability to prevent cyberattacks that require 
Congressional action?

A.3. Cybersecurity and the need to specifically address the 
threats from cyberattacks must be high priorities for both 
Government agencies and the private sector. As described above, 
the SEC has prioritized cybersecurity issues within the bounds 
of our jurisdictional mandate. We also are involved in 
interagency efforts to coordinate and share information across 
the Government. Similarly, the FSOC has made recommendations in 
its annual reports regarding steps that regulators and 
financial market participants should consider to improve 
coordination and communication about the threats of cyber 
incidents. Although there may be areas where cybersecurity 
legislation would be helpful--for example, in areas such as 
information sharing and data breach notification--I am not 
aware of deficiencies specific to the SEC and its jurisdiction 
that might require Congressional action at this time.

Q.4. What steps has FSOC taken to address the prevention of 
future cyberattacks on financial institutions, such as the 
recent breach at JPMorgan Chase?

A.4. Certain members of FSOC, including the SEC, participate in 
FBIIC, which has been coordinating information sharing related 
to cyber incidents, including the recent breach at JPMorgan 
Chase. As a member of FBIIC, the SEC has participated in those 
discussions.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                       FROM MARY JO WHITE

Q.1. Recently, the Treasury Department indicated that the 
Financial Stability Oversight Council was switching the focus 
of its asset management examination toward activities and 
products rather than individual entities.
    Will you confirm that individual asset management companies 
are no longer being considered for possible systemically 
important designation?

A.1. Although the FSOC has not designated any investment 
advisor as systemically important, it has not stated that it 
will no longer consider asset management companies for 
designation. However, as your question notes, FSOC did state in 
the readout of the July 31, 2014, FSOC meeting available at 
http://www.treasury.gov/initiatives/fsoc/council-meetings/
Documents/July%2031%202014.pdf that the FSOC has directed staff 
to undertake a more focused analysis of industrywide products 
and activities to assess potential systemic risks associated 
with the asset management industry. And on December 18, 2014, 
FSOC released a notice seeking public comment regarding 
potential risks to U.S. financial stability from asset 
management products and activities.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM TIMOTHY G. MASSAD

Q.1. The issue of FSOC accountability and transparency is one 
that I have raised numerous times. Given the magnitude of the 
regulatory burden and other costs imposed by a SIFI 
designation, it is imperative that the designation process be 
as transparent and objective as possible.
    Do you object to the public disclosure of your individual 
votes, including an explanation of why you support or oppose 
such designation?
    Will you commit to pushing for greater accountability and 
transparency reforms for FSOC? Specifically, will you commit to 
push the FSOC to allow more interaction with companies involved 
in the designation process, greater public disclosure of what 
occurs in FSOC principal and deputy meetings, publish for 
notice and comment any OFR report used for evaluating 
industries and companies, and publish for notice and comment 
data analysis used to determine SIFI designations? If you do 
not agree with these proposed reforms, what transparency and 
accountability reforms would you be willing to support?

A.1. The Council releases the minutes of its meetings, and I 
think that process is working well. In practice, the votes of 
the individual Council members are disclosed, and I have no 
objection to the disclosure. These are collective decisions of 
the Council, however, just as the decisions of the Federal 
Reserve Board, FDIC, SEC, and CFTC are decisions of those 
collective bodies.
    Regarding your second question, in the Dodd-Frank Act, the 
Council was required to assess potential risks to financial 
stability. The Council also was given authority to designate 
nonbank financial companies for supervision by the Federal 
Reserve if the material financial distress or activities of the 
company could pose risks to U.S. financial stability. These 
responsibilities involve information and deliberations that can 
be very market sensitive. Due to the sensitive nature of its 
mission, the Council must carefully balance confidentiality 
with transparency. While I understand that some may see it 
differently, I believe that the Council generally has done a 
good job of reaching the right balance. In practice, there have 
been no limits on the amount of materials companies have been 
able to submit, and it is carefully reviewed and considered.
    It's also fair to say that we're open to suggestions on how 
the Council can do better in any of its activities, and I 
pledge to be vigilant in this regard. Staff and principals of 
the agencies have an ongoing dialogue about possible 
improvements to the process, including whether to make official 
any the practices the Council has been following that provide 
greater access to the process.

Q.2. In the July FSOC meeting, the Council directed staff to 
undertake a more focused analysis of industrywide products and 
activities to assess potential risks associated with the asset 
management industry.
    Does the decision to focus on ``products and activities'' 
mean that the FSOC is no longer pursuing designations of asset 
management firms?
    Did the FSOC vote on whether to advance the two asset 
management companies to Stage 3? If so, why was this not 
reported? If not, why was such a vote not taken in order to 
provide clarity to the two entities as well as the industry?

A.2. The Council continues to study the asset management 
industry, and I look forward to being involved in that process. 
In addition, the SEC has announced actions concerning asset 
managers that may have an impact on the issues. At this point, 
I don't think any of us can say where a fuller examination of 
the issues will take us.
    I cannot comment--one way or the other--on any nonpublic 
matters that may or may not be pending before the Council. As 
stated above, I look forward to being actively involved as the 
Council moves forward on asset management issues. Determining 
the extent to which an individual company potentially may 
contribute to systemic risk is a difficult issue, and clear 
answers are seldom available. A more fulsome examination of 
issues in the asset management industry will help our analysis, 
but at this point, I cannot say where that analysis will lead 
us.

Q.3. CFTC-SEC Coordination: Chairman Massad, I have repeatedly 
stated that the SEC and CFTC need to move in a more coordinated 
fashion with respect to Dodd-Frank implementation and cross-
border initiatives for derivatives. In a hearing in February, I 
asked Chair White and then-Acting Chairman Mark Wetjen about 
their efforts to ensure coordination on the remaining Title VII 
rulemakings, and they responded that the two agencies are 
continually in discussions and that coordination is a priority 
for both agencies. What specific progress has your agency made 
in this venue since February, and what key obstacles still 
exist?

A.3. CFTC-SEC Coordination on Margin for Uncleared Swaps: The 
SEC and CFTC have a long history of interagency coordination in 
a wide variety of ways in terms of surveillance, enforcement, 
development of complementary rules, trading in security-related 
products, and dual-registrant issues. With the passage of the 
Dodd-Frank Act, interagency cooperation has only grown. The 
chairs and staff of the CFTC and SEC talk regularly in order to 
coordinate efforts. We are also working with our international 
counterparts to harmonize the rules across borders as much as 
possible, consistent with our statutory responsibilities.
    Regarding the remaining Title VII rulemakings, CFTC staff 
has been in regular contact with the SEC, sharing information 
and providing detailed input. The SEC also provides input to 
the CFTC. For example, in developing margin requirements for 
uncleared swap transactions for SDs and MSPs, Commission staff 
has continued to consult with staff of both the SEC and banking 
regulators.
    Section 4s(e) of the Dodd-Frank Act requires the CFTC to 
adopt rules imposing initial and variation margin on uncleared 
swap transactions entered into by SDs and MSPs that are not 
subject to regulation by a Prudential Regulator (i.e., the 
Federal Reserve Board (FRB), the Office of the Comptroller of 
the Currency (OCC), the Federal Deposit Insurance Corporation 
(FDIC), the Farm Credit Administration, and the Federal Housing 
Finance Agency). Section 4s(e) further provides that the CFTC, 
Securities and Exchange Commission (SEC), and Prudential 
Regulators shall, to the maximum extent practicable, adopt 
comparable margin regulations.
    The CFTC initially proposed margin requirements for 
uncleared swap transactions in April 2011 (76 FR 23732 (Apr. 
28, 2011)). Subsequent to the initial proposal, the Basel 
Committee on Banking Supervision and the International 
Organization of Securities Commissions, in consultation with 
the Committee on Payment and Settlement Systems and the 
Committee on Global Financial Systems, formed a working group 
to develop international standards for margin requirements for 
uncleared swaps. Representatives of more than 20 regulatory 
authorities participated, including from the United States, the 
CFTC, the FDIC, the FRB, the OCC, the Federal Reserve Bank of 
New York, and the SEC.
    In July 2012, the working group published a proposal for 
public comment. In addition, the group conducted a study to 
assess the potential liquidity and other quantitative impacts 
associated with margin requirements. A final report was issued 
in September 2013 outlining principles for margin rules for 
uncleared derivative transactions.
    The CFTC considered the comments received on its initial 
proposal and the report issued by the international working 
group and decided to repropose margin rules for uncleared swap 
transactions. The reproposal was approved by the CFTC on 
September 23, 2014 (``Margin Requirements for Uncleared Swaps 
for Swap Dealers and Major Swap Participants'', 79 FR 59898 
(Oct. 3, 2014)). In developing the reproposal, CFTC staff 
worked closely with the staff of the Prudential Regulators, and 
consulted with staff of the SEC.
    The comment period for the reproposal closed on December 2, 
2014, and staff is currently considering the comments in 
developing the final margin rules. Staff also will consult with 
staff of the Prudential Regulators and SEC in developing its 
final regulations.

Q.4. Cross-Border: In November 2013, CFTC staff issued an 
advisory indicating that in certain instances U.S. rules would 
apply to a transaction between a non-U.S. swap dealer and a 
non-U.S. person, without the possibility of substituted 
compliance. As I indicated in my November 15th letter, this 
surprised the market, creating uncertainty and the potential 
for market disruptions. The CFTC has since solicited comments 
on the advisory and extended its effective date to December 
31st of this year. Given that the effective date is rapidly 
approaching, is the CFTC considering extending the effective 
date given the continued issues implementation would cause, the 
concerns raised by commenters, and the need to provide market 
participants sufficient time to come into compliance with 
however the CFTC resolves those issues?

A.4. As you noted, the Commission invited public comment on the 
staff advisory on cross-border, issued on November 14, 2013, 
and the staff subsequently extended time-limited no-action 
relief from the relevant provisions of the CEA and Commission 
rules. The relief was intended to be responsive to industry's 
concerns regarding implementation and thereby ensure that 
market practices would not be unnecessarily disrupted. The 
staff has extended this relief through September 30, 2015. The 
staff has reviewed the public comments on the advisory and is 
developing recommendations. I can assure you that the 
Commission will carefully consider these public comments and 
staff recommendations. In doing so, the Commission will also 
consider extending appropriate relief in order to ensure that 
market participants have sufficient time to come into 
compliance with applicable provisions of the CEA and Commission 
rules.

Q.5. Swap Dealer De Minimis: The swap dealer de minimis level 
is set to automatically drop to $3 billion unless the CFTC 
takes action. Will you commit to publish for public notice and 
comment any proposal to drop the de minimis level? As you know, 
many parties will be affected by any drop in the de minimis 
level, and the public should be afforded an opportunity to 
comment on any such changes.

A.5. Commodity Exchange Act section 1a(49)(D) directs the 
Commission to exempt from designation as a swap dealer an 
entity that engages in a de minimis quantity of swap dealing. 
CFTC regulation 1.3(ggg)(4) sets the de minimis level at $3 
billion subject to a phase-in period during which the level is 
$8 billion until: (1) five years after a swap data repository 
first receives data pursuant to the Commission's regulations at 
which time the level would automatically go to $3 billion, or 
(2) another date set by the Commission based on a study to be 
performed by CFTC staff. I think it will be important to study 
this rule, incorporating public input and current market data 
into the analysis. Any changes to current rules would need to 
be data-driven and carefully considered. As of December 5, 
2014, there were 105 swap dealers provisionally registered with 
the Commission of which approximately 60 belong to one of 15 
corporate families that have registered from 2 to 10 affiliates 
as swap dealers.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                     FROM TIMOTHY G. MASSAD

Q.1. Volcker Rule: Will you commit to working to ensure that 
each of your agencies has a complete picture of an entire 
firm's trading and compliance with the Volcker Rule, which can 
best be accomplished by having all data in one place so that 
all regulators have access to it?

A.1. Pursuant to the jurisdictional provisions of sections 2 
and 619 of the Dodd-Frank Act, banking entities covered by the 
Volcker Rule are required to report metrics data for certain of 
their trading desks to specific regulatory agencies depending 
on the activities of those desks and the legal entities in 
which those desks book trades. The CFTC is working with the 
other four agencies to coordinate oversight of the banking 
entities' trading activities and to analyze and improve the 
metrics data. We believe that the agencies can work together to 
obtain a coherent, informative picture of the trading 
activities of each reporting firm.

Q.2. Are you committed to using disclosure to help advance 
compliance with and public trust from the Volcker Rule?

A.2. The CFTC remains committed to utilizing our oversight of 
certain of the banking entities' trading operations to advance 
compliance with, and public trust from, the Volcker Rule. The 
metrics reporting required by the Volcker Rule is a critical 
piece of that oversight.

Q.3. Volcker Rule: Will you commit to scrutinizing, for the 
purposes of the Volcker Rule, any reorganizations of trading 
desks as posing risks of evasion and will you commit to working 
jointly to clarify any guidance on the definition of trading 
desk for market participants?

A.3. The CFTC is aware that the flexibility afforded in the 
Volcker Rule's definition of ``trading desk'' could be misused 
by some banking entities in an attempt to evade detection of 
impermissible trading activities. We are actively monitoring 
the trading desk reorganizations in light of the reported 
metrics data and will coordinate with the other four agencies 
on any possible related guidance.

Q.4. Volcker Rule: I would urge the Board to clarify that a 
banking entity's requirement to make ``reasonable efforts'' to 
exercise its contractual rights to terminate its investment in 
an illiquid fund could be satisfied, for example, by a 
certification by the banking entity (a) that the banking 
entity's exit from the fund would be extraordinary from the 
perspective of how most investors enter or exit the fund (i.e., 
the investment contract does not routinely or ordinarily 
contemplate entry or exit, and/or such other indicia as are 
necessary to help distinguish between illiquid private equity 
funds and other funds, like hedge funds, that ordinarily and 
routinely permit investor redemptions), (b) that inquiring with 
third-party fund managers and limited partners regarding 
termination would result in a significant detriment to the 
business of the banking entity and (c) that the banking entity 
believes that the divestment would result in losses, 
extraordinary costs, or otherwise raise unreasonable demands 
from the third-party manager relating to divestment (or the de 
facto equivalent thereto).
    Such a certification from the banking entity, along with 
the language of the relevant fund agreements and such other 
requirements as the Board determines appropriate, would obviate 
the need to seek consent from third-party fund managers. Have 
you considered clarifying this in a FAQ?

A.4. The CFTC supports the Board's efforts to determine the 
veracity of claims of illiquidity for various covered funds and 
will coordinate with the other agencies on the appropriate 
method through which to clarify the issue, should the agencies 
choose to clarify.

Q.5. Deguaranteeing of Wall Street Banks: We've recently seen 
reports that the largest Wall Street banks are nominally 
``deguaranteeing'' their foreign affiliates in order to avoid 
coverage under U.S. regulatory rules, especially those related 
to derivatives. This ``deguaranteeing'' appears to be based on 
a fiction that U.S. banks do not actually guarantee the trading 
conducted by foreign subsidiaries, and hence would not be 
exposed to any failure by the foreign subsidiary. Can you 
comment on that, and specifically, whether you believe that 
U.S. bank or bank holding company could be exposed to losses 
from--or otherwise incur liability related to--a foreign 
affiliate's trading even when no explicit guarantee to third 
parties exists. Please specifically address whether an 
arrangement, commonly known as a ``keepwell,'' provided by the 
U.S. parent or affiliate to the foreign affiliate potentially 
could create such exposure--and specifically, liability--for 
the U.S. entity.

A.5. The CFTC is aware of ``deguaranteeing'' activities by five 
registered swap dealers that have U.S. based parents. We are 
concerned about these activities both from the perspective of 
whether they are compliant with the CEA and CFTC regulations 
and the effect they may have on risk transfer back to the U.S. 
We have gathered detailed information from all five registrants 
on the how, what, why and when of such activities and are now 
assessing this information and consulting with prudential 
regulators. As stated in the Commission's cross border 
guidance, the Commission believes that ``it is the substance, 
rather than the form, of the [financial support] arrangement 
that determines whether the arrangement should be considered a 
guarantee for purposes of the application of section 2(i) [of 
the CEA].'' 78 FR 45320 (2013). In a footnote to the quoted 
text, the Commission noted that ``keepwells'' would, in 
essence, be guarantees for purposes of section 2(i).

Q.6. Please comment on whether the size and importance to the 
U.S. parent or affiliate of the foreign affiliate's activities 
could itself create an implied guarantee such that the U.S. 
firm would have major reputational or systemic risk reasons to 
prevent the foreign affiliate from incurring significant losses 
or even failing--similar to rescues that occurred during the 
financial crisis of entities that were supposed to be 
bankruptcy remote.

A.6. The size and importance of an affiliate's activities could 
influence a U.S. parent's assessment of how much financial 
support to provide to that affiliate to prevent its failure. 
Reputational concerns could lead a parent to provide financial 
support to an affiliate. This is a concern that the Commission 
acknowledged in its cross border guidance when declining to 
identify only certain types of guarantees as relevant for 
registration purposes. 78 FR 45320. We note that if there is no 
agreement under which the parent is obligated to another party 
to provide financial support, then providing such support is 
not a legal requirement. Another possible way of addressing 
this issue may be through effective resolution plans that 
provide for the winding up of such an affiliate instead of 
``rescuing'' the affiliate.

Q.7. Many of these foreign bank subsidiaries are so-called 
``Edge Act'' corporations, which I understand are consolidated 
with the insured depository subsidiary for many purposes.
    Please comment on whether there is any chance that losses 
in these Edge Act corporations, particularly losses in their 
derivatives operations, could impact the deposit insurance 
fund.

A.7. The CFTC does not oversee the deposit insurance fund and 
therefore does not have the information necessary to answer 
this question.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
                     FROM TIMOTHY G. MASSAD

Q.1. Cybersecurity: As I have previously asked both Secretary 
Lew and Chair Yellen--Do you pledge to make cybersecurity a 
priority?

A.1. Yes, working to improve the cyber and information security 
and the cyber-related resilience, preparedness, and mitigation 
capabilities of the financial sector, and of U.S. futures and 
swap markets and clearing organizations in particular, is and 
will continue to be a priority.

Q.2. Do you believe FSOC can fulfill its statutory mandate to 
identify risks and respond to emerging threats to financial 
stability without making cybersecurity a priority?

A.2. Cyber and information security must be a high priority for 
the financial sector. Recognizing that automated systems play a 
central and critical role in the modern, predominantly 
electronic financial marketplace, cybersecurity is a statutory 
and regulatory priority for the CFTC: the Commodity Exchange 
Act and CFTC regulations require the infrastructures that we 
supervise, namely designated contract markets, swaps execution 
facilities, clearing organizations, and swap data repositories, 
to have programs of risk analysis and oversight that address 
cyber and information security. In addition, I agree it should 
be a priority generally for U.S. financial regulators: the 
Financial and Banking Information Infrastructure Committee or 
FBIIC--which is chaired by the Department of the Treasury and 
includes the CFTC--aids U.S. financial regulators in their 
efforts to strengthen financial sector resilience, 
preparedness, and mitigation capabilities with respect to 
cybersecurity, business continuity, and disaster recovery. The 
FBIIC also has an effective partnership concerning 
cybersecurity and automated system resiliency with its private 
sector counterpart, the Financial Services Sector Coordinating 
Council, which includes major markets, clearing organizations, 
and firms across the U.S. financial sector.

Q.3. As a member of FSOC, can you identify any deficiencies in 
the U.S.'s ability to prevent cyberattacks that require 
Congressional action?

A.3. One key way to increase financial sector resiliency with 
respect to cybersecurity is ensuring timely information sharing 
concerning cyberthreats, to the greatest extent practicable. 
Before undertaking a legislative initiative, we should endeavor 
to work within existing authorities to examine ways that 
financial regulators, the Intelligence Community, and law 
enforcement agencies might facilitate timely cyberthreat 
information-sharing. In that connection, the Commission already 
has authority under the CEA to share information with Federal 
and State agencies, as well as foreign regulators, subject to 
assurances of confidentiality.

Q.4. What steps has FSOC taken to address the prevention of 
future cyberattacks on financial institutions, such as the 
recent breach at JPMorgan Chase?

A.4. U.S. financial regulators work closely together through 
the FBIIC to improve financial sector resiliency and 
preparedness with respect to cyberattacks. Both the FBIIC and 
its private sector counterpart, the FSSCC, have response 
protocols in place for use when cyberattacks occur. FBIIC and 
FSSCC are currently engaged in updating these protocols in 
light of recent experience in this area, and they are working 
to match up the protocols of the public and private sectors 
even more closely, to help facilitate timely coordination 
concerning cyber incidents. FBIIC and FSSCC are conducting 
exercises, with participation of financial regulators, the 
private sector, and law enforcement and other parts of the 
Government with specialized cyber expertise, to enhance our 
joint understanding and planning processes. In addition, FBIIC, 
FSSCC, and the Financial Sector Information Sharing and 
Analysis Center are working together, and consulting with the 
Intelligence Community and law enforcement, to identify 
measures and best practices for strengthening the resiliency, 
preparedness, and mitigation capabilities of the financial 
sector with respect to cyberthreats.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
                     FROM TIMOTHY G. MASSAD

Q.1. Position Limits: Mr. Chairman, in a recent media 
appearance, you said that the CFTC intends to address end-user 
concerns with position limits. I have heard concerns about the 
aggregation of positions even where a person does not control 
day-to-day trading. Does the CFTC intend to address these types 
of concerns in its work on end-user issues?

A.1. CFTC is now considering public comments received on a 
notice of proposed rulemaking (NPRM) that would modify the 
aggregation provisions of the position limit regime under part 
150 of CFTC's regulations. We are soliciting extensive input on 
the position limits rule--78 FR 68946 (Nov. 15, 2013), comment 
period extended 79 FR 2394 (Jan. 14, 2014), comment period 
reopened 79 FR 30762 (May 29, 2014), June 19, 2014, staff 
roundtable, \1\ comment period extended 79 FR 37973 (July 3, 
2014), comment period reopened 79 FR 71973 (Dec. 4, 2014). In 
light of the language in section 4a of the Commodity Exchange 
Act (CEA), its legislative history, subsequent regulatory 
developments, and CFTC's historical practices in this regard, 
CFTC noted in the NPRM that it believes CEA section 4a requires 
aggregation on the basis of either ownership or control of an 
entity. The NPRM would add a new exemption, by way of notice 
filing, for a person seeking disaggregation relief, under 
specified circumstances, for positions held or controlled by a 
separately organized entity (owned entity), for ownership or 
equity interests of not more than 50 percent in the owned 
entity. The proposal also would add a new exemption, by way of 
application, for a person seeking disaggregation relief, under 
specified circumstances, for positions held or controlled by an 
owned entity, for ownership or equity interests of greater than 
50 percent in the owned entity.
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     \1\ Transcript available at http://www.cftc.gov/PressRoom/Events/
opaevent_cftcstaff061914.

Q.2. Swap Dealer De Minimis: Mr. Chairman, as you know the swap 
dealer de minimis level is set to automatically drop to $3 
billion unless the CFTC takes action. Will any action taken by 
the CFTC to address the swap dealer de minimis issue be open to 
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public notice and comment?

A.2. Commodity Exchange Act section 1a(49)(D) directs the 
Commission to exempt from designation as a swap dealer an 
entity that engages in a de minimis quantity of swap dealing. 
CFTC regulation 1.3(ggg)(4) sets the de minimis level at $3 
billion subject to a phase-in period during which the level is 
$8 billion until: (1) five years after a swap data repository 
first receives data pursuant to the Commission's regulations at 
which time the level would automatically go to $3 billion, or 
(2) another date set by the Commission based on a study to be 
performed by CFTC staff. I think it will be important to study 
this rule, incorporating public input and current market data 
into the analysis. Any changes to current rules would need to 
be data-driven and carefully considered. As of December 5, 
2014, there were 105 swap dealers provisionally registered with 
the Commission of which approximately 60 belong to 1 of 15 
corporate families that have registered from two to ten 
affiliates as swap dealers.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                     FROM TIMOTHY G. MASSAD

Q.1. FSOC: Recently, the Treasury Department indicated that the 
Financial Stability Oversight Council was switching the focus 
of its asset management examination toward activities and 
products rather than individual entities. Will you confirm that 
individual asset management companies are no longer being 
considered for possible systemically important designation?

A.1. As you know, the OFR released a report on asset management 
issues a year ago, and the Council held an asset management 
conference last spring. This topic is an important one. The 
Council continues to study issues that affect the asset 
management industry and the financial markets. I expect the 
Council will provide industry and the public ample opportunity 
to comment further later this year as it further explores these 
issues, and I look forward to being involved in that process. 
At this point, I do not know where further discussion of the 
issues will take us, but I hope to gain a better understanding 
of the risks surrounding this industry.