[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

OVERSIGHT OF THE U.S. SECURITIES
AND EXCHANGE COMMISSION

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

HEARING

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

APRIL 25, 2012

__________

Printed for the use of the Committee on Financial Services

Serial No. 112-119

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HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

James H. Clinger, Staff Director and Chief Counsel
Subcommittee on Capital Markets and Government Sponsored Enterprises

SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice MAXINE WATERS, California, Ranking
Chairman Member
PETER T. KING, New York GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois BRAD MILLER, North Carolina
JEB HENSARLING, Texas CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin
JOHN CAMPBELL, California ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan JOE DONNELLY, Indiana
KEVIN McCARTHY, California ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico JAMES A. HIMES, Connecticut
BILL POSEY, Florida GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK, AL GREEN, Texas
Pennsylvania KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois

C O N T E N T S

----------
Page
Hearing held on:
April 25, 2012............................................... 1
Appendix:
April 25, 2012............................................... 51

WITNESSES
Wednesday, April 25, 2012

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange
Commission..................................................... 8

APPENDIX

Prepared statements:
Schapiro, Hon. Mary L........................................ 52

Additional Material Submitted for the Record

Garrett, Hon. Scott:
Article by Beagan Wilcox Volz entitled, ``Lawyer Skewers
Boston Fed Chief's Money Fund Comments,'' dated April 24,
2102....................................................... 67
Schapiro, Hon. Mary L.:
Written responses to questions submitted by Representative
Grimm...................................................... 70
Written responses to questions submitted by Representative
Hensarling................................................. 71
Written responses to questions submitted by Representative
Hurt....................................................... 72
Written responses to questions submitted by Representative
Miller..................................................... 75
Written responses to questions submitted by Representative
Schweikert................................................. 77
Written responses to questions submitted by Representative
Sherman.................................................... 78

OVERSIGHT OF THE U.S. SECURITIES
AND EXCHANGE COMMISSION

----------

Wednesday, April 25, 2012

U.S. House of Representatives,
Subcommittee on Capital Markets and
Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Scott Garrett
[chairman of the subcommittee] presiding.
Members present: Representatives Garrett, Schweikert,
Royce, Manzullo, Hensarling, Pearce, Fitzpatrick, Hayworth,
Hurt, Grimm, Stivers, Dold; Waters, Sherman, Lynch, Miller of
North Carolina, Maloney, Moore, Green, and Ellison.
Ex officio present: Representative Bachus.
Chairman Garrett. Good morning. Today's hearing of the
Subcommittee on Capital Markets and Government Sponsored
Enterprises entitled, ``Oversight of the U.S. Securities and
Exchange Commission'' is called to order. I thank Chairman
Schapiro for being with us this morning with all of her notes
and preparation.
With that, we will begin with opening statements, and I
will recognize myself for about 3 minutes. And again, welcome.
The intention of today's hearing is to conduct appropriate
oversight of the operations of the SEC, and there is no
shortage of issues that we will be hearing about.
The SEC's current workload touches on almost every facet of
the Nation's financial markets: money market funds; conflict
minerals; the implementation of the JOBS Act; the oversight of
broker-dealers and investment advisers; Title 7 rulemaking;
credit rating agencies; market structure; accounting and
auditing oversight; community advisers; and many more.
It is because of this breadth and scope that all new market
regulations coming out of the agencies must go through a
rigorous review of costs and benefits associated with each
rule. I want to thank the Chairman for her recent focus on the
importance of this concept with the new formal Guidance on
Economic Analysis issued last month to agency divisions and
offices. This guidance and its newfound consensus of cost-
benefit analysis will hopefully rebut some of our colleagues on
the other side of the aisle who continue to demagogue a cost-
benefit analysis as simply a way to undermine Dodd-Frank
regulation.
This analysis is actually a good faith attempt to ensure
that new rules being produced meet their intended goals to not
add unnecessary and overly burdensome costs to the private
sector. So I look forward to continuing to work with the
Chairman to ensure that this new guidance is binding on the
agencies and the new standard in this document is applied to
all rules under consideration. I also hope that the Chairman
will be more supportive of my SEC cost-benefit legislation so
that we can ensure that our future Chairmen are subject to the
same appropriate standards.
Another broader issue that needs to be addressed is the
fundamental restructuring of the agency. Section 967 of the
Dodd-Frank Act required an independent study to be done and
recommendations to be made as to how the SEC should reorganize
itself to be more efficient and achieve better results with the
taxpayers' money. Section 976 also required periodic reports to
the SEC on the status.
The exploratory note to the SEC's March 30, 2012, report
states, ``The Commission was not consulted on the decision to
hire the consultants advising to the MAP Project or the cost of
the scope thereof.'' I do find that statement troubling.
Nowhere in Dodd-Frank are you required actually to spend
literally millions of dollars for an outside consultant to help
the agency implement the recommendations of the study. I have
heard estimates of up to $10 million, something which could
have been done internally through the Office of the Chief
Operating Officer. This is a very blatant example of millions
of dollars that people say are being wasted. And I find it
difficult to sympathize with requests then that we hear from
the agency for additional taxpayer money year after year when
we are spending in this manner.
Finally, I am dismayed that back in February when you gave
a speech on the state of the SEC, you specifically omitted
facilitating capital formation as a primary component of the
SEC's mission. It is hard to imagine that this was just some
sort of casual oversight, given the depth of the ongoing
congressional negotiations at that time of the JOBS Act.
Furthermore, in your testimony today, once again that area is
omitted. Fortunately, there is a bipartisan and bicameral
majority of Congress that recognizes the importance of capital
formation on job creation, even if the agency and yourself do
not.
Too many times, the idea of protecting investors is only
framed under the umbrella of protecting them from fraud.
Protecting investors is also about assuring investors that they
have a place to invest their capital and make a return. It is
about providing investors with choices and cost-effective ways
to conduct their business. Capital formation is a vital and
equally important part of that mission. And hopefully, you will
remember that in future testimony and remarks.
With that, I yield back my time, and I recognize the
gentlelady from New York for 3 minutes.
Mrs. Maloney. Thank you so much. I would like to welcome
you, Chairman Schapiro, and thank you for your service. It is
nice to see you again. I believe I saw you last the week before
the OGR Committee and that was hearing number 48. Is that
correct?
Forty-two? So now, it is 43--43 hearings you have attended.
And at that hearing last week, I asked you about the progress
the SEC is making in terms of implementing the many rules in
Dodd-Frank, and I want to reiterate how important it is that
these rules be done and finalized as soon as possible. Because
in many ways I think it is the lack of certainty, not the rules
themselves, that are concerning. And I know the SEC is working
overtime to get these rules done and I am sure these issues
concerning cost-benefit analysis will be firmly covered today
and I believe that cost-benefit analysis is a very important
part of making decisions going forward. I know that you do,
too.
I do want to mention that I am very concerned about the
clearinghouse rules. It is very important, going forward, to
make sure that these clearinghouses are rock solid strong. And
your decisions that you made recently on high-frequency trading
and the consolidated tape throughout this process is a very
important one. And I also wanted to mention the swap
definition. I know that is a rule you are working on jointly
with the CFTC and it seems like that needs to be put in place
before many other rules can be addressed.
So I hope that you will be telling us where that is going
forward. And the extraterritorial guidelines of exactly how far
it goes and the oversight that you have, I hope is an area you
will be discussing. As you know, the ranking member put forward
an amendment in one of our bills that would have increased the
oversight of the SEC in the territorial area. I also wanted to
take a minute to raise the issue about real estate investment
trusts which are a very important industry in my district.
Last August, the SEC published a concept release to revisit
the scope and application of the statutory exemption of
mortgage REITs from regulation under the Investment Company Act
of 1940. You well know the important role that REITs play in
terms of providing liquidity in the housing market, and given
the fragility of that particular sector, it has been the
hardest one to bounce back.
And the fact that significant holders of mortgage credit
are backing away or deleveraging. We are always looking for
ways to encourage increased participation of private capital. I
know that you and your staff are giving due deference to these
considerations. And I hope you will be mindful of this as you
decide whether to move forward. And I look forward, as always,
to your testimony, and I welcome you to your 43rd testimony
before Congress this session.
Thank you.
Chairman Garrett. The gentlelady yields back.
The gentleman from Alabama, the chairman of the full
Financial Services Committee, is recognized for 3 minutes.
Chairman Bachus. Thank you, Chairman Garrett, for holding
this hearing.
And thank you, Chairman Schapiro, for being here this
morning.
The Dodd-Frank Act expanded the SEC's authorities and
responsibilities, requiring the Commission to promulgate 123
rules, conduct 32 studies, and establish 7 new offices or
committees. That makes today's hearing particularly urgent, as
this committee has the responsibility to conduct oversight of
the SEC's activities and initiatives and budget requests.
The SEC's budget has increased by roughly $1 billion over
the past decade, and the Administration is requesting $245
million more for the agency than it requested in 2012. How the
SEC spends its money is a reflection of the Commission's
priorities, and this hearing will help us better understand
what those priorities are, and how the SEC is prioritizing its
resources.
One of those priorities appears to be further money market
fund reforms, yet, as Vice Chairman Hensarling and I noted in a
recent letter to you, Chairman Schapiro, the SEC has missed
numerous deadlines for mandatory rulemaking. So the suggestion
that the agency is now devoting time and resources to a
discretionary rule, without providing Congress or the public
with empirical data and economic analysis to justify such a
rulemaking, raises questions about the SEC's priorities and
abilities to manage its resources.
We believe the Commission should first determine whether
more reforms are needed before choosing among the proposals
that are reportedly under consideration. In past hearings, I
have commended Chairman Schapiro for pursuing reforms designed
to avoid future debacles such as the SEC's failure to detect or
prevent the Bernie Madoff or Allen Stanford Ponzi schemes.
However, I do want to point out--and this is not to
diminish the fact that you have made a lot of needed reforms--
that one regulatory gap remains unaddressed--and you
acknowledge this--relating to the Commission's oversight of
investment advisers.
Last year, only 8 percent of investment advisers were
examined by the SEC. This lack of oversight, particularly in
the aftermath of the Madoff scandal, is perilous and risky.
Retail investors are at risk if their investment professional
is examined only once every decade.
All investment professionals should be subject to
consistent examination and oversight, which is why bipartisan
legislation I am introducing this week establishes one or more
self-regulatory organizations to oversee retail investment
advisers. This will dramatically increase the examination rate
for investment advisers with retail customers.
A responsive SEC that is wisely prioritizing its use of
resources is the goal for all of us to share.
I know you share that goal, Chairman Schapiro.
I thank Chairman Garrett for calling this important
hearing, and I yield back the balance of my time.
Chairman Garrett. I thank the gentleman.
Ms. Waters is now recognized for 3 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. I appreciate
you holding this hearing today. And I would like to thank
Chairman Schapiro of the Securities and Exchange Commission for
coming before us to testify today. I appreciate that this
subcommittee has conducted rigorous oversight of the SEC. By my
count, this is the 16th time that the SEC has been before the
Financial Services Committee during the 112th Congress. And of
course, the Commission also makes frequent appearances before
other committees in this Congress.
There are several topics I hope we can explore with
Chairman Schapiro today, including the SEC's budget request,
implementation of the JOBS Act, potential money market fund
reforms, and of course, the continued work to finalize rules
related to the Dodd-Frank Act. I hope that we can productively
explore these topics, but I also hope that we can recognize
attempts to weaken or undermine the SEC, by either underfunding
it, or imposing upon it much more onerous cost-benefit rules.
I would like to believe, and I must believe, that we are
all interested in an SEC that can perform the task and the
mission that it is charged with. And that while there is need
for clarification and definition, none of us on either side of
the aisle would like to weaken the SEC and not have it do its
job.
The Commission has made a good faith effort to be
responsive to some of the criticism of their cost-benefit
analysis, and I am curious to hear more about the recently
issued guidance on this topic. However, there has been a lot of
work done by this committee that can be identified as
legislative efforts that may tie the hands of the SEC as it
attempts to protect investors.
Some legislation that moved through this committee had
perhaps laden the Commission with additional litigation
expenses and could make it very difficult for the SEC to do the
job that Congress asked it to do under the Dodd-Frank Act.
There is no better effort or job that can be done by this
committee than for both sides of the aisle to get together
again and ensure that the SEC is not hampered in doing its job,
and that all of the attempts that are being made in this
committee are attempts to clarify, to define, and to clear up,
rather than undermine.
Under this backdrop, I think it is important to keep fresh
in our minds what has happened, the damage that has taken place
to our capital markets and our great economy just 4 years ago.
We cannot forget the many foreclosures that have taken place,
and all of the dollars of household wealth that has been wiped
out; it must be kept fresh in our minds. Although the financial
services industry has rebounded, American households still
struggle from the fallout from this recession.
Having said that, I hope that we can have a productive
hearing today, and I certainly look forward to testimony from
our witness.
And I thank you again, Mr. Chairman, for holding this
hearing.
Chairman Garrett. I thank the gentlelady.
Mr. Hensarling is recognized for 2 minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
And welcome, Madam Chairman. I guess you took note that
this is, I think, your 42nd appearance before the committee.
Given that you have been in office for a little over 3 years,
and given the provisions of the Dodd-Frank Act and a number of
questions about the committee, my guess is we can get you up to
50 appearances in relatively short order.
As you well know, there are a number of members of this
committee who are concerned about the lack of fundamental
economic analysis that has historically taken place at the SEC.
And I certainly want to commend Chairman Garrett for his
legislation.
At a time when our Nation is still suffering from roughly
37 to 38 straight months of 8 percent-plus unemployment, with
the underemployment being almost twice that, the worst record
since the Great Depression, knowing how invaluable the
efficiency and vibrancy of our capital markets is to job
creation, it is a good and proper and important topic that we
deal with on ensuring that there is meaningful economic
analysis.
In addition, there have been questions concerning the
relative priorities of the Securities and Exchange Commission,
and the seeming misallocation of resources as well. I do want
to commend you for the steps that you have taken in issuing
staff guidance regarding economic analysis. I will look forward
to hearing more in this hearing about that.
But I do want to also echo what Chairman Bachus said
about--if my figures are right--the SEC having missed
approximately 62 percent of its mandatory deadlines under Dodd-
Frank. And in this case, that might not necessarily be a bad
thing, but it does question certain discretionary rules that
are being considered, particularly the money market fund
regulations where we are still looking for the rationale and
the empirical evidence that the 2010 administrative rule 2A-7
has not proven sufficient.
So that is an open question in our minds. But I look
forward to your testimony.
And I yield back the balance of my time.
Chairman Garrett. The gentleman yields back.
Is there a request for time? Yes? Yes, there is.
The gentlelady is recognized for 3 minutes.
Ms. Moore. Thank you so much, Mr. Chairman. I didn't
prepare an opening statement, but I couldn't resist the
opportunity to congratulate the Chairman of the SEC for the
diligent hard work that they have done under very stressful
situations with the tremendous numbers of additional
responsibilities that have come to the agency upon the advent
of Dodd-Frank.
It has occurred to me that there are many criticisms that
are levied against the SEC about your increased spending
authority, but you have tremendous increased responsibilities.
And I just wanted to make note of the tremendous breadth and
depth of reforms that you have already put into place.
I look forward to hearing your testimony and asking some
very specific questions about some things I think are
concerning to me.
And with that, Mr. Chairman, I would like to yield back the
balance of my time.
Chairman Garrett. Thank you. The gentlelady yields back.
Mr. Royce is recognized for 1 minute.
Mr. Royce. Thank you, Mr. Chairman.
There are some concerns. There have been many failures at
the SEC over the last several years, and despite our hearing
testimony from people like Harry Markopolos about the over-
lawyered culture at the SEC and the ``investigative
ineptitude''--in his words--last Congress, Dodd-Frank rewarded
the SEC with additional authority without looking at the
fundamental problems within the agency. And that is one of our
concerns.
And Chairman Schapiro, I do not envy you. You have a lot on
your plate as you display in your testimony today; you do. And
I appreciate also the work you are doing with this idea of
taking a slow-to-act bureaucracy head on with the idea that we
are going to take people with expertise in these critical areas
from the market and put them into important positions, hire
them to these positions because they have a background.
Addressing the over-lawyered nature of the SEC is important
because there is a perception of regulatory competence
throughout the financial sector. There is this perception that
people do not have to do due diligence because, after all, the
SEC is going to do that.
And that leads, frankly, to an erosion of market
discipline, in my opinion. That is one of the things that
happened. Like it or not, that perception is out there.
So it is in everyone's interest that we get this right to
the extent possible following the crisis. And that is why these
moves to bring people in with that type of expertise that you
are undertaking, I think, is very important.
I yield back, Mr. Chairman.
Chairman Garrett. The gentleman yields back.
Mr. Fitzpatrick for 1 minute.
Mr. Fitzpatrick. Thank you.
Chairman Schapiro, good morning.
You have made a number of speeches recently about your
intention to propose rules later this spring to further limit
the use of money market funds. And one element in the proposal
would be to force money funds to float their net asset value so
they could no longer be offered at a dollar per share.
Another would be to impose capital requirements on money
funds which would essentially make them more like a bank
product.
As a former county official from Pennsylvania whose county
benefited from the use of money funds for cash management, I
would like to hear about whether the SEC has done an analysis
as to how many entities may not be able to use money funds
under the proposed rules that are being considered at the SEC.
With that I yield back.
Chairman Garrett. And the gentleman yields back.
Mr. Dold is recognized for 1 minute.
Mr. Dold. Thank you, Mr. Chairman.
Chairman Schapiro, welcome back. As always, we appreciate
your time and testimony here today.
These oversight hearings are critical. They are a critical
congressional responsibility, and also critical for the
Executive Branch agencies because they have a responsibility to
help improve government transparency, accountability, and
effectiveness.
So I want to thank you for your participation. I guess we
are going on 42 or 43--depending on how you count it--but
certainly, we appreciate it.
Obviously, the SEC is facing some significant changes,
issues, and challenges. And these include conducting and
completing multiple studies and reports, as well as writing and
implementing many new and complicated and consequential rules,
all dictated by Dodd-Frank.
I am certainly pleased that this committee has worked
frequently on a bipartisan basis to try to clarify
congressional intent and try to identify and avoid unintended
consequences, which necessarily come from a complicated Dodd-
Frank process.
I know that we will get into many of these issues today,
but for now I want to specifically highlight the municipal
advisers rulemaking as one of the clearest, most important
examples of the need to clarify congressional intent to avoid
serious unintended negative consequences.
So I look forward to your testimony today, and I look
forward to digging into some of these issues.
Thank you so much.
I yield back, Mr. Chairman.
Chairman Garrett. The gentleman yields back.
And finally, Mr. Grimm is recognized for 1 minute.
Mr. Grimm. I thank the chairman.
And welcome back, Chairman Schapiro.
As I am sure most of us here would agree, in order to have
strong financial markets in the United States, we must have
clear rules that are fairly and uniformly enforced by
regulators such as the SEC. And, unfortunately, if the crisis
of 2008 showed us anything, it showed that a lack of
enforcement of existing rules did help to bring our financial
system to the brink of disaster.
Therefore, today, if possible, I have particular interest
in hearing what steps the SEC has taken thus far to implement
the reform and modernization recommendation presented by the
Boston Consulting Group, as well as which steps the Commission
plans on taking in this area in the near future.
With that, I yield back. And I thank you.
Chairman Garrett. The gentleman yields back.
And that, I believe, concludes all of the opening
statements.
We will now recognize our witness, the Honorable Mary L.
Schapiro, Chairman of the U.S. Securities and Exchange
Commission.
Chairman Schapiro, you are recognized. And thank you again
for being with us for many, many meetings.

STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S.
SECURITIES AND EXCHANGE COMMISSION

Ms. Schapiro. Thank you.
Chairman Garrett, Ranking Member Waters, and members of the
subcommittee, I appreciate the opportunity to testify regarding
the recent activities of the United States Securities and
Exchange Commission.
In the past 3 years, the SEC has experienced enormous
change, substantial challenges, and significant progress. The
aftermath of the financial crisis, the extensive new
responsibilities placed upon the agency, and the rapid growth
of the financial markets have together obliged the SEC to
become more efficient, creative, and productive to achieve its
mission, which of course includes capital formation as well as
investor protection.
I am pleased by our record. To cite just a few highlights,
the Commission filed more enforcement actions in the last
fiscal year than it has ever filed, and it obtained orders for
more than $2.8 billion in penalties and disgorgement.
We brought actions arising out of the financial crisis
against more than 100 individuals and entities, naming 55 CEOs,
CFOs, and other senior corporate officers.
We implemented a risk-focused examinations program, and in
2011 completed more than 1,600 oversight exams. The exam
program has resulted in both improved guidance to the financial
industry about risky practices and in actionable information
for our enforcement unit.
We implemented a new whistleblower program that is already
providing high-quality information regarding difficult-to-
detect wrongdoing and permitting the investigators to focus
resources more efficiently.
We improved our internal financial controls, which resulted
in a GAO audit opinion for Fiscal Year 2011 with no material
weaknesses. We implemented a host of internal reforms designed
to improve the agency's structure, strengthen capabilities,
upgrade internal controls, and enhance workforce competencies.
And we have used external hiring opportunities to obtain
specialized industry expertise in areas as diverse as
quantitative analysis, computerized trading, and structured
products.
While we have made significant progress in many areas, we
realize that we must constantly evolve to keep pace with those
we regulate. In addition to improving our core operations, we
are working to implement the significant new responsibilities
assigned to the agency under the Dodd-Frank Act and the JOBS
Act.
Already the SEC has proposed or adopted rules for over
three-fourths of the more than 90 Dodd-Frank provisions that
require SEC rulemaking. And we have issued 14 of the required
studies and reports.
While the agency's budget has grown in recent years, so
have our responsibilities in the size and complexity of the
markets we oversee. For example, during the past decade,
trading volume in the equity markets has more than doubled, as
have assets under management by investment advisers now
totaling $48 trillion--trends that are likely to continue for
the foreseeable future.
In addition to the growth of the market, the new
requirement of the JOBS Act will also call for significant
commitment of agency resources. There, too, we have made
progress. We have formed rulemaking teams comprised of
economists, attorneys, and experts. We have sought public
comment earlier than the rulemaking process requires.
And in the days immediately following enactment, the staff
prepared and posted practical guidance on, among other things,
how emerging growth companies can file their confidential IPO
submissions and on the new requirements and thresholds on
Exchange Act registration and de-registration.
With respect to our budget request for Fiscal Year 2013,
our request would allow the Commission to achieve four high-
priority initiatives. First, it would allow us to enhance our
investor protection activities by bolstering staff resources
and our enforcement in our examinations units and by continuing
to develop and implement robust analytical models that identify
regulated entities with high-risk profiles.
Second, it would allow us to speed capital formation by
eliminating regulatory bottlenecks, to improve economic
analysis, and to efficiently consider authorizations to
businesses engaged in new lines of business.
Third, it would allow us to strengthen the market stability
effort. Currently, the SEC has fewer than 25 staff persons to
monitor the 8 clearing entities that clear and settle an
average of $6.6 trillion in transactions every day. We believe
a greater presence is needed.
In addition, there is a need for agency attention to
important issues such as market structure improvements, high-
frequency trading, exchange-traded funds, and enhanced efforts
against cyber security threats.
Finally, it would allow us to make IT investments in data
management, disclosure review, internal accounting and
financial reporting, electronic discovery, and to modernize the
EDGAR system and sec.gov.
I believe that our past efforts and our future priorities
will help us fashion an ever-better equipped, more expert, and
effective agency. I look forward to working with you to build
on this progress.
And, of course, I am happy to answer any questions.
[The prepared statement of Chairman Schapiro can be found
on page 52 of the appendix.]
Chairman Garrett. Great. Thank you very much for your
statement.
We will now begin with questions. And I will recognize
myself first. We are limited for time, obviously, with all
these questions, so what I thought I would do is run through
half a dozen sort of yes-or-no questions, and then come back to
elaborate on that, okay?
Starting, first and foremost, with cost-benefit analysis--I
understand that a memorandum was issued regarding current
guidance on economic analysis. Is that correct?
Ms. Schapiro. Yes.
Chairman Garrett. And that was done back in the spring of
this year, in March?
Ms. Schapiro. It was, I believe, distributed in March. It
had been in the works for a while.
Chairman Garrett. Yes.
This guidance is binding, then, on the agency?
Ms. Schapiro. Yes, the staff is following the guidance.
Chairman Garrett. Right.
Have you as Chairman put in writing, then, to each of the
divisions that it is binding on them?
Ms. Schapiro. The guidance has been distributed and
everybody is following it, and everybody understands the
expectation is that they will follow it.
And, of course, the Commission is the ultimate arbiter of
whether the staff has followed the guidance. The staff
understands that they are to follow the guidance.
Chairman Garrett. Okay, so the staff understands. I guess
the question, then, is out of--because the memorandum comes out
of the OGC and the RSFI?
Ms. Schapiro. It comes from the Chief Economist and the
General Counsel.
Chairman Garrett. Okay.
Should a directive come from your office?
Ms. Schapiro. It certainly could. We have professional
staff at the SEC, and they understand that this is the
expectation and this is the requirement. I haven't sent out an
e-mail that says, ``You must follow this guidance.'' They will
and are following it.
Chairman Garrett. Will you instruct them?
Ms. Schapiro. I certainly could.
Chairman Garrett. Okay. Is this guidance publicly
available?
Ms. Schapiro. It is not publicly available, in part because
it has been circulated to the Commissioners and we are awaiting
input from the Commissioners to see if there is any further
enhancements or evolution to the guidance based on their input.
At that point, I am comfortable having it circulated. And
of course, a number of committees of Congress or Members of
Congress have it, as it was provided for a cost-benefit
analysis hearing last week.
Chairman Garrett. So it is mandatory? I am going to go
back, contrary to what I was going to do, yes or no. So it is
mandatory on the agency, but it hasn't been--the Commissioners
have not signed off on it?
Ms. Schapiro. They have not formally voted on it. They are
aware of it. They have been briefed on it. My understanding is
most of them think it is excellent, and the staff is following
it. If the Commission has edits to it or changes or
enhancements, we will as a Commission work through those. And
at that point, we can vote on it as a formal document.
Chairman Garrett. Is it normal, the practice that something
becomes mandatory on the agency before the Commission signs off
on it?
Ms. Schapiro. In fact, most policies like this, the
Commission probably doesn't sign off on most internal
procedural policies. But this one, because of its importance
and because we think the Commission will have valuable input to
the process, we wanted to make sure they all had it and were
comfortable with it.
Chairman Garrett. And since you just say because of its
importance and because that it is now, as you say, binding on
the agency, does the SEC need now then to what, to re-propose
the rules that it had previously proposed but are not yet done
in the process, that in other words are not yet final, in order
to go through this process and to give the public notice of
that?
Ms. Schapiro. The staff is going through a process right
now of looking at all of the rules that have been proposed but
not yet finalized to see if, in light of the new guidance,
additional economic analysis will be necessary. And where it is
necessary, we will supplement with additional analysis.
It is important to note that this guidance, while it puts
everybody on the same page and it communicates very clearly
what the requirements are for economic analysis in SEC
rulemaking, many of these things were being done in many
rulemakings already. So I don't have a final count on whether
it will be necessary to re-propose anything.
I can give you an example from 2 weeks ago. We actually
reopened a comment period based on the receipt of additional
data and were able to make that part of the file before we went
final on a rulemaking. So we are looking at whether we need to
do more with rules that have been proposed but not finalized.
Chairman Garrett. Right, because they would have to--if
this is the new way where you are going forward, that the
public would want to be able to--the public should be able to
have the ability to comment on the economic analysis, that in
essence was not part of the process under this memorandum
previously.
Ms. Schapiro. Although for some rules, there was a complete
economic analysis already done at the proposing stage, but if
there is additional data, we can always open the comment period
for comment on that data. But as I said, the staff is doing an
analysis of all the existing rules proposals.
Chairman Garrett. And so you will do that for each
particular rule, say whether or not it will happen then? Is
that what you are saying?
Ms. Schapiro. On a case-by-case basis with each rule as it
comes to the Commission for final approval, we will make a
determination whether the prior economic analysis was
sufficient and meets the standards of the guidance.
Chairman Garrett. And just one last question. Normally when
you come before this body, you do not give your opinion on
legislation. That is sort of your policy I guess, which is
fine. But I know that with regard to the JOBS Act, you did
actually send your position in opposition to the legislation.
Was there anything that prompted you to do that on that
legislation? Is there anyone from the Senate or Senate staff
who prompted either you or your staff to engage in that
conduct?
Ms. Schapiro. No. And, Mr. Chairman, I do give my opinion
from time to time in fact. As you may recall, I have commented
on H.R. 2308 in the past and some of the additional
requirements in your bill on economic cost-benefit analysis for
the SEC to do.
And, as I testified on a number of capital formation
initiatives over the course of the last year, I stressed some
of the issues that were in my letter about the need to balance
investor protection.
Chairman Garrett. But will this affect your ability to
implement the JOBS Act because you have--
Ms. Schapiro. Absolutely not.
Chairman Garrett. And will you continue to prioritize it
even though your limited resources over such a prioritization
of Dodd-Frank?
Ms. Schapiro. We have many Dodd-Frank rules to complete. As
was pointed out, we have missed a number of deadlines already.
Those are a high priority. The JOBS Act is a high priority. It
is the law of the land. We will absolutely faithfully implement
it as Congress intended.
Chairman Garrett. Thank you. I appreciate it.
The gentlelady from California?
Ms. Waters. Thank you very much.
I heard you just relate to a question relative to the JOBS
Act. And I voted for the JOBS Act. It was a leap of faith for
me. I had some concerns about it, but in an attempt to listen
to the arguments about job creation and support for small
business and all that, I supported it. But, I was very much
desirous of having my amendment on research included in that.
I offered an amendment to the provision of the research
section that would have taken several steps, including
preventing the repeal of certain aspects of the so-called
Global Settlement that former Attorney General Spitzer
negotiated almost 10 years ago. This settlement limited
potentially damaging conflicts of interest between the
investment banking and research departments of large investment
firms in the United States.
The U.S. Chamber of Commerce even wrote to the House,
saying this aspect of the JOBS Act went too far, saying there
may be blurring of boundaries that could create potential
conflicts of interest between the research and investment
components of broker-dealers. And I think you even wrote to the
Senate leaders expressing your concerns with this provision
after the bill passed the House.
And even though I did not get my amendment in, I don't know
what your authority is to pay attention to this area because of
your understanding and my concerns and others about this
potential conflict.
Having said that, I also want--and you may have answered
this question already about priorities. Does this in any way
take priority--the JOBS Act--in the SEC over Dodd-Frank, or how
do you view that?
And lastly, since I am going to get all of my questions in
so you can answer them all at once, I was the author of a proxy
access. And I know the decision of the courts on proxy access.
What are we doing to get it back and to be able to frame in
ways that the court indicated it should be dealt with?
Ms. Schapiro. Congresswoman, I lived through the research
analyst investment banking conflicts of interest in a very
direct way at FINRA, and we participated in the Global
Settlement. And so let me say that the Global Settlement
remains in effect.
The issue becomes the fact that a number of FINRA (the
self-regulatory organization) rules replaced provisions in the
original Global Settlement. And several of those rules are
directly implicated by the JOBS Act.
The JOBS Act is quite clear that those rules cannot
continue to be maintained, nor could new rules be written in
particular areas that sought to put a wall between research and
investment banking.
So for example, right now research analysts are prohibited
from participating in pitches with the investment bankers to
get their investment banking business. Under the JOBS Act, that
rule may have to be reconsidered.
There are also quiet periods that now operate within 40
days after an IPO or within 15 days of the expiration of a
lock-up period where research can't be issued, so-called
``booster shot'' research. The JOBS Act makes it clear that
quiet periods' rules cannot be maintained.
So we will, again, faithfully follow the law, as will
FINRA; and where rules cannot be maintained, they will have to
be eliminated.
Ms. Waters. I and others will keep a close eye on this, and
want to work with you to understand whether or not we are
running into conflict of interest problems. And maybe we can
revisit that at some time, but I am really worried about it.
Ms. Schapiro. That would be fine, and we would be happy to
provide Congress at some point with our view about whether
issues are arising again. And let us hope that that they won't.
On your question about priority of Dodd-Frank over the JOBS
Act, I would say that they are both very high priorities.
Whenever we have congressional mandates, particularly those
with specific deadlines, we prioritize them over other things.
And so we will be working very hard on both completing our
Dodd-Frank work and our JOBS Act work.
And with respect to proxy access, I think that is not an
issue that we have the capacity to take on, again, at this
time.
Ms. Waters. I don't understand exactly what your last
answer was. What do you mean you don't have the capacity to
take on at this time?
Ms. Schapiro. In terms of re-proposing a proxy access rule
and putting that on the Commission's immediate agenda, we don't
have the capacity right now to redo that whole process in terms
of the number of people and the hours in the day for the
agency. It is something that we will continue to look at over
time, but we are just not going to be able to get to it as we
finish all this other work.
Ms. Waters. Thank you very much. I am going to have to
think about that.
Chairman Garrett. I now recognize the gentleman from
Alabama, the chairman of the full Financial Services Committee,
Chairman Bachus.
Chairman Bachus. Thank you.
Chairman Schapiro, you are hearing questions about economic
analysis and capital formation. We have expressed concerns
about the derivative rule, about the Volcker Rule, about the
Federal Reserve's (Fed's) proposal to enact single counterparty
credit limits, and all these questions concerning the JOBS Act.
And you have expressed that the crowd funding could pose some
risk.
Let me tell you what our motivation is. And I think I speak
for most Members. My grandfather was a railroad engineer, and
that was part of his identity. That is what he did. My dad was
a contractor. My other grandfather was a farmer. That is really
our concern. It is about jobs. And the jobs just aren't there
today.
People talk about how homeownership is the American dream,
but even to have homeownership, you have to have a job. And
today we have unemployment. We have underemployment. We have
part-time employment. We have temporary workers. We have 2
million Americans who have even given up looking for a job
because they are so discouraged. And the reason we are
concerned about the Volcker Rule's impact on jobs, and we
passed the JOBS Act, which I think was a bipartisan effort, is
we want to put America back to work. And I know you do too.
I can tell you that the institutions you supervise are not
based on safety and soundness regulation; it is about
disclosure and ensuring that investors have all of the
information they need, and you should not be trying to take the
risk out. You are charged with promoting capital formation and
job creation.
You know, what does your uncle do? Well, he is unemployed.
You have seen those lines during the Great Depression, and boy
are those sad images. And that is why we keep saying, has there
been an economic analysis on this proposal? What we are really
asking is, is this going to eliminate jobs? Is this going to
put people out of work? My question to you would be, do you
know of any of the agencies that have undertaken a
comprehensive economic analysis on what Dodd-Frank will do?
And I won't pose it as far as capital formation or
availability of credit, but has anyone done a study on its
impact on job creation? Because we have had employer after
employer that has come in and said, this is going to eliminate
2,000 jobs. This is going to eliminate 1,000 jobs. And this is
somebody's father. This is somebody's son who is going to lose
their job if we don't get this balance right. So I would ask
you, do you know if there has been any study done on the
cumulative economic impact of Dodd-Frank on job creation, or
capital formation, or economic growth?
Ms. Schapiro. Mr. Chairman, I am not sure that any agencies
have done that. I have, I think, seen some private sector
studies that talk about the potential cumulative impact and
costs, although I don't know that they have translated it into
the number of jobs.
I would say that we care deeply about job creation,
although we come at it from a slightly different angle, which
is that we must have markets in this country that operate with
integrity so that investors have confidence to invest in
companies that can create jobs, that can build factories, and
that can create the economic growth that we are all striving
for.
And it is getting that balance right with regulation that
helps to ensure the integrity of the marketplace, that allows a
company to trade freely and actively on the stock exchanges,
and that gives investors sufficient information to make
reasoned judgments about, ``I will put my money here, but not
here.'' To balance the regulation necessary for that to happen
with a need to not have unnecessary and overly burdensome
regulation and not to regulate to the nth degree because we
won't take all the risk out.
Investing is risky. And it should be risky. But it should
be risky not based on a lack of information or a market
structure that doesn't work as it didn't on May 6th. Or because
there is fraud or Ponzi schemes or other market abuses. So, I
actually think we very much share the same goal and have
slightly different perspectives about how to get there. Part of
this rule-writing process has been about bringing so many
perspectives through thousands of comment letters and hundreds
of meetings together to help inform us about how to get that
balance right.
Chairman Bachus. Sure. And I appreciate that. I think your
job is to prevent fraud and misrepresentation; to have markets
that operate with integrity but not to take the risk out.
Because with risk, can come reward. And if you try to take that
out, it is an impossible venture.
Ms. Schapiro. I absolutely agree.
Chairman Bachus. Thank you.
Chairman Garrett. The gentleman yields back.
Mrs. Maloney?
Mrs. Maloney. Thank you, Mr. Chairman.
And welcome, Madam Chairman. I really agree very much with
the gentleman from Alabama that we need to make it a priority
to put Americans back to work. That is the priority. But we
have to understand that this financial crisis which by all
accounts and from every economist points to the cause as coming
from huge swaths of the financial industry not being regulated
at all, or deregulated. And this crisis has cost this country
$18 trillion.
After the Great Depression, Congress put in place three
major reforms: the FDIC; Glass-Steagall; and the SEC. It was
after Glass-Steagall was dismantled and when huge swaths of
areas that the SEC regulated were deregulated principally in
energy derivatives, that we got this financial crisis.
So I would argue that balanced and fair regulation can
preserve jobs, grow our economy, and is very, very important.
So I feel that we need to implement Dodd-Frank in order to
preserve economic growth. I think every American would be
pleased to have 60 years of economic growth, which is what we
had after the crisis of the Depression and the reforms we have
put in place.
I would like to ask you--you mentioned the equity market
structures; and I know that you came out with proposed rules
roughly 2 years ago. But I haven't seen any activity in the
market structure since then. And this may be an issue on which
we will hold hearings. It is certainly an area that many of my
constituents are concerned about and some feel that our current
market structure is outdated. So, what are your plans for
moving forward on market structure proposals?
Ms. Schapiro. Since the Flash Crash of May 6th which
heightened everybody's awareness of the fact that market
structure is actually an important issue for capital formation
as well as investor protection, we have done a number of really
important things. We put in place single stock circuit breakers
so that trading in a stock is paused for 5 minutes if a stock
moves more than 10 percent over a 5-minute period, as a way to
prevent the kind of dramatic decline we saw in good stocks on
that day for no apparent economic reason.
We also are working on market-wide circuit breakers that
would halt trading across all the equity and derivatives
markets based on certain price moves. We also banned naked
access to the marketplace, which now requires that customers go
through a broker-dealer's risk management before they can put
orders into the market. We eliminated stub quotes. We put out
clear rules about when trades would be broken, and a number of
other--
Mrs. Maloney. Since my time is limited, I would like to go
to the statement that you made on the Flash Crash in May of
2010, that it took the SEC 5 months to figure out exactly what
happened and everyone involved agreed that 5 months is just too
long.
So I was concerned about your walking away from your
determination to get real-time data in market tracking and I
would like to put several articles in the record concerning
this, and I would like to find out exactly where you stand on
this: the idea for a database. Do you still support the
database? And is your database part of the Office of Research
that was part of Dodd-Frank?
Did you just drop the real-time element of it, or the
entire idea? And did you ever do an RFI to see if the
technology was out there to be able to do it in real-time and
get real comparative costs?
Ms. Schapiro. We are going forward with the consolidated
audit trail. As you point out, there is no single comprehensive
audit trail that exists today. That is why, with heroics, it
took 5 months for the SEC and CFTC staff to reconstruct trading
from May 6th. That is just not acceptable, from my perspective,
for the world's largest capital markets.
I hope the consolidated audit trail proposal will go to the
Commission for a vote in the near future. We are likely to not
require real-time reporting. The costs of that are
extraordinary, and the benefit is limited.
Mrs. Maloney. Madam Chairman, would this just be for the
SEC or is this part of the total research project for--
Ms. Schapiro. No, this is--
Mrs. Maloney. --Office of Research?
Ms. Schapiro. This is the SEC undertaking to reconstruct
trading in the equity and options markets. We would hope
eventually it would cover the futures markets as well.
Mrs. Maloney. I think my time has expired. Thank you.
Chairman Garrett. Thank you. The gentlelady yields back.
The gentleman from Arizona is recognized.
Mr. Schweikert. Thank you, Mr. Chairman.
Madam Chairman, why don't I do a broad-breadth question
instead of, as I touched base with you before, where I was
going over lots of microissues.
First, in the JOBS Act that now is in front of you, there
are a number of implementing mechanics with which you must
deal. Can you give me a top line of what is moving and any
timelines you know of?
Ms. Schapiro. I will be happy to try.
It is in its early days. I will say the on-ramp provisions
were all effective upon enactment, but that still required that
the SEC staff publish guidance and answer lots of the questions
we have been getting. We did all of that within the first week
of the bill being signed. And we have received two confidential
IPO filings already and one bank is already coming to de-
register.
With respect to Title II, the general solicitation, we are
required to do rulemaking there. The deadline is 90 days. With
respect to general solicitation, we are required to do
rulemaking within 90 days. That is going to be very, very
challenging because the requirement that purchasers be verified
as being accredited will raise a lot of difficult issues about,
``What does that verification process look like?''
Crowd-funding rulemaking is required within 270 days. And I
will say for general solicitation, crowd funding, regulation A
and 12G, we have two rulemaking teams already assembled. We
were already doing some of this work on our own initiative to
try to facilitate some capital formation issues before the JOBS
Act was passed. So we have just slipped those people into these
new roles.
In crowd funding, we have to deal with an intermediary
registration system if a funding portal, not a broker-dealer,
is going to be utilized and there are issuer disclosure
requirements that we will have to develop.
Mr. Schweikert. And to that point--and I don't want to stop
you--but to that point, any window of timeline there?
Ms. Schapiro. As I said, the rulemaking is due in 270 days.
I don't know what the staff's best estimate is, but I would be
happy to try to provide that for the record.
Mr. Schweikert. If part of it is--I literally have dozens
of folks, particularly from Arizona, who are just giddy about
both the on-ramp and also some of the crowd funding and some of
the opportunities here. And I keep ginning them up that, ``Hey,
it is coming; continue to do your work and get your mechanics
laid out.'' So--
Ms. Schapiro. We have already opened e-mail comment
mailboxes, so we are actually already getting comments on what
people think are important features of these rulemakings. And I
think that is going to be informative to us.
Reg. A, which extends the offerings up to $50 million in a
12-month period, will also require rulemaking, although I think
that is a much easier lift and the thresholds of shareholders
for reporting under the 34 Act also requires rulemaking; but
again, I think, not nearly as complicated as potentially crowd
funding and general solicitation are.
Mr. Schweikert. Any discussions from counsel or around you
in regards to--I guess the proper term is decimalization moving
to--for lightly traded securities?
Ms. Schapiro. My recollection is that the statute requires
us to study that issue and so our economists are setting out
the terms of that study now.
Mr. Schweikert. Okay.
To sort of leap to one of our favorite subjects here--and I
know you have already actually touched on this a bit--give me a
top line where you see us moving right now in the discussions
on money market funds.
Ms. Schapiro. I would be happy to.
And I just want to add on the JOBS Act, within a day after
it was enacted, our staff did a Web cast for 1,000 people to
explain the terms of the Act and how we expected it to operate
and interact with existing SEC systems.
Money market funds--we could talk for a long time about
that issue, and I know it is of interest to a number of
Members. The staff is working on some proposals for the
Commission to consider that would seek to try to bolster the
resiliency of money market funds and finish the job that
effectively was begun in 2010 when we did a lot of reforms.
They were important reforms. I think they are judged to have
been successful with what they were designed to do, which was
to ensure that money market funds had sufficient liquidity to
meet redemption requests. And we saw in the summer, with all
the volatility in Europe, that they in fact did have sufficient
liquidity.
What those rules did not do is protect against a default by
money market--defaults on paper held by a money market fund as
we saw in the Reserve Fund breaking the buck.
Mr. Schweikert. Mr. Chairman, I know we are out of time,
but this is one of those occasions where my great concern is,
we did have, what was it, two funds that ultimately broke the
buck?
My fear is we do something that damages rates of return in
those funds for so many investors, so many communities, so many
pensions. So it is trying to find the rational balance of where
we stay safe, where we don't also create a cascade of lower
returns for lots of folks for decades to come.
Mr. Chairman, I yield back. Thank you, sir.
Chairman Garrett. Thank you. The gentleman yields back.
Ms. Moore is recognized for 5 minutes.
Ms. Moore. Thank you so much, Mr. Chairman.
And you know, I, of course, would like to pursue the same
line of questioning as my colleague, Mr. Garrett, on the money
market funds. I do want to commend you, Madam Chairman, for the
reforms that you have made in the money market funds, these
reforms. But I am concerned that the proposals that your staff
may be reviewing now; I am just sort of perplexed as to how you
came to the conclusion that this might be the most expedient
thing to do?
I don't see how floating the net asset value will continue
to retain the liquidity for the customers. And I fear that
municipalities, for example, will really rely on this
instrument--won't even be able to use it if you float it.
It certainly has been a very valuable instrument for
liquidity for many companies and municipalities and I don't
understand how sort of a pseudo margin requirement would
operate and more importantly, I guess I am wondering that if
there were customers who sort of fled money market funds
because they would not be as attractive as a short-term
investment, a place to just sort of park maybe your payroll or
something.
What would happen with the $2.5 trillion in funds that
might make their way into banks? Wouldn't that increase some of
the systemic risk that banks might have? I think a lot of banks
don't even want the flood of $2.5 trillion in the banking
system.
So I am concerned about the rationale for these new
proposals.
Ms. Schapiro. Congresswoman, let me answer that. Maybe I
can explain and bring multiple answers to your many questions
by doing this.
But at the end of the day, what motivates this is a desire
that the taxpayer never be on the hook again for these
instruments as they were in 2008.
The Reserve Fund--
Ms. Moore. But the taxpayers weren't on the hook.
Ms. Schapiro. Oh, they absolutely were on the hook. The
Treasury had to step in with a guarantee program; the Fed had
to step in with a liquidity facility. There was a $62 billion
fund called the Reserve Fund that held just $785 million of
Lehman Brothers paper.
On the day that Lehman went into bankruptcy, Reserve
experienced a run, $40 billion of shares were--
Ms. Moore. Right.
Ms. Schapiro. --in 2 days.
They quickly depleted their cash and they began selling
securities, further depressing prices in the market. That run
quickly spread to other money market funds and during that
week, investors withdrew $310 billion or 15 percent of all
money market fund assets.
Those money market funds depleted their cash and they
sought to sell portfolio securities into, again, an illiquid
market.
Ms. Moore. We paid out like $0.99 on the dollar to--
Ms. Schapiro. On Reserve, after years of litigation.
But the point is the run spread quickly to the rest of--we
call it neighborhood risk--the money market fund community--
Ms. Moore. I keep--
Ms. Schapiro. --and it only stopped when the--
Ms. Moore. Madam Chairman, I am just afraid of my time--
Ms. Schapiro. Okay.
Ms. Moore. I just still want to make sure that you carry
this in a direction that I want.
I do understand it. I think that the reforms that you have
made really did address that. With respect to requiring greater
capital requirements and I am just concerned--so go on.
Ms. Schapiro. The run was only stopped because the Treasury
stepped in and put a guarantee program in place. But the
collateral consequences were not just the run on money market
funds, but the short-term credit markets froze up completely,
commercial paper issuers had to draw down on their backup lines
of credit, and that put additional pressure on bank balance
sheets.
Ms. Moore. Madam Chairman, I just want to make sure--I
understand that. I want you get to the question that I asked
about the--what impact will this have when the money market
funds no longer serve--for example, if we can't serve
municipalities, they may not even be able to use a fund that is
structured the way it is currently being proposed.
Ms. Schapiro. There are certainly alternatives to money
market funds and whether or not the Commission adopts a capital
requirement or a floating net asset value, money market funds
will continue to exist and will be an option for many, many
investors.
Other options include bank accounts, CDs, direct Treasury
or other government obligation investments, and direct
commercial paper investments. But I think what is important
here is that we will do analysis accompanying any proposal that
we might put out that will talk about the range of alternative
investment products that could be considered: What are the
tradeoffs in terms of risk and yield and liquidity? The extent
to which any reforms we propose could shift money market fund
investments into alternative products; what the impact of those
shifts will be.
We will estimate the best we can the operational costs and
competitive impacts of anything we do. We will discuss the tax
implications.
We will have a full-blown analysis. My guess is that this
will have a very vigorous comment and debate process follow it,
then we will make a decision about whether this protection of
the system from a destabilizing and potentially devastating run
is worth the cost of changing what the money market industry
currently looks like. Those are hard, hard questions and I am
not belittling them in any way. We recognize them, but I also
think that they are important issues that we, as a regulator
and with responsibility for the economic system and systemic
risk, have to be willing to at least talk about.
Chairman Garrett. Thank you.
Ms. Moore. And thank you for you indulgence, Mr. Chairman.
Chairman Garrett. I recognize the gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman.
After listening to one of my colleagues earlier, I am again
reminded of Santayana's famous admonition that, ``Those who do
not learn from history are doomed to repeat it.'' And until we
learn the lesson of history that when Washington, D.C., decides
to lower underwriting standards and effectively mandates,
cajoles, incents and arm-twists financial institutions into
loaning money to people to buy homes they cannot afford to
keep, then I fear for future financial crises.
I would also note that, with the possible exception of the
practice of medicine, I am not sure there was a more regulated
industry prior to 2008 than the financial services industry;
piling on more regulation on top of old is not necessarily a
solution to the challenges that are before us.
Madam Chairman, I want to follow up on comments that our
full committee chairman made, Chairman Bachus. I believe you
know this, and I am heartened by things that I have heard you
say today about balance, about the purpose of our capital
markets. But I also recall that I find myself agreeing with
about 80 percent of what our President says. I just end up
disagreeing with about 80 percent of what he does.
And this goes to the whole question of economic analysis,
which is really having a cogent defensible jobs impact
statement to rulemaking. I have to tell you, whether I am
talking to Fortune 50 CEOs in Dallas, Texas, where I reside, or
good, honest, hardworking small business people in the rural
areas of the Fifth District of Texas, they cite the red tape
and regulatory burden coming out of Washington as the number
one impediment to job creation, at a time when you know our
economy is hugely underperforming.
And so, the first question I have--and there is not much in
Dodd-Frank I am fond of, but it is the law of the land. Much of
it you have to implement. So my question is this: Since the
passage of Dodd-Frank, how many additional employees have been
added to the SEC? And what is the breakdown between attorneys
and economists?
Ms. Schapiro. I don't have an exact number on the breakdown
between attorneys and economists. I would be happy to try to
get that information for you. I think it is important to
remember that we are also a law enforcement agency. And that
requires that we have people who can go to court and try cases
and conduct investigations.
I will also say that we have had the largest ramp up in
economist staff under my tenure, and, I think, of almost any
time in the agency's history. We have 24 economists just
working on rule-writing, and we have many more economists who
do litigation support, risk analysis, quantitative modeling,
and so forth. We are hiring 20 more economists right now, and
have offers outstanding to 17 recent Ph.D. candidates, and we
have asked for 20 more in Fiscal Year 2013--
Mr. Hensarling. My time is limited. I appreciate that. So
if you could get the exact number in specific detail--
Ms. Schapiro. I would be happy to provide you with that.
Mr. Hensarling. --if you could relay that to me, I would be
appreciative.
In the remaining time I have--there has been a lot of
discussion obviously about money market funds, so I don't want
to belabor the point. Clearly, there is concern here. And I
guess, Madam Chairman, there may be something to what you are
doing. Many of us have open minds.
But at the same time, we are not sure, given the recent
changes that have been made, that there has been a really
thorough study on what the impact is going to be on the
investment community, whether or not the new additions to the
rules have had a chance to really be assessed. And so, there
continues to be great concern here on a product that, again,
many Americans rely on. And so, I would hope that you would be
very careful in your deliberations there.
There continues to be a debate with regards to the request
for funding of your agency. Now, I think we have had something
like a six- to eight-fold increase in the last decade. Clearly,
you have outlined a number of challenges. As you are aware, an
independent management study was part of the Dodd-Frank Act.
And as I understand it, on March 30th, the SEC issued a
report of the implementation of the SEC organizational reform
recommendations, where it said, ``Staff and management time to
devote to this initiative will continue to be in short supply,
and in future phases of implementation are likely to require
levels of funding that must be directed at other agency
priorities at this time.''
Again, given some of the criticisms of the U.S. Court of
Appeals with respect to the proxy access rules, certain
management challenges with respect to leasing and other
matters, I guess I have the question--I don't know if you are
pushing back on the conclusions of the management study, or you
just simply don't see it as a priority, whether I am
interpreting this correctly? But many of us have great problems
in simply putting more money into a vehicle that in many
respects may not be working.
Ms. Schapiro. Congressman, I am not arguing with the
recommendations at all. In fact, we have made a lot of
progress. A number of them have been, in fact, implemented, and
we are continuing to do so. All we are trying to say there is
that BCG estimated it would cost $45 million to $55 million to
implement all of those recommendations over a 2-year period. We
don't have that kind of money to spend on this. We don't think
that is an appropriate amount of money to spend on this. So we
are going to take these recommendations in chunks.
And so, we have done a number of things. We have redesigned
our information technology group. We have implemented a
continuous improvement program that is identifying cost
savings. In fact, over $8 million in cost savings was
identified very recently. We are restructuring different
operations. We have recalibrated the relationship with SROs so
that our reliance on them is a leverage point for us. We have
implemented a new performance management system. We are doing
strategic hiring, as Congressman Royce mentioned.
But we are going to focus on these in increments while work
continues on all 17 groups of recommendations that came out of
BCG. And we are only going to put supplemental contractor
dollars to workforce planning initiatives and data governance
initiatives until those are completed. And then, we will do
more of them while we continue to do things like look at our
regional office strategy and some of the other ongoing work
streams.
So we are moving ahead on multiple fronts, but we also have
an enormous amount of work that Congress has asked us to do,
whether it is Dodd-Frank or the JOBS Act, and management
attention is in a bit short supply.
Mr. Hensarling. I yield back.
Chairman Garrett. The gentleman yields back.
I believe Mr. Green actually has been here since the
beginning. So--
Mr. Green. Thank you, Mr. Chairman.
And I thank Chairman Schapiro for appearing here today as
well.
My intelligence indicates that in 2005, you had
approximately 19 examiners for each $1 trillion managed by
investment advisers. And today, you have approximately 10. Is
this correct, Madam Chairman?
Ms. Schapiro. The magnitude is about right. I am not sure
of the exact numbers. But, yes, we are only now back at our
2005 staffing levels overall for the agency.
Mr. Green. There is also an indication that broker-dealers
have increased from 95,000 in 2005 to 160,000 today. Is this
generally in the ballpark as well?
Ms. Schapiro. That would be broker-dealer branch offices?
Mr. Green. Yes.
Ms. Schapiro. The actual number of broker-dealer firms is
about 4,500, I believe.
Mr. Green. 4,500?
Ms. Schapiro. But 160,000 branch offices.
Mr. Green. Yes. Is it fair to say that with these
increases, you do need additional cops on the beat?
Ms. Schapiro. We do. The markets are not only
extraordinarily more complex, but they are growing rapidly. New
products are devised and introduced all the time. We have new
responsibilities with respect to over-the-counter derivatives,
with respect to municipal advisers, private funds and hedge
funds and so forth that have registered, and new credit rating
agency responsibilities.
We are trying to deploy the best technology in the SEC's
history to help us manage all of this burden. But, we do need
more examiners and we do need more enforcement staff.
Mr. Green. Much has been said, and I agree with much of
what has been said, about overregulation. But I do think that
you should take just a moment and give us some indication of
what can happen if we have underfunding such that you cannot
properly police the consequences of underfunding. Would you
speak briefly on the consequences, please, of underfunding?
Ms. Schapiro. Sure. I think there are four broad categories
of problems. One is that we won't adequately staff our mission-
essential functions, like going into brokerage firms, mutual
funds or investment advisers and examining their activities to
ensure that they are treating customers fairly. And we won't
have the resources to bring all of the fraud cases and stop the
Ponzi schemes that we should.
Mr. Green. For just a moment, do this. Elaborate on what
happens to market integrity and investor confidence when there
is a failure in the system because of underfunding.
Ms. Schapiro. I can give you a very specific example.
After May 6th, the Flash Crash, when we saw that our market
structure failed very badly, there were net outflows from
equity mutual funds by investors for about every single week
for about 6 or 8 months after that period. Investors had lost
confidence in the integrity of the marketplace and its ability
to function fairly.
We see investors harmed by an enormous number of frauds to
very devastating consequences. And that stops them from ever
investing again, and that takes that capital out of the system
and away from companies that can use it to create jobs and to
grow their businesses. So, a failure to enforce the securities
laws has real concrete, on-the-ground ramifications for
investors who are cheated or defrauded. It has real
consequences for our ability to oversee the marketplace when we
don't have adequate funding.
And also, it has real consequences for businesses that
don't want to face regulatory bottlenecks. If they come to the
SEC and say, ``I want an exemptive order in order to be able to
offer a new exchange-traded fund,'' and we don't have the staff
and the resources to devote attention to that exemptive order,
businesses are held up from doing what they want to do as well.
Mr. Green. As I close, it is a difficult position that you
are in, because you have a big job to do. It is huge.
If you are not properly funded and we have some sort of
breakdown--and I am trying to be polite with my language--you
will be accused of not doing your job. And many times the
reason that things can't get done is because you don't have the
resources to do these things.
So it puts you in a very difficult position. You, on one
hand, have to politely ask for the funding, understanding that
if you don't get it, there can be consequences. But it is
difficult for you to talk about the consequences, because you
don't want to insult the people that you have to ask to fund
the agency.
And I have great sympathy for the position that you are in.
I do hope that you can continue to make the case for the need
for funding and the consequences of underfunding. I think
overregulation is without question a matter to be considered.
But underfunding is also of paramount importance and I thank
you for making the case.
Chairman Garrett. The gentleman yields back.
Mr. Pearce is recognized for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
And thank you, Madam Chairman, for being here and answering
the questions. On page 11 in your testimony, you talk about
investor confidence and the fairness of the financial markets.
And so I kind of want to pursue the information on MF Global.
Coming down into the decision on the bankruptcy there was
an option to go one direction to Chapter 11, which there are
nuances that seem to favor creditors. And then the other option
was to go to Chapter 7, which seemed to have nuances that
favored customers.
So who made the decision that it--I previously questioned
Mr. Harbeck with SIPC, the CEO, and he told me that he was
notified by a member of the SEC Trading and Market Division at
5:20 a.m. that, ``Things are really rapidly deteriorating at MF
Global.'' So at 5:20 in the morning, Mr. Harbeck was informed
that the decision had already been made. Who made that
decision?
Ms. Schapiro. Congressman, my understanding, and I will be
happy to verify this for you, is that with respect to the
holding company, the decision to go into bankruptcy was made by
them and their management. The SEC staff made a--
Mr. Pearce. Who decided that it was going to be selected as
a security firm rather than a commodity trading firm? That was
a pretty key little point.
Ms. Schapiro. The SEC staff made a recommendation to the
CFTC Chairman and to me that the broker-dealer, the dually
registered Futures Commission merchant broker-dealer be put
into SIPC.
Mr. Pearce. Which would mean that--so that we are going to
go and we are going to favor the creditors rather than the
customers, right?
Ms. Schapiro. Not under SIPC, no. And SIPC is required,
when it becomes clear that a brokerage firm is not capable of
meeting its obligations to its customers--
Mr. Pearce. Yes, but--
Ms. Schapiro. --and SIPC--
Mr. Pearce. --proceeding as a Chapter 11, if I could
interrupt--proceeding as a Chapter 11 allows them to continue
to try, doesn't it?
Ms. Schapiro. But that is not at the broker-dealer level.
That may have been at the holding company level. At the broker-
dealer level, once it is clear they can't meet their
obligations to their brokerage customers under SIPA, the
appropriate course is the institution of a SIPC proceeding.
Mr. Pearce. So that decision was again made by whom?
Ms. Schapiro. It was a recommendation by the SEC staff to--
Mr. Pearce. You all were in the room watching the
progression of MF Global. When they began to dip down and use
those customers' segregated funds, did that qualify as
misconduct?
Because I am reading in the second paragraph on page 11
there that you were to act quickly to halt misconduct. Is that
misconduct when MF Global began to reach down and use that
money?
Ms. Schapiro. I have to say that I don't want to prejudge
any potential enforcement action by opining upon whether they
violated the law.
Mr. Pearce. So you think that it is okay for--
Ms. Schapiro. No, it is never okay to utilize customer
assets for the--
Mr. Pearce. Okay, so they were doing it. It says here that
you are to act quickly. That is your testimony. It says, ``We
are going to act quickly to halt misconduct.'' And you are
saying it is never appropriate. Why didn't you step in and stop
that?
Ms. Schapiro. Congressman, if I could just point out, there
were only 318 securities accounts at this firm. There were
30,000 futures accounts. We were not the regulator or primarily
looking at--or looking at all at--what was happening with
respect to the futures segregated accounts. That would have
been--
Mr. Pearce. But you have an input into the room; so you
have the guy who worked for Goldman Sachs sitting there in the
room, Mr. Gensler, who later recuses himself. Did you as the
SEC express concern about who the CFTC had in the room; that
you had a guy who was really deeply embedded with the people
who are in the process?
I think that on October 27th--I think Goldman Sachs
actually made a large purchase. So you have Mr. Gensler sitting
in here, who previously worked for Goldman. They make a large
purchase of securities. They didn't even bother giving the
money to them.
So MF Global is starving for cash and surely--you said your
law enforcement agency--surely law enforcement doesn't stop and
say, ``I am only in charge of law enforcement for my 318
firms?'' Somebody has to be blowing the whistle here.
Ms. Schapiro. Of course, I agree with you. And the SEC, the
CFTC, the FBI, and the U.K. Financial Services Authority are
all heavily engaged, along with the trustee in bankruptcy and
the trustee in SIPC, with investigating exactly what happened
and what went wrong in this firm.
I raise the point about there only being 318 securities
accounts because it is a very tiny part of what happened here
as compared to the futures side.
So the primary regulator there was the Chicago Mercantile
Exchange--
Mr. Pearce. If I can take back my time, I need to make one
more comment.
From this perspective, I see all the regulators sitting in
a room watching the thing turn upside down. You have 36,000 hog
farmers and dairy farmers and people out here who have their
money at stake. They would be the 99 percent.
I see regulators which allowed Goldman Sachs to come in and
buy assets; George Soros to buy assets at deeply discounted
prices all the while saying that, ``We are there to stop
misconduct.'' Watching people dip into the customer trading
accounts without securitizing it on the other end. For 4 or 5
days, the regulators sat there.
We talk every day in this Administration about fairness to
the 99 percent. But when I see the actions, I see things that
look desperately like the 1 percent got much more fair
treatment than the 99 percent.
Ms. Schapiro. Congressman, let me just say that if there
are violations of the law here, we will pursue them with as
much vigor and force as we possibly--
Mr. Pearce. I hear that, but the last time we asked, nobody
had even bothered talking to Mr. Corzine. Mr. Corzine was the
one at the helm. Nobody had even bothered talking to him.
I yield back, Mr. Chairman.
Chairman Garrett. The gentleman yields back.
Mr. Lynch is recognized for 5 minutes.
Mr. Lynch. Thank you Mr. Chairman.
And Madam Chairman, thank you very much for coming to this
committee and helping us with our work.
I do want to follow up on the line of questioning that was
being conducted by Ms. Moore previously regarding the
possibility of the proposal of the SEC going to a net asset
value standard for short-term money market funds.
And I understand that about 57 percent of the short-term
municipal debt is currently being held in these short-term
money market funds.
As you well know, in many of our districts, State and local
governments are in difficult straits. And I am wondering how
you see the proposal to go to a NAV standard? What that will do
to municipal markets? I am very concerned about that. And I
just wanted to follow through your thinking on that?
Ms. Schapiro. Absolutely. This is an area of concern for
us. And--
Mr. Lynch. I would be happy to hear that.
Ms. Schapiro. And I should say--and you may not have been
in the room when we began this conversation--we do not take
this on lightly, this whole area of money market fund reform.
We did a set of changes in 2010 we think were very
important and very helpful to bolster the resiliency of this
market. It is a $2.5 trillion market. We understand it is
important. We understand why people love it. The risk isn't
priced into the product.
But, I also believe it creates real systemic risk and the
potential for the taxpayer to be on the hook again as they were
in 2008 when the Reserve Fund broke the buck. That said, there
are lots of important issues to explore here. One is the use by
municipalities of money market funds and what kind of cost-
benefit analysis we can do around that issue to understand what
their alternatives are and whether or not just having a
floating net asset value or perhaps a capital requirement would
in any way dissuade them from continuing to utilize this
product. And we are having those conversations.
Mr. Lynch. Let me just jump in there because I don't want
all my time to be--I have another question.
But, if you look at the whole market, it is probably closer
to $6 trillion. I know that you know the very short-term is
probably $2.5 trillion to $3 trillion, but if we move that
money out of short-term money market funds, it is like to go
into banks that we are trying not to get bigger.
We don't want these banks to get even bigger. But I think
that might be the perhaps unintended consequences of what you
are proposing here. Or going to hedge funds or some other
alternative, as you--that really presents another set of risks
that I think we may not be anticipating.
Ms. Schapiro. There no question that each alternative
involves tradeoffs, whether it is less yield or more risk. And,
we are currently evaluating survey data from corporate
treasurers, including those who actually don't use money market
funds, to look at how they currently allocate their portfolios.
I will say for the corporate treasurers who don't use money
market funds for cash management, the bulk of their assets are
actually in government securities; although a significant
amount are in bank accounts.
But, these are important issues and they are issues we will
be pursuing as we try to formulate a potential approach here.
Mr. Lynch. I just ask for caution; that is all.
Ms. Schapiro. Absolutely.
Mr. Lynch. I really am concerned about this, especially
with respect to the municipal markets here.
Ms. Schapiro. We have heard the concern, believe me.
Mr. Lynch. Okay.
Ms. Schapiro. I have been the subject of lots of vitriol
about even raising this issue. We have done a President's
Working Group report that laid out a series of options. We have
held a roundtable. We have had hundreds of meetings and comment
letters. And we haven't even put out a proposal yet. So--
Mr. Lynch. Okay.
Ms. Schapiro. --we will proceed with great deliberation, I
assure you.
Mr. Lynch. All right. Thank you for that.
The other question I had is, back in January 2010, the SEC
issued a concept release on restructuring U.S. equity markets.
Mr. Capuano and I recently asked for some response to that.
I know you have moved to put into effect the proposals and the
concept release and you have not done that yet. And we are
still dealing with a fair amount of volatility in market
structure, such as opaqueness and a high percentage of canceled
orders.
I guess what I am asking you is, do you foresee the SEC
putting out a proposal on the concept release any time soon?
Ms. Schapiro. We have done quite a few things in the market
structure area already--single stock circuit breakers; banning
naked access to the markets.
We will shortly, I hope, approve a new proposal for a limit
up, limit down that will not allow orders outside a specified
range to even be entered into the marketplace, hopefully
helping to stem some of the volatility. And I hope that we will
shortly propose and adopt market-wide circuit breakers that
will be keyed across the equity options and futures markets,
and if we have very dramatic moves in the marketplace.
That said, there is unfinished work in the market structure
area, particularly with respect to high frequency trading.
Mr. Lynch. I just want to add that I know you are working
at 2005 funding levels. And that is absolutely wrong. So I am
not blaming you. I don't think you have the resources you need.
But this is an incredibly important issue. And, we have to get
this done. So--
Ms. Schapiro. I couldn't agree with you more. To me, one of
the most important things the SEC needs to be focused on is
market quality and what is contributing to or detracting from
market quality.
Mr. Lynch. All right.
Thank you, Mr. Chairman. I thank you for your indulgence.
Chairman Garrett. Thank you.
Mr. Royce is recognized for 5 minutes.
Mr. Royce. Thank you.
Chairman Schapiro, it is nice to see you today.
As you know, the Department of Labor is currently working
on a proposal to revise the definition of fiduciary as it
relates to the provision of individualized investment advice
for a fee, which the Department might release this summer.
And officials at the Department have made a number of
public comments about how they are working with the Commission
and how they are working with other Federal agencies, I assume
Treasury and the CFTC and so forth, to mitigate the impact that
the revised definition will have on the regulations being
enforced by the other agencies.
Is there a concern at the Commission that the next proposed
rule issued by the DOL will have implications beyond fair
jurisdiction and implications for your jurisdiction?
Ms. Schapiro. It is a great question. And we have had a
number of conversations with the Department of Labor. Our
economists have been, in fact, sharing literature reviews and
so forth. And I think there are three primary issues.
One has been resolved, fortunately. And that is whether the
disclosures that would be required by swap dealers and swap
market participants under Dodd-Frank could turn those entities
into fiduciaries under ERISA. And DOL has given us clear
guidance in a letter to us and to the CFTC that that will not
be the case.
But it leaves the second issue, which is whether there
should be a fiduciary duty for investment advisers and broker-
dealers when they are giving advice to retail customers about
securities, a standard that exists on the adviser side but not
the broker-dealer side currently, and whether there is a
potential for the DOL fiduciary rule to conflict with that.
We will work very hard to make sure that conflict doesn't
occur. Our fiduciary duties are more disclosure-oriented. DOL's
are more toward prohibiting certain kinds of transactions by
fiduciaries.
The third issue--and I think the one the securities
industry is most concerned about--is whether broker-dealers who
provide advice on IRA accounts, which I think account for about
40 percent of broker-dealer accounts, would be fiduciaries
under ERISA. Today they are not, and I think that is probably
the major point of contention in the DOL rulemaking from the
perspective of the securities industry.
Mr. Royce. Let me ask you--the letter that you received--
that is not binding from the DOL. Am I correct, or how do you
interpret that?
Ms. Schapiro. I haven't looked lately. It came last fall. I
would have to go back and look at the exact wording of it. But,
I took it as an official declaration that they do not believe
compliance with the business conduct standards under Dodd-Frank
rulemaking would turn those dealers into fiduciaries.
Mr. Royce. Let me ask you another quick question. The issue
I wanted to talk to you about again was the liquidation of
Lehman.
In your response previously, you mentioned the Commission
staff is implementing the recommendations regarding the
trustees' fees. What progress can you share with us? Because
the data I have is as follows, and this is on the progress
report by LBI.
And so here are the highlights: Unresolved customer claims,
$41 billion; claims that moved from disputed to closed, $300
million--so that is 0.7 percent of unresolved claims; claims
allowed in the period, 0.1 percent of unresolved claims, or $40
million; fees in the 6-month period for the trustee, the fees
are $92 million; total fees to date, $733 million. So for every
$1 of claims resolved in the last 6 months, the trustee spent
$0.27.
To get back to a point that I have raised before--at what
point do we look at the progress being made, which after those
initial back office customer account transfers appears to be
minimal, and at what point do we look at this huge bill being
run up and question the reasonableness of these fees?
Ms. Schapiro. I think it is a very fair question. And there
has clearly never been a more complex liquidation proceeding
than the Lehman one under SIPA. As you pointed out, we are
looking very closely at recommendations from our Inspector
General about our oversight of SIPC. And he put forth, I think,
12 recommendations.
Ten of those have already been implemented. The last two
are in the process of being implemented. They required
consultation with the Commission. And we are working hard to do
closer oversight of SIPC and the trustee's fees. As you know,
we don't select the trustee. And in fact, under SIPA, it is
required.
Mr. Royce. I know, but that brings up another point. And
that is why I would like you to monitor this case; because, as
you know, this was the trustee that was assigned to the MF
Global case as well. To me, it seems that a critical function
of a trustee is to manage disputes and settle claims, and I
watch the progress on this and it really calls that into
question in my mind.
Ms. Schapiro. All I can really say is that we are
redoubling our efforts for oversight in this regard, but there
are contingencies in this liquidation that are going to take a
significant amount of time to resolve. As you know, there are
multiple entities involved, multiple jurisdictions involved,
and it is enormously complex.
I do think that the litigation with Barclays over the
transfer of funds under the Asset Purchase Agreement having
been resolved on one level could amount to a substantial
payout. The problem is that decision has been appealed to the
courts. And again, that will take time.
Mr. Royce. Thank you, Chairman Schapiro.
Thank you, Mr. Chairman.
Chairman Garrett. Thank you.
The gentleman from California is recognized.
Mr. Sherman. Thank you.
Madam Chairman, thanks for being here; so many questions,
so little time. Many of the questions I raise I will ask you to
respond to for the record.
The first concerns REITs. Let me mention that the SEC
published--your concept released to revisit the--Congress has
provided a carve-out in the Investment Company Act of 1940.
We need REITs to be involved, especially in the California
economy. Investor protection is paramount, but I know you will
give due consideration to the congressional carve-out of
mortgage REITs and the role they play in capital formation.
Now let me shift over to Iran. Companies that do business
with Iran--particularly with the Iranian government,
particularly in areas of strategic significance--undermine
American foreign policy, but also expose their shareholders to
risks, namely sanctions.
And, in fact, inside word here from Congress--don't want to
provide insider information--those risks are going to increase
as Congress imposes new sanctions on those companies, both
U.S.- and foreign-based, that do business with Iran and its
government.
By a vote of 410 Members of the House, we adopted the Iran
Threat Reduction Act. And I would like you to tell us for the
record what the SEC has done to further the disclosure
requirements of that Act.
I think investors deserve to know which companies are
engaged in what kinds of activities with Iran, both to protect
themselves financially, but also investors have a right to make
investment decisions based on foreign policy concerns as well.
Chairman Schapiro, you were here back in July 2010, and you
told us that you would be taking steps to educate investors.
And I would like to know what steps the SEC has taken to
educate investors about the risks companies face from doing
business in Iran and the potential impact of sanctions.
Of particular concern is that the SEC established 4 years
ago a Web-based tool to allow investors access to a list of
companies which in their public filings with the Commission
disclosed that they conduct business in countries that sponsor
terrorism.
Now the greatest problem with is that it was effective, and
the companies wanted to deny potential investors information
about what they were doing. They didn't want to have to face
investor pressure. So they pressured the Commission, and they
said, ``Aha! Your tool is imperfect.''
The response of the SEC was to pull the tool and to try to
make it even more perfect. And now it is 4 years later and
nothing has been done and the tool still isn't up. So I would
like to ask what efforts the SEC is making to reestablish this
tool so that investors can easily identify those companies that
do business in countries designated as state sponsors of
terrorism.
Why don't I give you a minute to make some more comments
about Iran? And then I will have one other question I need to
squeeze in.
Ms. Schapiro. Congressman, I am going to have to get back
to you on the tool, specifically. I remember reading about it.
It was discontinued by my predecessor. I remember there were
lots of issues around it. But I would like to supplement the
record--
Mr. Sherman. The real issue was that it was effective.
Ms. Schapiro. That may well be the case. I will say--
Mr. Sherman. And we did have a promise that it would be
restored, and it has been 4 years.
Ms. Schapiro. I will get right on it. I will also say that
the staff had been working on a disclosure rule for companies
that face material risks from possible violation of sanctions
legislation. And that is circulating with the Commission.
But I will say that the Senate appropriations report for
this year actually directs us to require disclosure by
companies of activities that may subject them to sanctions
under the Iran Sanctions Act and the staff is in the process of
developing that rule. It is very similar to what the House
passed in December, so I can get you an exact timeframe for
that, but it is well under way.
Mr. Sherman. I look forward to reading that timeframe in
your written response. And I hope that you will be moving
forward as you promised us in 2010 with an education program.
Finally, I would like to shift to the FASB standards
dealing with leases. This could balloon the liabilities
reported on the balance sheets of almost every American
company.
There are economic studies that show that this rule could
do real harm to the U.S. economy. And I would like you to
explain what steps the SEC will take to work with the FASB to
make sure that the economic impact of rule changes is reviewed
and that the SEC takes a broad policy view as to this possible
change in FASB standards.
Ms. Schapiro. As you know, we oversee the FASB, and I am
not intimately familiar with all the requirements of the
proposed standard, but I will be happy to provide you with
information about exactly where it stands and what the
Commission's approach will be to that.
Mr. Sherman. You come here for 5 minutes and you end up
with a lot of work, but thank you very much for your future
steps. Thank you.
Ms. Schapiro. Thank you.
Chairman Garrett. Great.
The gentleman yields back.
Mr. Fitzpatrick is recognized for 5 minutes.
Mr. Fitzpatrick. Thank you.
Chairman Schapiro, a couple of weeks ago, we had a hearing
in this subcommittee on the issue of mandatory audit-firm
rotation. And at that hearing the chairman of the PCAOB--his
name is Mr. James Doty--stated that conducting a cost-benefit
analysis related to the PCAOB concept release on mandatory
audit firm rotation would be, what he called, ``putting the
cart before the horse.'' And I was wondering if you agreed with
that sentiment?
Ms. Schapiro. I didn't hear that statement. I know that
under the JOBS Act, the PCAOB will be required to do an
analysis and that would be important for the SEC to see in
reviewing any proposed PCAOB standard.
Mr. Fitzpatrick. I also, at that hearing--I brought with me
a stack of comment letters which would been submitted to the
PCAOB, and a vast majority of those comment letters were
opposed to the idea of mandatory audit firm rotations so it
sounds like you can commit to the committee that the SEC will
require--you are saying the JOBS Act requires--
Ms. Schapiro. I believe it does--
Mr. Fitzpatrick. --financial analysis?
Ms. Schapiro. --that it requires some kind of an economic
impact analysis.
And, of course, the comment period I think has just ended,
maybe this week, on this proposal and the PCAOB has held some
public hearings and roundtables. So there will be a lot of
information available for the SEC staff in reviewing this
potential rule as well as for the PCAOB staff.
Mr. Fitzpatrick. But the Commission had, in the event that
the JOBS Act doesn't require they take the position, it is not
required by the Act, had the SEC step in and say, we want to
see an economic analysis?
Ms. Schapiro. We will certainly want to see an analysis.
This is a very major undertaking. This is an issue that has
been debated for years--was debated in Sarbanes-Oxley. The
alternative that was adopted then was a lead partner rotation
and that happens every 5 years and I think that has actually
had a positive effect.
So this is not a new issue to us and one which we will be
very closely involved in.
Mr. Fitzpatrick. Okay.
And I wanted to follow up on Congresswoman Moore's
questions.
In 2008, was it only the second time in over 40 years that
a fund broke the buck, this is on money markets. As a result,
in 2010, the Commission adopted reforms for the money market
industry and the reforms seem to be working. So I was
wondering, what is the purpose of proposing rule changes at
this point?
Ms. Schapiro. Sure. But it is important to note that while
the Reserve Fund was one of only two that actually broke the
buck, just in the period of I think 2008 to 2009, it might have
been 2007 to 2008, over 100 money market fund sponsors had to
step in and provide capital or other support so that their
money market funds wouldn't break the buck. Now that is
implicit; it is not explicit. Investors expected it to happen,
but there is no source of capital that is committed or
dedicated to money market funds that had to necessarily be
there.
And of course in the Reserve Fund's case, they didn't have
any capital. Their parent or their sponsor was not in a
position to buy out that Lehman paper that caused them to break
the buck. The result was obviously a devastating run stopped
only by the American taxpayer in the form of a Treasury
guarantee program.
We still believe that even though the reforms that we put
forward in 2010 have had a very positive impact on money market
fund resiliency, it doesn't protect against a credit event that
could cause a money market fund to break the buck. Investors
don't appreciate that these are investments--these are not cash
instruments, they are investments, and when they break the
buck, the impetus to run is enormous, and institutions get out
first, leaving retail investors in the fund and the losses are
concentrated with those remaining investors.
And again, from my perspective, the fact that the American
taxpayer had to be on the hook for this $2.5 trillion industry,
at that time it was even larger, is just not an acceptable
place for us to be. We have to explore whether there are other
things we can do to ensure that that doesn't happen.
We will be very deliberate. We will try to be very
thoughtful and very careful about how we go forward with this.
We appreciate that these are valuable instruments for
corporate treasurers, for municipalities, for individual
investors, but the reality is they have a structural weakness
that makes them susceptible to runs that can devastate our
entire economy.
Mr. Fitzpatrick. So is this a proposed rule at this point
or are you actually--
Ms. Schapiro. It is not even--
Mr. Fitzpatrick. --in the process?
Ms. Schapiro. --it is not even a proposed rule.
The staff is working on a proposal. And it has largely
taken the form of either floating net asset value, meaning the
price would reflect the actual value of the instrument, or in
the alternative, capital requirements so that if one does get
into trouble, there is a capital buffer there to absorb the
losses, or a capital requirement in conjunction with some kind
of minimum account balance for some short term of time.
Mr. Fitzpatrick. Where do the other Commissioners stand?
Ms. Schapiro. You would really need to ask them. Some of
them have spoken publicly about it and expressed reluctance. I
think they all would say right now they still have an open
mind. But we will see and, of course, it will require three
votes to become a proposal.
Mr. Fitzpatrick. Thank you.
Chairman Garrett. The gentleman yields back.
Mr. Miller is recognized.
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
I will have questions for the record or a question for the
record about the conflict minerals regulation to sort of
certification that conflict minerals were not used in
manufactured products.
But the questions I have today are about the valuation of
second liens in the biggest banks financial statements.
Obviously, the biggest banks are enormous and they do
everything and they operate everywhere. Chase's balance sheet,
for instance, is $2.3 trillion. It is apparent from the fact
that several of the biggest banks are trading well below book
value that investors are skeptical about the valuation of some
of their assets and their liabilities. And one of those appears
to be second liens.
They have enormous portfolios of second liens and
apparently do not--they continue to buy those at par as long
the second liens are performing, but a good many of those
second liens are behind firsts that are not performing or
behind firsts that are underwater. So those are second liens
that may have trouble in their future.
And if a first mortgage ends up defaulting and going into
foreclosure, the second lien loses everything, they lose out
completely.
Is that something the SEC is looking at as an investor
protection the valuation of second liens?
Ms. Schapiro. It certainly would be and our concern
obviously would be for the quality and the truthfulness of the
disclosure and the disclosure by the banks. I have a
recollection, but I would like to clarify it for the record,
that we have given guidance in this area in the last 6 months
or so to the large banks.
But if I could supplement the record with that information,
that would be great.
Mr. Miller of North Carolina. Okay. You will provide that
additional information in--
Ms. Schapiro. Absolutely.
Mr. Miller of North Carolina. --in a supplemental? Okay.
Ms. Schapiro. But whether we have given guidance, we are
seeing in our review of the largest financial institutions--
public disclosure on this issue.
Mr. Miller of North Carolina. And you do agree that second
liens are behind even if a second lien is performing if it is
behind either a nonperforming first, a delinquent first, or an
underwater first, which is essentially unsecured debt, that it
should be valued at much less than par?
Ms. Schapiro. I am not an expert so I probably should not
say whether I agree, but that seems to make sense to me.
Mr. Miller of North Carolina. All right.
Mr. Chairman, I will yield back.
Chairman Garrett. Thank you.
The gentleman yields back.
Mr. Stivers is recognized for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman.
Welcome Ms. Schapiro, and thanks for taking a lot of your
time today to talk with us about a few things.
I wanted to follow up a little bit on a few things that
have already been asked.
One question that has not been asked is sort of a
structural question; a question about harmonization between the
SEC and the CFTC which will lead to a bigger structural
question in a second. But how are you doing at harmonizing the
derivatives rules?
Ms. Schapiro. I think we are actually doing very well.
Last week, we were able to finalize a really important
foundational rule which is the definition of security-based
swap dealers, major swap market participant, major security-
based swap market participant. And for all those dry words,
those are really important rules. We were able to do that
jointly and get that done.
The next big joint rulemaking will be to define the
products: what is a security-based swap and a swap?
Once those are done, the two agencies can go forward with
finalizing other rule requirements, some of which will not be
identical because there are differences in the markets we each
regulate. We are just 5 percent of this multi-hundreds of
trillions of dollar market. The CFTC has the bulk of it and
with commodity swaps and energy swaps and interest rates, it is
a very diverse market for them. For us, it is a much narrower
market.
Mr. Stivers. And do these new agreed-upon definitions
conform with the Securities and Exchange Act, because I know
that your rules originally did and the CFTC's did not. So I
would like it when you conform with the law--let me go ahead
and be clear there.
Ms. Schapiro. Yes, I think what we relied on a lot in our
security-based swap dealer definition is the trader-dealer
distinction that exists, and has existed for many, many years
under the securities laws. And I think what the CFTC ultimately
adopted as this process went along was much more of that
thinking. So I think they are consistent with the Federal
securities laws.
Mr. Stivers. Great.
And I don't know if you have paying attention to what has
happened here in the House. The House has passed a couple of
bills, one of which is mine, H.R. 2779; and another, H.R. 2682,
which we passed with overwhelming majorities.
I know mine got 357 votes, and I think Mr. Grimm's got more
votes, so congratulations to him.
My bill deals with their affiliate swaps and how they are
treated; and H.R. 2682 deals with end-user exemptions.
Have you come to any agreement with the CFTC with regard to
those things? Obviously, the Senate has not moved either one of
those bills yet. But with the overwhelming bipartisan
majorities in the House, have you come to agreements that will
make either of those bills unnecessary?
Ms. Schapiro. I don't know the answer to that with respect
to the inter-affiliate transactions, and I would be happy to
come back to you on that one specifically. With respect to the
end-user margin, that is generally a CFTC issue, because it is
the non-financial end-users commodity--producers, agricultural,
co-ops, and others--that are the kind of end-users we have all
been most concerned about in this regard. So since we are only
regulating security-based swaps, we see this as much less of an
issue on our side.
Mr. Stivers. Sure, okay.
I am certain to run out of time. I do want to ask you--
follow up on the questions that the chairman raised earlier
about the regulatory system. You came to my office a few months
ago, and we talked about the SRO model. Can you give us a few
sentences of your opinion on the SRO model and whether it works
or not?
Ms. Schapiro. Sure.
With full disclosure, I spent 12 years at an SRO, FINRA,
and its predecessor, NASD, so you will understand where I am
coming from. But I think in a time when there are constrained
resources within the Federal Government, the ability to
leverage a self-regulatory organization is really critical. And
if you just look at our numbers, we examine about 8 or 9
percent of investment advisers every year.
Mr. Stivers. I need to cut you off, but I do know you have
three models for investment adviser oversight. I hope you will
choose the one that includes authorizing self-regulatory
organizations, because I think it works.
Ms. Schapiro. You will have to choose that. We don't have
the authority.
Mr. Stivers. Okay. We will get on that. The other thing
that you just talked with, I think Mr. Fitzpatrick, about was
the floating net asset value and you talked about some options
that you have come up with. Have you looked at some illiquid
investments in these money market mutual funds?
Have you looked at a regulator choosing a capital
requirement that closely conforms with the illiquid
investments, because frankly, that is the real issue? And I
didn't see that as one of your choices of your three options
that you explained to Mr. Fitzpatrick.
Ms. Schapiro. I think the economic analysis that we do will
actually look at how big a capital buffer you need under
different rate and redemption scenarios, for example. And so,
we will try to do some analysis of how you might calibrate
appropriately the capital buffer.
Mr. Stivers. Thank you.
And I yield back my nonexistent time. Thank you.
Chairman Garrett. I appreciate that.
Mr. Ellison is now recognized for 5 minutes.
Mr. Ellison. Thank you, Mr. Chairman.
Just a few questions--can you share with us the status of
the salary ratio and the rule process? How is it coming? Are we
going to make it on track? I appreciate you responding to my
letter of March 8th on this topic.
Ms. Schapiro. I am happy to do that. This is not a
rulemaking I believe that had a specific deadline, although
there is obviously a lot of interest in it. This is the
calculation of the median of employees' compensation compared
with the total compensation of the CEO.
Our staff is working very hard on that rule. I will tell
you that it is a very, very difficult rulemaking. If it was a
matter of adding up all the W-2s of employees and comparing
that to the CEO, we could have done it quickly. It is quite a
prescriptive provision in the law, and there are very extensive
record-keeping requirements in order to come to a total
compensation calculation.
For example, right now, companies have to give that total
compensation calculation for five named executive officers.
They actually compute that manually. That can't be done
manually when you have 60,000 or 70,000 or 80,000 employees
around the world. There are a lot of questions about, ``How do
we treat part-time employees in this calculation; what about
joint venture employees; what about employees overseas?''
And as I said, the definition of total compensation is
quite complex, and includes the necessity of calculating
pension benefits and so forth. This is a long way of saying we
are working on it. We have had lots of meetings with interested
investors as well as public companies and we are working hard
to try to get it right in a reasonable way.
Mr. Ellison. I want to urge you to continue that effort,
because it seems to me that one of the problems we get into in
this committee, and probably in others, is that we start with a
simple idea: What is the ratio of CEO pay to other average
employees? It sounds like a simple idea like you said; the W-2
thing versus CEO pay.
And then, people who really don't want to do it, never
wanted to do it, and are fundamentally against doing it because
they don't want to disclose, come up with an inordinate number
of ways to just make it complicated and therefore impossible.
And so, I just hope you don't let the complexity of the
situation overcome you, and that you keep on soldiering on,
because it is important.
And if there is any doubt about that, there was a recent
report about how shareholders at Citigroup came out and said,
on CEO pay, ``We have a problem with this compensation.'' It is
about empowering shareholders. Some people think, why are you
interfering? At the end of the day, shareholders and the public
want to get a better handle on this issue of compensation for a
lot of reasons. And I don't have time to go into all of them.
Let me ask you this question: Will you be able to continue
aggressive action to protect investors in capital markets
without the budget increase you requested?
Ms. Schapiro. We think the budget increase is really
essential, given the additional responsibilities that the
agency is taking on under Dodd-Frank and under the JOBS Act.
And so, with whatever resources we have, we will work our
hearts out to protect investors, to facilitate capital
formation, and to make sure our markets operate with integrity.
But we are underresourced to the task that we have been
given, and while we are becoming ever more efficient and
innovative in leveraging alternatives to do our job, I think it
is really critical for this country, and for this economy to
have a strong Securities and Exchange Commission.
Mr. Ellison. And if I may also add, we underfund an agency,
and then when a Madoff situation comes up we blame the agency,
and then use that catastrophe as proof that the agency is not
doing a good job; therefore, a justification to cut it even
more. And it is disappointing when that happens. And so I do
hope that your budget is fully supported, because of course it
is essential that the work you do goes forward.
I did want to ask you a question about the cost-benefit
analysis you are required to do with regard to rules. How is
that affecting your ability to promulgate rules? Is it
undermining, is it helping, is it an aid, is it a hindrance, is
it mixed? What are your thoughts?
Ms. Schapiro. We firmly believe a good cost-benefit
analysis, an economic analysis, is important to us in informing
the policy choices that we need to make in order to do rules
that will accomplish what Congress has asked us to do in the
legislation. So we are very committed to doing it.
I will say it has probably slowed us down in some cases,
that we are doing a more robust, more analytical cost-benefit
analysis, although we have always done cost-benefit analyses.
We have done Paperwork Reduction Act, Reg Flexibility Act,
efficiency, competition and capital formation analysis, burdens
on competition analysis.
Of all the Federal financial regulators, we do the most
cost-benefit analysis and we are used to doing that. But we
appreciate that we need to do it even better, and our new
guidance I think will enable us to have everybody working from
the same page and do an even better job.
Mr. Ellison. Yes.
Mr. Chairman, I ask unanimous consent to submit for the
record a Bloomberg article, entitled, ``Dimon Widens Gap with
JPMorgan as Wall Street Pay Slides.''
Chairman Garrett. Without objection, it is so ordered.
Ms. Schapiro. I would add that it is a key reason we need
more resources. We are hiring many more economists to do our
rulemaking.
Mr. Ellison. Right. We hear you.
Thank you.
Chairman Garrett. Thank you.
The gentleman yields back.
Mr. Dold is recognized for 5 minutes.
Mr. Dold. Thank you, Mr. Chairman.
Chairman Schapiro, in May of 2009 Martha Haines, the head
of the Office of Municipal Securities, told this committee that
establishing an effective registration and examination program
for municipal advisers would be easy, because there were only
about 260 non-broker-dealer municipal advisers. Clearly, her
estimate was inaccurate, as the proposed rule I believe could
force thousands of individuals to register with the SEC.
Is Dodd-Frank Section 975 written so broadly that the SEC
has no other choice but to capture thousands of unsuspecting
individuals as municipal advisers?
Ms. Schapiro. I don't think so. The statute is written
broadly, but I think the SEC has the ability to tailor the
rulemaking. And as you and I have discussed, I think we cast
the net too widely in our proposing release. And when we get to
final rules, I think that you will see that we have tailored it
quite a bit more.
We have received 1,000 comment letters, so we know that
there is deep interest in this issue from a wide range of the
community; from engineers and geologists, to accountants, bank
employees, and volunteer appointed officials in municipal
entities. There are a lot of people who have weighed in with
very good comments on how to tailor the rule more
appropriately. And I am hoping that we will be able, at the end
of the day, to strike the right balance.
Mr. Dold. I certainly hope so. And I know that you have
told this committee before that you believe, as you just did,
that the rule as proposed is far too broad and that the
Commission plans to scale back the rule before it is finalized.
But can you at least give us some more specific areas where you
would like to see it scaled back?
Ms. Schapiro. Sure. For example, the definition of
investment strategies is probably too broad and includes
activities that don't necessarily need to be regulated by the
SEC, such as whether the proceeds of a municipal offering ought
to go into a bank account; and whether or not traditional
banking and trust activities really need to be covered since
those are otherwise regulated entities.
We have received comments. I don't know that I have a view
yet on whether the underwriter exemption needs to be broader,
because it doesn't include enough activities that are related
to underwriting.
I do think that the exclusion for employees of municipal
entities should be expanded to include those who are appointed
officials. We do not want to dissuade citizen volunteers from
serving and the definition excluded those who are elected, but
not those who are appointed.
Again, that is an area where I think we can make some
reasonable carvebacks, and not do any damage to the goal behind
a municipal adviser registration, but also not layer on
unnecessary burdens.
Mr. Dold. I certainly appreciate that. And that was
actually going to be in my next question. As we look at 975, it
did go through the process of exempting elected officials out,
but didn't go through the process of actually exempting out
those that were appointed.
And you can just imagine school boards, all these different
individuals who are out there across our Nation who are giving
of their time to make the communities a better place, and I
know you have heard from literally thousands of commenters that
this would be a significant disincentive for these citizens to
get engaged and get involved, because you would be forcing them
to in essence register with the SEC, which you know is a fairly
significant process.
Ms. Schapiro. Absolutely.
And it wasn't as though we wanted to capture them. We
assumed that they would not be performing the functions that
the rule dictates require registration. So it was really a lack
of clarity on our part, not making a conscious distinction that
elected is out, but appointed is in.
We didn't think appointed would be engaged in the
activities that would require registration. We clearly need to
fix that.
Mr. Dold. I think as we take a look through on a number of
the different rulemakings--I certainly hope that this can
provide some additional clarity, which I think is one of the
important things for why we are having this hearing today; is
so that we can provide additional clarity.
I certainly hope that you take this back. Because we want
to make sure that this is narrowly tailored and that we are not
casting that wide net as you talked about before.
Ms. Schapiro. Absolutely. And this is why the comment
process is so valuable to us, too.
Mr. Dold. Chairman Schapiro, thank you so much for your
time. I appreciate your being here.
Mr. Chairman, I yield back.
Chairman Garrett. The gentleman yields back.
Mr. Hurt is now recognized for--
Mr. Hurt. Thank you, Mr. Chairman.
And Chairman Schapiro, I want to also join in my thanks to
you for appearing before our committee.
I was reminded by the opening statements by some of our
colleagues this morning about how funny I think people back
home think it is when we congratulate ourselves for doing our
job.
With respect to the number of times that you have appeared
on Capitol Hill, I think it is worth noting that whatever the
failures may or may not have been of the SEC over the years, I
think that we can all agree that a lack of congressional
oversight has probably contributed to that.
And we in Congress are as responsible for those failures as
anybody I think in the executive agency. And I know, based on
my observations of you in your job, that you fully understand
that.
Again, I appreciate your appearance. I appreciate the time
that you spent with me and my colleagues I know on an
individual basis coming to make sure that we understand what
the issues are, because, good gracious, we need to.
And so I thank you for that commitment. I know you have a
tough job and it seems almost perhaps even impossible on some
days considering the fact that we are borrowing $0.40 on every
$1 we spend in this country.
We have diminished resources to be able to do the important
work or to provide funding for the important work that you do
at the SEC. I was interested particularly during your comments
with your hat tipped to capital formation and how we can reduce
the regulatory bottleneck that can free up more resources in
the private sector for capital formation.
With that said, I would been thinking about the JOBS Act
and I know that at least certainly an important portion of
trying to reduce some of the red tape so that we can have more
resources to create jobs, has to do with the registration
process for banks and the deregistration process, and those
certain thresholds.
We have banks in my district in Merle, Virginia, the Fifth
District, that now will be affected by these new thresholds.
And with respect to the deregistration process, it is my
understanding that once certain paperwork has been filed, they
are immediately terminated from registration but have been
informed by the SEC that they will have to continue to file
periodic reports with the SEC for a certain period of time,
maybe 90 days.
I wonder if you could speak to that, the purpose of that
and why that is necessary, and if there is anything that can be
done to make it easier for these banks to have that certainty
and get through that process more quickly?
Ms. Schapiro. Congressman, I would like to get back to you
further on that, but my recollection is that the reason the
staff made that judgment was because there are people who are
receiving public disclosure about these registered reporting
companies that would no longer get any disclosure; therefore,
there ought to be a time period where they get some final
disclosure so they can make decisions about whether they want
to continue to own the stock, in light of the fact that there
will not be public reporting anymore.
So yes, they will have the burden a little bit longer after
they deregister, but the investors who own their shares will
also have the loss of information as a result of the
deregistration. So I think it goes to that, but I would be
happy to get you more information.
Mr. Hurt. It does seem to me that some sort of final report
might be in order. But it seems to me to make the periodic
reports for the time going forward, for 90 days or whatever, it
is seems not to be consistent, frankly, with the law--
Ms. Schapiro. I believe it may also be the current
requirement pre-JOBS Act. For companies, of course, that go
dark before two--just at much lower numbers. But let me come
back to you--
Mr. Hurt. Thank you.
Ms. Schapiro. --if I could on that.
Mr. Hurt. And then the other question I wanted to ask has
to do with the registration of private equity companies that
you have been very kind to discuss with us, and whether or not
your exemptive authority would apply in exempting P.E.
companies of any size, certain sizes, from registration. But in
particular I wanted to ask you about whether or not the
interpretive guidance that I think that you have indicated that
you all will be providing.
What is the status of providing that interpretive guidance
for the registered advisers that deal with these private equity
funds that would make clear that there are differences between
private equity and other financial services products?
Ms. Schapiro. Again, I know the staff has been working very
closely with the P.E. industry to try to answer their questions
and provide whatever relief would be appropriate under the
statute and I would be happy to get back to you on that
specifically.
I think you also know that we have tried very hard to scale
the requirements. For example, the systemic risk reporting for
P.E. is only for firms with over $2 billion under management.
And they only file very, very basic information annually.
So we have tried to be very sensitive to the fact that a
P.E. fund is different than a hedge fund and we understand
that. And P.E. is different than a liquidity fund and
different, frankly, than a venture capital fund and our
requirements are sealed to the potential risks that they might
pose. But I would like to come back to you, if I could, on
where they are exactly with the relief.
Mr. Hurt. I would appreciate that. Thank you very much.
Chairman Garrett. The gentleman yields back?
Mr. Hurt. I yield back. Thank you.
Chairman Garrett. I now recognize the gentleman from New
York, Mr. Grimm.
Mr. Grimm. Thank you, Mr. Chairman.
And thank you, Chairman Schapiro. You have been very
gracious with your time.
Trying to bring a little continuity--we were just speaking
about the JOBS Act. One of the provisions of the JOBS Act I
believe brings shareholder limits from $500 to $2,000. Just for
clarification, is that going to be implemented--is that
effective immediately or is that after all the rulemaking when
the rest of the JOBS Act is done?
Ms. Schapiro. I believe this requires some rulemaking. But
I don't think it is very much rulemaking in this regard, unlike
crowd funding which requires much more extensive rulemaking. I
am sorry--I am just not recalling the details.
Mr. Grimm. I will take that as, ``After the rulemaking, it
will become effective?''
Ms. Schapiro. I--
Mr. Grimm. Do you want to get back to me on that one?
Ms. Schapiro. Yes, I would like to get back to you because
in fact we have had one bank already come in to deregister and
we obviously haven't done rulemaking. So it may be that it is
immediately effective.
Mr. Grimm. Okay.
Ms. Schapiro. I am just not remembering exactly.
Mr. Grimm. That is fine.
In that same vein, my understanding is that it was drafted
in a way that it may not include savings and loans. But my
understanding is you have the authority within your purview to
fix that. Can you or will you fix that?
Ms. Schapiro. We are looking at that. I received a letter
about a week ago from a number of savings-and-loans asking us
specifically about that issue, so the staff is looking at that.
Mr. Grimm. Okay. Great.
Let me switch to the Volcker Rule for a second. As written
in the Volcker Rule proposal--could treat a mutual fund as a
banking entity in limited cases? For example, I think a bank
sponsor that has just launched a mutual fund and owns nearly
all the shares of the new fund. As a result, the mutual fund
itself would have to comply with trading and investment
restrictions of the Volcker Rule? Yet that fund, like all
mutual funds, will eventually become wholly shareholder owned.
The proposed rule also states that a banking entity is
prohibited from having an ownership interest interacting as a
sponsor to a hedge fund, private equity fund or similar fund as
the agency determines collectively. The proposed rule is called
a covered fund.
That term is defined so broadly that it could sweep in a
range of investment vehicles, even highly regulated mutual
funds. So my question is this: Do you agree that the Volcker
Rule should not limit a bank's ability to sponsor, invest, and
register investment companies?
Ms. Schapiro. I will say that these are issues that have
been raised in the course of the Volcker rulemaking. We have
gotten 18,000 comment letters. It is a joint rulemaking among
all the financial regulators. We are looking at it very
closely, including the prohibitions and the extent to which we
have any flexibility with respect to sponsoring funds. I don't
have an answer right--
Mr. Grimm. All right. I will broaden that. Congress'
intent, I don't think, was restricting a mutual funds trading
and investment activities.
Ms. Schapiro. I think that is probably right.
Mr. Grimm. Okay. Fair enough.
If we could go back for a second--my colleague asked about
MF Global. And you threw out some stats. I think it was 318
securities accounts, I suppose the vast majority being CFTC-
segregated customer funds.
Ms. Schapiro. Right. I believe there are 36,000 futures
accounts, and only 318 active securities accounts.
Mr. Grimm. Okay. That is what is bothering me.
That begs the question--when the SEC staff recommended
going with SIPC, Chapter 11; when you look at the
disproportionate number of accounts, this firm mostly was
covered by the CFTC. The vast, vast majority was covered by the
CFTC, which would make me lead that the suggestion should have
been to let the CFTC have the bankruptcy under Chapter 7.
Ms. Schapiro. SIPC handles the bankruptcy of the combined
entity, which was a broker-dealer as well as an FCM.
Mr. Grimm. Actually, my understanding is that the law says
that they have the ability to do so. It is discretionary, which
is why you had the conversation in the first place. You
wouldn't have needed a recommendation if the law said it has to
go under SIPC.
Ms. Schapiro. I don't recall that there was any discussion
about--and I could be wrong, and I certainly wasn't in on every
conversation--about whether or not to somehow try to separate
the broker-dealer piece of this from the FCM piece of it. And
of course, the trustee is working mostly to try to--
Mr. Grimm. No, but here is the problem.
Madam Chairman, here is the problem. Now that it has gone
Chapter 11, the segregated fund, the customers have become
creditors. They were never creditors. Had it been under Chapter
7, they would have been protected.
Because now they are going to be in U.K. foreign courts,
which you have seen with Bear Sterns, you have seen with Lehman
Brothers, years and years of litigation. But if you are a
creditor, that is fine. You have taken on that risk; but as
someone that has the protection of a segregated account--and
that goes back to your statement before that part of your
mandate is ensuring the integrity and consumer confidence of
the markets.
If I am a foreign investor and I am putting my money in an
FCM, I am told that money cannot be touched. It is protected.
Guess what? The decision that the SEC and CFTC made just turned
that upside down because that is not true anymore. Because the
monies that were taken out of those segregated funds,
unlawfully, however it was done, shouldn't have been done. We
understand it shouldn't have been done, but we know it does
happen. That is why we have criminal statutes in place. But it
does happen. People break the law.
The bankruptcy decision took away my rights as a customer
and made me a creditor. Why would I ever invest in the U.S.
markets again under those circumstances if regulators can
decide by bankruptcy law that now you are a creditor? And that
is why I think that in light of Bear Sterns, in light of Lehman
Brothers, we should really be looking at that.
Because those decisions matter, especially when it is 318
securities accounts, which means they really weren't doing much
securities business; over 36,000 customer accounts. They were
mostly an FCM, and, therefore, the CFTC should have put it
under Chapter 7, in my opinion.
I thank you, and I yield back.
Chairman Garrett. The gentleman yields back.
The gentlelady from New York is recognized.
Mrs. Maloney. Thank you, Mr. Chairman.
Thank you, Chairman Schapiro. And I hope that your day will
get easier from here.
With all that we have been talking about, it is clear that
one of the themes becomes management of limited resources, not
only from the standpoint of the broad economy, but also from
the standpoint of you as head of the SEC.
Even if you were to be granted the entirety of your
request, you would still probably be sorely challenged to get
accomplished the full slate of things that you have to do just
in terms of Dodd-Frank implementation. The Volcker Rule alone
strikes me as something that could consume all of your time.
So in light of that, I want to get your broader perspective
just on how you are prioritizing. Because it strikes me,
respectfully submitted, that you would want to prioritize your
tasks really, and guide us accordingly, as those who advise or
authorize the funding market impact of the rulemaking that you
have to promulgate; the rules that you have to promulgate,
including a cost-benefit analysis.
Obviously we have talked a lot about that, recognizing that
market participants also have limited resources to bring to
bear; the material fulfillment of your prudential role, which
Representative Grimm was just referring to obviously in terms
of MF Global, which is a prominent case that does shake
investor confidence; preventing overt fraud; having the
resource allocation to do those things that really were
antecedent to Dodd-Frank, that prudential regulatory role.
So I would submit to you that--and I know just about all of
us have chimed in about money market funds, but I do submit,
with all due respect, that given the reforms that were put into
place in 2010, the additional protections, it is not broke at
this point.
I haven't devoted any additional resources to that kind of
task at this moment, nor would I to the CEO compensation
calculations required by Dodd-Frank, which as you note are
arcane and abstruse at best, byzantine almost, and take
resources away from where we need them to be deployed without
any additional information, because clearly those discussions
about compensation ratios can be had within existing rules and
regulations.
So within that context, how would you propose really
prioritizing your menu of tasks over the next several months?
Ms. Schapiro. It is a great question.
I think from where I sit, our number one obligation is to
fulfill the mandates that Congress has given to us. And that is
Dodd-Frank and the JOBS Act right now. Those are high priority,
and they have been. We have been running at full speed since
Dodd-Frank was passed. Now we have the JOBS Act work to do. And
those would be two very high priorities.
I have a personal deep interest, and I think it is
incredibly important for the future of our country, frankly,
that we get market structure issues well in hand. We have done
a lot, but there is more to do. There is more to understand
about our market structure and whether the rules that govern
how our markets operate are still effective and still work,
given technology, given globalization, given complexity.
I think we have to continue to prioritize the internal
reforms, hiring the new skill sets, bringing in different ways
of thinking and doing things, and building our technology. We
have four incredibly important technology projects that we are
working on right now. Those have to continue to be a priority.
I also think we have to prioritize issues coming out of the
financial crisis--and I will disagree with you--like money
market fund reform, where a really devastating run was only
stopped because the taxpayers stepped in and guaranteed an
industry that should never have to be guaranteed by the
taxpayer.
So we have to explore those issues. How long that takes us
and where we land at the end of the day, I don't know. But I
think we have to be willing to have the debate and the
discussion. And so, I think those are all important areas for
us to be dealing with.
I will also put in the category of financial crisis areas,
a new look at our capital rules and our broker-dealer custody
requirements coming out of events like Madoff. We try to learn
from the bad experiences the agency has had and make sure that
we are doing what we can internally to make sure they don't
happen again, and where the regulatory regime needs to be
bolstered to do that as well.
So that is basically how I had prioritized them. And of
course there are a thousand decisions under those broad
categories.
Mrs. Maloney. Thank you, Mr. Chairman.
And I know our time has expired. I yield back.
Chairman Garrett. Yes, the gentlelady's time has expired.
The gentlelady yields back.
If the Chairman is amenable to staying for another 10 or 12
minutes for just the Members who are here or in the back room,
I will go through a proverbial lightning round for about--if we
do 2\1/2\ minutes each, that is another 15 minutes; because I
know you have been sitting there for some period of time.
So very quickly, I recognize myself. The MAP program,
Section 967, required of course that an outside look at the
SEC, as far as management and proposals for corrections,
administratively be done. Two reports have been submitted by
the SEC. These basically have been focusing on administrative
actions, and this is to my opening statements.
The SEC has spent approximately, from what I see in the
report on page 60, around $16.5 million for outside consulting
and staffing. This goes to your question about you all, I am
sure you are, working your hearts out here. Isn't this an area
where you all--basically you are chief operating officer,
should be working their hearts out and not putting this into
outside consultants?
Ms. Schapiro. I think they are working their hearts out,
but I don't think we necessarily had all the internal skills
that were necessary.
Chairman Garrett. But this is just administrative at this
level that they are trying to do.
Ms. Schapiro. Oh, no, but it is not.
For example, it is not administrative to redesign the
Office of Information Technology, create an Office of the Chief
Data Officer, and implement a continuous improvement program
where we have identified savings as much as we can.
Chairman Garrett. So how much money has been spent and will
be spent on outside consultants in these areas?
Ms. Schapiro. My understanding is that to date, we have
spent $8.5 million for implementation plan development,
modeling, risk management, and creation of the program office
to support the 17 work streams.
Chairman Garrett. And have the Commissioners--all the
Commissioners have not been involved. Only the chairman has. Is
that correct?
Ms. Schapiro. I have administrative responsibility for
running the agency. The Commissioners have all been briefed on
the work streams by the senior staff of the SEC who lead those
work streams. That is not led by--
Chairman Garrett. So you don't think that they should be
involved?
Ms. Schapiro. I am happy for them to be--I have a very open
door. I am happy for the Commissioners to be involved to
whatever extent they would like to be. And I think they have
all been briefed. They have all been asked for their input.
Chairman Garrett. Okay.
And one last question on another area, on ETF and ETF
backlog. This goes to the issue about--as far as money needed
for this.
I understand you are saying the suggestion is that it is an
issue of dollars and cents. They need more money. But Eileen
Rominger was I guess giving testimony or information over in
the Senate indicating that is not the case, that money is
really not the issue, that there are other issues here.
And part of the proof of the fact is that a backlog of ETFs
go back over all the way, 4 or 5 years, to 2007. So that would
say it is not a money issue. That is another issue. Maybe that
is a decision orientation of the department or the agency
instead.
Ms. Schapiro. No.
Look, sometimes there are money issues in terms of backlogs
being created where industry wants relief and we don't have the
people that we can throw at them. For example, we get about
2,000 self-regulatory organizations, including exchange,
filings, every year that have to be processed under Dodd-Frank
on a very short timeframe. We move resources from other places
to do that.
There are a lot of very complex issues with respect to
ETFs, particularly highly leveraged--
Chairman Garrett. In 4 of 5 years, there is some of these--
this--
Ms. Schapiro. I would have to go and look at what those
specific ones were. I am guessing that the staff does not
believe they can make the public interest finding to approve
those. But I would be happy to get back to you on the specifics
of those applications.
Chairman Garrett. Okay. So that may be an issue there as
far as what they are finding, as far as the public interest as
opposed to a lack of funding, particularly or actually coming
up and doing.
Ms. Schapiro. It is possible and it is possible it is a
combination.
Chairman Garrett. Thank you.
Mr. Stivers is eagerly writing down--
Mr. Stivers. Yes, I am dutifully writing down--before I get
to a question, I did want to associate myself with the remarks
from Mr. Dold on the municipal advisors rule; hopefully you
will redo that to avoid inadvertently capturing a bunch of
extra folks.
I also want to strongly associate myself with the question
Mr. Grimm asked about savings and loans. Clearly there was no
intent in this Congress to allow bank holding companies to move
to 2,000 shareholders, but not allow savings and loans. And
there may have been some inadvertent drafting that may or may
not limit it, but I know that you have the ability, as you
actually had the ability, you raised the capital limits from $1
million to $10 million over the years but left the shareholders
alone.
You actually had the ability as we have talked in my
office, to raise the shareholder limit and I hope you will use
your discretion to ensure that there is a seamless transition
for both banks and savings and loans to that 2,000 limit, the
1,200 to deregister because I think it is really important that
we don't change the competitive landscape between banks and
savings and loans on capital formations.
But my larger question is something that has not come up
much today and that is on conflict minerals. I know that you
have worked on some rules and you were talking about--the rumor
is that sometime mid this year there will be a final rule and
the problem that I know a lot of companies have is that they
are forced to prove a negative, which is really hard. And even
on trace amounts of minerals, they are potentially forced to go
through this.
I know there was at some point some discussion about maybe
trying to get some flexibility and latitude on really small,
almost minimal amounts of minerals. Do you know if you have
come to any conclusion on that, or is there anything that we
can do to help you on that?
Ms. Schapiro. I think it is the staff's view that there is
not really the flexibility to have a de minimis exception, in
fact, because most products that contain these minerals do
contain a very de minimis amount.
That said, we are working through an awful lot of issues
here; another enormous anxiety, I think, on both sides is
whether you believe in the conflict minerals rule as a good
thing or not.
We know there is a lot of interest in it and a lot of
anxiety and we are trying to work through to achieve the
congressional intent, but also to make it as workable as we
possibly can.
Mr. Stivers. I will say before my time runs out--actually,
I guess after my time runs out--we all want you to get it right
as opposed to do it fast.
Ms. Schapiro. ``Fast'' is out of the question, I would
say--
Mr. Stivers. Okay.
Ms. Schapiro. --but we are working on ``right.''
Mr. Stivers. Thank you.
I yield back the balance of my time.
Chairman Garrett. The gentleman yields back.
By the way, I don't know if you saw the 60 Minutes piece
this past weekend on Sunday--60 Minutes is on Sundays here--on
Lehman's.
I know whenever programs are on Sunday, we will get a call
on Monday about them. And the calls in general, with regard to
you all, the SEC, were all the folks who were at Lehman who
were from the SEC today.
The idea being, ``Should they have caught something and
didn't''--this was all Repo 105, and we have had some hearings
on that issue.
And so, the question is, ``Where are the regulators who
were actually inside Lehman's, not just the days before, but
for months before, and--''
Ms. Schapiro. That was all before my time--
Chairman Garrett. Yes.
Ms. Schapiro. --so I would have to go back and see who was
there and where they are now. I am sure some of them are still
with the agency, some of them are really talented people, but
they were part of--
Chairman Garrett. The piece on 60 Minutes--and 60 Minutes
is good for it, of course, as you know how 60 Minutes is--
Ms. Schapiro. Yes.
Chairman Garrett. --raises a question all across. And that
was a question--is, ``If they missed then, are they missing it
someplace else? Are they over at the Federal Reserve today
missing someplace else?''
Ms. Schapiro. What I will say is that they were part of a
program, the consolidated supervised entity program, which I
have testified--
Chairman Garrett. Yes.
Ms. Schapiro. --about before. It was started and ended
under my predecessor.
Chairman Garrett. Right.
Ms. Schapiro. It was wholly inadequately funded and
supported by the agency. They were a small handful of people, I
believe less than a dozen, responsible for the five largest
investment banks. And it was a voluntary program. So--
Chairman Garrett. Yes.
Ms. Schapiro. I think one of the lessons of that is that
voluntary programs don't work very well and if you are going to
take on the regulation of the largest banks in the world, you
need more than a dozen people to do it and they need to be
adequately trained and have authority.
Chairman Garrett. The other takeaway that--we get calls
from districts on that after the program--was the lack of civil
actions either by the SEC or by Justice. And I guess the report
that came out was the 2-year--a couple of years ago indicated
that perhaps that would have been appropriate.
Would you be able to say whether there is any--
Ms. Schapiro. I--
Chairman Garrett. --likelihood? Yes?
Ms. Schapiro. No, it would be inappropriate for me to
comment on matters that remain under investigation and
analysis. But I can tell you that our staff has conducted an
independent and extremely extensive investigation of all these
issues. They have searched through millions of pages of
documents. We have taken testimony of all the key people
including members of Lehman senior management, outside
accountants. We--
Chairman Garrett. The fact that you can't testify, does
that mean the fact that it is still under review?
Ms. Schapiro. It is still under review, I would say. But I
would also add that I saw 60 Minutes. I actually went out right
after the examiner's report was issued with the senior team
from the SEC and met with Mr. Valukas for several hours to go
through all of his findings and details so we would be sure
that we had a road map.
Chairman Garrett. Right.
Ms. Schapiro. But it is clear that, at least in my
experience, the illegality of conduct is something not quite as
clear cut as it seems to be or is reported to be. And it makes
bringing cases extremely difficult.
Chairman Garrett. Did you ever make a recommendation to
Justice, then, on something like this?
Ms. Schapiro. I think on this matter, we talked quite
extensively with Justice, as we do on many matters.
Chairman Garrett. Do you make recommendations to them like
go ahead with criminal charges?
Ms. Schapiro. Again, not speaking to this particular
matter--
Chairman Garrett. No to this--
Ms. Schapiro. --but there are certainly cases where we call
Justice and say, this is criminal conduct, do you need to bring
the case at the same time we are?
Chairman Garrett. And can you say whether you did that in
this case?
Ms. Schapiro. I can't say.
Chairman Garrett. Okay.
And will you be able to say on--are you able to say on this
case or any other case, or any other case when--like made up of
all the cases that we talked about here--are you able to say
when you finish an investigation--
Ms. Schapiro. Sure.
Chairman Garrett. --and when we come to you and then you
would say--
Ms. Schapiro. Sure.
Chairman Garrett. --``Our investigation is done and we are
either going to investigate or either going to recommend or not
recommend''--are you able to say at that point?
Ms. Schapiro. Once we have closed a matter and are not
bringing in an enforcement case, we have done that and clearly
we have done it with Madoff. I personally have spoken
extensively about the issues surrounding the Madoff matter and
we have done so in other cases.
Once the case is resolved--
Chairman Garrett. Yes.
Ms. Schapiro. --there is nothing that prohibits us--
Chairman Garrett. So it is not--
Ms. Schapiro. --from talking about it.
Chairman Garrett. --so it is not like sometimes with
maybe--I may be mistaken on this, over in criminal area and
FBI, they will say they will never tell you what the outcome is
if they complete their investigation, they just sort of end
them or something like that. You never know whether you are
done being investigated by them or something like that is my
understanding, at least that is what I hear.
Ms. Schapiro. I think we tend to, too.
Chairman Garrett. You draw a line--
Ms. Schapiro. I think we do. I couldn't tell you if we do
it 100 percent--
Chairman Garrett. Yes.
Ms. Schapiro. --of the time, but I think we do.
Chairman Garrett. Okay, I appreciate that.
Ms. Schapiro. Thanks.
Chairman Garrett. And with that, I only have one item to
put into the record, which is an April 24th article entitled,
``Lawyer Skewers Boston Fed Chief's Money Fund Comments,'' by
Beagan Wilcox Volz. And without objection, that is entered into
the record.
At this time, I appreciate the time and attention and
questioning and the answers from our witness, Ms. Schapiro. And
I thank you for being here on the 40--
Ms. Schapiro. I don't--42nd, 43rd--
Chairman Garrett. It all blurs together at this point. I
look forward to seeing you here again.
Ms. Schapiro. Thank you.
Chairman Garrett. Thank you.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for Members to submit written questions to this
witness and to place her responses in the record.
This committee is adjourned.
[Whereupon, at 12:46 p.m., the hearing was adjourned.]

A P P E N D I X

April 25, 2012

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