- FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2016

[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2016

_______________________________________________________________________

HEARINGS

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON APPROPRIATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

________________________

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
APPROPRIATIONS

ANDER CRENSHAW, Florida, Chairman

TOM GRAVES, Georgia JOSE E. SERRANO, New York
KEVIN YODER, Kansas MIKE QUIGLEY, Illinois
STEVE WOMACK, Arkansas CHAKA FATTAH, Pennsylvania
JAIME HERRERA BEUTLER, Washington SANFORD D. BISHOP, Jr., Georgia
MARK E. AMODEI, Nevada
E. SCOTT RIGELL, Virginia

NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full Committee, and Mrs. Lowey, as Ranking
Minority Member of the Full Committee, are authorized to sit as Members of all Subcommittees.

Winnie Chang, Kelly Hitchcock,
Ariana Sarar, and Amy Cushing,
Subcommittee Staff

______________________

PART 7

Page
Consumer Product Safety Commission.... 1

Federal Communications Commission..... 81

Securities and Exchange Commission.... 183

Statements for the Record............. 271

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

___________________

Printed for the use of the Committee on Appropriations

PART 7--FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2016

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2016

_______________________________________________________________________

HEARINGS

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON APPROPRIATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

____________

SUBCOMMITTEE ON FINANCIAL SERVICES AND GENERAL GOVERNMENT
APPROPRIATIONS

ANDER CRENSHAW, Florida, Chairman

NOTE: Under Committee Rules, Mr. Rogers, as Chairman of the Full Committee, and Mrs. Lowey, as Ranking
Minority Member of the Full Committee, are authorized to sit as Members of all Subcommittees.

Winnie Chang, Kelly Hitchcock,
Ariana Sarar, and Amy Cushing,
Subcommittee Staff
_____________________

PART 7

Page
Consumer Product Safety Commission... 1

Federal Communications Commission..... 81

Securities and Exchange Commission.... 183

Statements for the Record............. 271

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

______________

U.S. GOVERNMENT PUBLISHING OFFICE

97-181 WASHINGTON : 2015

COMMITTEE ON APPROPRIATIONS

----------
HAROLD ROGERS, Kentucky, Chairman

RODNEY P. FRELINGHUYSEN, New Jersey NITA M. LOWEY, New York
ROBERT B. ADERHOLT, Alabama MARCY KAPTUR, Ohio
KAY GRANGER, Texas PETER J. VISCLOSKY, Indiana
MICHAEL K. SIMPSON, Idaho JOSE E. SERRANO, New York
JOHN ABNEY CULBERSON, Texas ROSA L. DeLAURO, Connecticut
ANDER CRENSHAW, Florida DAVID E. PRICE, North Carolina
JOHN R. CARTER, Texas LUCILLE ROYBAL-ALLARD, California
KEN CALVERT, California SAM FARR, California
TOM COLE, Oklahoma CHAKA FATTAH, Pennsylvania
MARIO DIAZ-BALART, Florida SANFORD D. BISHOP, Jr., Georgia
CHARLES W. DENT, Pennsylvania BARBARA LEE, California
TOM GRAVES, Georgia MICHAEL M. HONDA, California
KEVIN YODER, Kansas BETTY McCOLLUM, Minnesota
STEVE WOMACK, Arkansas STEVE ISRAEL, New York
JEFF FORTENBERRY, Nebraska TIM RYAN, Ohio
THOMAS J. ROONEY, Florida C. A. DUTCH RUPPERSBERGER, Maryland
CHARLES J. FLEISCHMANN, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
JAIME HERRERA BEUTLER, Washington HENRY CUELLAR, Texas
DAVID P. JOYCE, Ohio CHELLIE PINGREE, Maine
DAVID G. VALADAO, California MIKE QUIGLEY, Illinois
ANDY HARRIS, Maryland DEREK KILMER, Washington
MARTHA ROBY, Alabama
MARK E. AMODEI, Nevada
CHRIS STEWART, Utah
E. SCOTT RIGELL, Virginia
DAVID W. JOLLY, Florida
DAVID YOUNG, Iowa
EVAN H. JENKINS, West Virginia
STEVEN M. PALAZZO, Mississippi

William E. Smith, Clerk and Staff Director

(ii)

FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR 2016

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Thursday, March 19, 2015.

CONSUMER PRODUCT SAFETY COMMISSION

WITNESSES

HON. ELLIOT F. KAYE, CHAIRMAN, CONSUMER PRODUCT SAFETY COMMISSION
HON. ANN MARIE BUERKLE, COMMISSIONER, CONSUMER PRODUCT SAFETY
COMMISSION
Mr. Crenshaw. This hearing will come to order. Just to let
everyone know, we are probably going to have a vote sometime
between 11:30 and a quarter to 12:00. Let's get started on
time. We will have time for the testimony and a few questions.
We will see what happens.
But just let me say that I want to welcome our witnesses,
Chairman Kaye and Commissioner Buerkle.
Chairman Kaye, you were only sworn in, I guess, late last
summer. However, you have been with the Commission for some
time now, and we appreciate your institutional knowledge as
chairman.
And, Commissioner Buerkle, we welcome you back to Capitol
Hill.
Ms. Buerkle. Thank you.
Mr. Crenshaw. Thank you both for being here today and
testifying on the Consumer Product Safety Commission's fiscal
year 2016 budget request. The Commission has the daunting task
of overseeing tens of thousands of consumer products. These
products are used daily by all of us, and it is important that
the Commission lives up to its mission of protecting consumers
from unsafe products, while at the same time ensuring that
American businesses and manufacturers are not adversely
impacted by unnecessary, onerous rules and regulations.
The President's fiscal year 2016 budget request for the
Consumer Product Safety Commission totals $129 million. That is
a $6 million increase over 2015. The request includes $5
million for a nanotechnology research center. I am very
interested to learn more about this initiative. Additionally,
the request includes $17 million in funding for the Import
Surveillance pilot program that has had some good success.
However, I am concerned with the Commission's request to
collect a fee from importers in an effort to expand the
program. So I look forward to your testimony here today
justifying the fee, but as well as for the outreach the
Commission has done with those involved in the global trade.
In the fiscal year 2015 omnibus this subcommittee included
$1 million for third-party test burden reductions, as we are
concerned that the Commission is not dedicating the appropriate
resources to this congressionally-mandated priority. I look
forward to hearing your testimony today on how the Commission
is implementing this mandate, and work you have done to reduce
the significant third-party testing burdens.
And finally, I am interested in learning more about how the
Commission works with all the stakeholders. The success of the
U.S. regulatory system for protecting consumers and minimizing
product hazards relies heavily on a cooperative relationship
between the Commission and all of the affected stakeholders.
Chairman Kaye, you have said one of your top priorities
when it comes to rulemaking will be addressing public safety
hazards. So I am interested to hear your testimony on outreach
to stakeholders so that the Commission can get the rules done
right instead of wasting your time and our time and resources
in litigation and lawsuits.
So once again, welcome to both of you. I look forward to
your testimony. I would like now to recognize my distinguished
ranking member and friend, Mr. Serrano.
Mr. Serrano. I noticed the hesitation after distinguished.
Mr. Crenshaw. I didn't know if you are a distinguished
friend or a distinguished ranking member. I think you are both.
Mr. Serrano. Friend. Thank you. Thank you, Mr. Chairman.
I would also like to welcome Consumer Product Safety
Commission Chairman Elliot F. Kaye and Commissioner Ann Marie
Buerkle, who also happens to be my former colleague from the
New York State delegation. I thank you both for making the time
to be here today. It has been several years since the CPSC has
had a hearing before the committee, and I am glad to have the
opportunity to discuss with you all of the fiscal year 2016
budget requests and other issues of great importance to
consumers.
The CPSC has an important role to play in protecting
consumers. It is responsible for ensuring that products for
sale on the domestic market pose no safety hazards or threats
to American consumers. Without CPSC's supervision the American
market would be overrun by products that could cause
significant deaths, injuries, and safety threats to consumers.
Providing adequate funding to this agency should be a high
priority for this Congress or any other Congress.
The agency has made significant advances over the past
several decades. Families and individuals have been spared
great harm as a result of the agency's work to recall household
products, such as toys, baby products, and household cleaners,
which are found to be defective and dangerous. This work cannot
be accomplished without the staff that the agency employs.
Unfortunately, employment within the agency has steadily
declined over the past 30 years. It seems that budget
constraints have impacted employment rates.
The decrease in employment is particularly troubling to me
as more and more products enter the market each year. I am
especially concerned with the agency's ability to continue to
provide consumers with necessary safety information and
regulate new products in the growing market.
The agency seeks to expand its research and development in
the area of nanotechnology in this year's budget.
Nanotechnology is being used to develop products from backpacks
to toothbrushes. The government spends more than $1.5 billion
per year on nanotechnology research and development, including
such things as military and material applications at agencies
such as DOD, Energy, and EPA, but spends about one-tenth of 1
percent or $2 million annually at the CPSC to understand the
safety implications of consumer products, including children's
products that utilize this technology. In the interest of
getting the agency ahead of the curve rather than behind it, I
believe Congress should consider supporting more funding for
this area.
I would also like to express my concern for the need to
increase the agency's presence at our borders. In the past few
years alone we have seen Chinese products come onto the U.S.
market that have been defective and dangerous for American
consumers. It is imperative that taxpayer dollars are used to
hire and train personnel who can work in conjunction with the
U.S. Customs and Border Protection to make certain that
defective products do not make it into our homes.
As a parent, a grandfather, and a consumer, I wholly
support the work of the Consumer Product Safety Commission. I
look forward to discussing these and other issues with you.
And I must say, Mr. Chairman, that this agency doesn't get
the attention from Congress that it should, and I don't mean
just in funding. A lot of people don't pay attention to it. And
yet it is probably one of those agencies that sets us apart
from the rest of the world, that we actually care about the
quality of our products and how they affect our children and
affect ourselves and affect the whole country.
Thank you.
Mr. Crenshaw. Thank you. And that is why we are having this
hearing today.
So, Chairman Kaye, we would like to recognize you for an
opening statement. If you could keep that within the 5-minute
framework we will have more time for questions. The floor is
yours.
Mr. Kaye. Thank you, Mr. Chairman. Good morning, Chairman
Crenshaw, Ranking Member Serrano, and the members of the
subcommittee. Thank you for the invitation to come speak about
the work of the United States Consumer Product Safety
Commission and our budget for fiscal year 2016.
I am also pleased to appear alongside my friend and
colleague Commissioner Ann Marie Buerkle, who brings great
leadership to many issues, especially our efforts to reduce
testing costs while assuring compliance with the law.
CPSC's vital health and safety mission touches everyone in
some way, each and every day. From the parent of the baby who
gently moves his or her child throughout the day from crib, to
baby bouncer, to stroller, and back to crib; or the self-
employed millennial who on a cold winter day relies on a space
heater to stay warm and an extension cord to power a computer;
to the baby boomer who purchased adult bed rails to help care
for an aging parent moving in, the products in the CPSC's
jurisdiction are inseparable from our daily lives.
We believe we provide an excellent return on investment for
the American people. We run a lean operation, especially
considering the thousands of different products in our
jurisdiction, and we cover them all with a budget in the
millions, not the billions.
We are very appreciative of the continued bipartisan
support for the Commission and our work. We saw the support in
the overwhelming, nearly unanimous passage of the Consumer
Product Safety Improvement Act of 2008, and we see it here in
the appropriation levels the Congress has provided. These
levels have allowed our dedicated staff to drive standards
development to make children's products safer, to increase our
enforcement effectiveness, and to better educate consumers
about product-related hazards.
Our proposed budget reflects our continuing efforts to
carry out and enforce CPSIA-driven enhancements to consumer
product safety. Unfortunately, not all of those priorities and
requirements are achievable at our current levels. For that
reason, we were pleased to see the President include in his
budget two important consumer product safety initiatives. Both
initiatives, if funded, will advance consumer safety and at the
same time provide real value to those in industry making or
importing safe products.
First, we are seeking a permanent funding mechanism to
fully achieve the intent of and direction in CPSIA Section 222.
Section 222 calls upon the Commission to develop a Risk
Assessment Methodology to identify likely violative imported
consumer products. In 2011, we created a small-scale pilot that
has been a success. However, the pilot alone does not fulfill
the mission and direction and vision of Congress and without
full implementation we will not be able to sufficiently
integrate CPSC into the much larger United States Government-
wide effort to create a single window for import and export
filing of all products.
If the CPSC can be fully integrated into the single window,
we can transform Congress' vision of a national scope, risk-
based, data-driven screening at the ports into a reality, a
reality that will mean safer products in the hands of American
consumers and faster entry for importers of compliant products.
Our proposed budget also includes increased funding to
address critical emerging health and safety questions
associated with the exploding use in consumer products of
nanomaterials. These materials offer many benefits. However,
there has been a significant lag in assessing possible health
effects of human exposure to nanomaterials in consumer
products, especially to vulnerable populations, such as our
children.
In light of the questions raised in the scientific
community about the effect that certain nanoparticles might
have on human lungs, concerns that center on identified
similarities to asbestos exposure, we are seeking to
significantly advance the state of the science as it relates to
human exposure from consumer products with nano.
In the absence of CPSC driving this work, it will not be
done by any other federal agency. All involved, companies
already using the nanomaterials in the products they make and
parents whose children are already using these products,
deserve to know sooner rather than later the answers to the
health questions posed.
Finally, I would like to discuss an additional priority of
mine, one that is not reflected in dollars but to me at least
makes a lot of sense. How we at the CPSC do what we do is often
as important as what we do. Since day one in this position I
have worked daily to try to establish a certain culture among
the five of us at the Commission level. The Commission, and
more importantly, the American public, are far better served by
an agency where we operate in a culture of civility,
collaboration, and constructive dialogue.
Of course for this to happen it requires a commitment by
all five of us. I am pleased to say that any observer of our
public meetings would agree that such a positive and productive
culture exists at the CPSC. There is no doubt we have policy
differences, but we discuss them with respect and stay focused
on merit-based policymaking.
Thank you again for the invitation to speak to you about
the CPSC and the lifesaving work undertaken by our staff, and I
look forward to answering any questions you may have.
Mr. Crenshaw. Thank you very much.

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Mr. Crenshaw. Now, Commissioner Buerkle, you are
recognized.
Ms. Buerkle. Thank you very much. Chairman Crenshaw,
Ranking Member Serrano, thank you for holding today's hearing
on the United States Consumer Product Safety Commission's
fiscal year 2016 budget and for giving me the opportunity to
provide testimony to the subcommittee. I had the honor of
serving alongside the subcommittee's distinguished members in
the 112th Congress, and it is good to be back on Capitol Hill
in my capacity as a Commissioner at the Consumer Product Safety
Commission. I hope that today's hearing will renew our
relationship of working together to keep America's consumers
safe from unreasonable risk of injury or harm.
I want to take a moment to acknowledge CPSC Chair Elliot
Kaye. While we may differ significantly on the policy issues,
the tone he has set at the agency is one of collegiality and
mutual respect. I believe that such an environment really
allows for real debate and discussion of the issues rather than
partisan arguments.
I have been a Commissioner at the agency since July of
2013, and what continues to impress me is the dedication of the
CPSC staff. They take our mission of safety very seriously.
Equally, I have been impressed by the cooperation and the
efforts made by the regulated community to advance safety
initiatives, as well as to comply with our regulations.
As a federal agency we are stewards of the American
taxpayer's dollars and we must ensure that the regulations we
promulgate are reasonable, balanced, and truly address a safety
issue. CPSC accounts for only a relatively small amount of our
Nation's spending, but we have a very significant regulatory
impact on the economy.
Today our national debt exceeds $18 trillion. Yet, the
President is proposing a $4 trillion spending plan for 2016 on
top of our debt, and I think that this number is equally as
staggering, the federal regulatory state in the United States
costs our economy an estimated $1.86 trillion annually, which
is more than the GDP of Canada.
Regulations are a necessary part of government, but I
believe that the CPSIA has forced too much regulation without
regard to risk, let alone cost-benefit. As a result, we are
unnecessarily burdening businesses, especially our small
businesses.
I did not support the Commission's 2016 overall budget
request of $129 million, in part because it calls for a $6
million increase over current funding levels and an $11 million
increase over what this subcommittee appropriated in 2015.
The intended use of the funds is also of concern to me. In
2011 Congress directed the CPSC to explore ways to reduce costs
associated with third-party testing. To date, the Commission
has done very little to approve actual burden-reduction ideas.
I am grateful to this committee and to the House for including
the $1 million for burden reduction in our 2015 appropriation,
and I hope that our agency will spend the money wisely. I am
disappointed that the President's budget request did not follow
your lead in funding burden reduction.
Test burden reduction and safety are not mutually
exclusive, and I think that burden reduction must be a part of
our operations at CPSC. One of the most challenging things for
anyone to do is prioritize scarce resources, whether it is a
hard-working family sitting around their kitchen table or the
leadership of a regulatory agency. However, in this climate of
a weak economic recovery, we all must make tough choices to be
fiscal responsible while remaining true to our mission.
With that in mind, I am also concerned that CPSC may be
spreading itself too thin. The agency has clearly identified
import safety as a major priority. We got a significant boost
for that program in our 2015 appropriation, and I would like to
see our agency focus on that issue before we expand efforts
elsewhere.
CPSC should become more collaborative, not only with
consumers and consumer groups, but also with manufacturers and
the regulated community. The agency should spend more of its
resources on education and outreach, educating consumers about
potential hazards, as well as informing the industry about how
to comply with our law and regulations. I urge greater
collaboration with the regulated community by placing greater
emphasis on voluntary standards rather than mandatory
standards. We should seek out where we can build public-private
partnerships to achieve our common goal of safety.
Rule review must be a greater priority for CPSC so we can
better understand what regulations are effective and which ones
are not. Doing this will allow us to ensure that the rules we
have promulgated are meaningful, and more importantly, actually
improve safety. Rules that are not working or are no longer
necessary must be amended or should be repealed.
The common goal for all of us, Congress, CPSC, industry,
and consumers, is safety. We are all people who have families
for whom we want safe products. I have 6 children and 16
grandchildren, and I do not want dangerous products hurting
them or any American. But the United States Government cannot
and should not try to establish a zero-risk society. We must
find a balance that keeps people safe from unreasonable harms
and risks, with solutions that actually address a problem so
that the regulated community is not unnecessarily burdened. We
must do so in a way that spends the American people's tax
dollars efficiently and effectively.
Thank you very much for the time to be here today, and I
look forward to answering any questions you might have.
Mr. Crenshaw. Well, thank you very much.

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Mr. Crenshaw. Let me just start. And, again, we are
probably going to be voting before too long, but I think we
will have a chance to get a few questions in. And I want to
start with this import surveillance.
As I understand it, you are proposing to expand the program
that you have now through I guess a fee, and there is some
concern that that has an impact on international trade, things
like that. Now, can you tell us what you are doing to make sure
you are not going to duplicate any other efforts? Are you
talking to the stakeholders involved? Are you going to form an
advisory committee? How do you propose to put that in place and
make sure you are not doing something that is already being
done?
Mr. Kaye. Thank you, Mr. Chairman, I appreciate the
question.
Yes, absolutely. We have gone through all of those steps,
one, to make sure we are not duplicating any other effort by
any other Federal agency. And from our perspective, we look at
the post-9/11 era when Congress looked to the border agencies,
there are 47 agencies that have a presence at the border, and
to seek a way for those agencies not only to be better at what
they do to screen items that are coming in, but to coordinate
and collaborate better to make sure that the United States
Government is talking and then talking back to the trade. And
it is something the trade has been seeking.
And so in the SAFE Port Act of 2006 the Congress required
the agencies to go online and require e-filings through the
International Trade Data System, ITDS, which is a Customs-
related entity, as well as with Treasury, and also to do it
through the Automated Commercial Environment, the ACE system
that Customs runs.
What changed everything was the President's executive order
from a year ago February where it significantly accelerated the
timeline to get all of these agencies into the single-window
system that I referenced in my testimony. And so what the CPSC
is trying to do is to play its part. We have been identified as
one of the 14 key border agencies by the Department of Homeland
Security and Customs and Border Protection as being a necessary
entity to have the capability to participate in that single-
window effort. And the vision of that single window is that if
a trade entity is bringing in compliant products, they will
move through much more quickly and the government will be able
to focus its efforts on those parties that are not following
the rules.
And so everything we have done to try to implement our RAM
system, both our pilot that you and I referenced in both of our
testimonies, as well as the full-scale version that we are
seeking, is consistent with that effort. And we also, to your
question about advisory groups, we did set up through the
Department of Commerce and Customs, they have a Commercial
Operations Advisory Committee, we set up a special subcommittee
on consumer products where we are engaging all the key,
relevant members of the trade to make sure we get this right.
All of the agencies that are participating in the single
window are creating pilots to try to test the system so that
when it goes live at the end of the year, at least the initial
part of it, it has been stress tested and we can see that it
works. And we are doing one of the pilots, and we had a webinar
last week.
Every 2 weeks we are having these sessions with this
Advisory Committee to make sure that as we do our pilot and as
we take other steps to try to get online with the single window
that we will have gotten it right. But the key to that is we do
not currently have the funding mechanism to be able to join
that single window and to deliver our part of moving compliant
trade more quickly through the ports and stopping those that we
should be focusing on.
Mr. Crenshaw. Thank you.
Commissioner Buerkle, do you see it that way?
Ms. Buerkle. Not exactly, Mr. Chair.
First of all, I kind of want to separate it out. It becomes
very complicated when you put them all together because I think
there are separate initiatives we should talk about. And I will
just say for the record that I am not a proponent of user fees.
I think constitutionally they are questionable. You cannot
charge an individual for a service they haven't received. And
the money would be used to build the system. So I think there
is a constitutional issue and a fairness issue. Some will not
even avail themselves of the service. But, primarily, the
Constitution is my concern with the user fee.
Beyond that, I think we have to look at this in three
steps. The initiative, and the chairman referred to, I am so
pleased that he has opened this up to the public in discussion,
is the 1110 rule for the agency, which is electronic filing of
a certificate of compliance if someone wants to bring product
into the country. Until we get that piece in place, we have no
mechanism to comply with the next piece of this, which is the
executive order, which is allowing it to come through a single
window. So first we need the 1110.
Now, gratefully, the agency is doing a pilot, which will
start January 2016, which I think is a very wise thing to do
because when you are involving so many players and so many
parties and you are talking about bringing trade to its knees
if we don't get this right. So the pilot is a good idea. So
that is the 1110.
That final 1110 rule in the e-filing probably won't come to
fruition for a couple of years. The next part of the money we
were given in 2015 is being used to--it is a need survey that
is being done, a requirements survey. We are spending $1
million on it to put it out for bid and to have it contracted
to look at how and what the RAM system, as we expand it, should
be and how it should work. That makes sense. And before we do
that and complete that and identify the needs of CPSC, I think
we should do that first, and then spend the money on expanding
the RAM.
But I think it is important when we talk about this Risk
Assessment Methodology, that is RAM, is that we right now have
the capability to look at every line for every article that is
coming into the United States. We don't have the people. We are
not collocated at many of our ports with CBP. And that is where
the money, the additional of the $4 million from last year,
part of that will be used to ramp up our presence at the
borders, and so that is a good thing.
But my thought is in all of this, we are affecting so many
stakeholders. This is a difficult, complicated issue. We can
take it step by step. Let's get the e-filing done, then let's
look at what our requirements survey showed, build out the RAM,
and make sure that we can communicate electronically with CBP
so as those certificates come in we are not stopping trade or
bringing it to its knees.
Mr. Crenshaw. Well, thank you.
And my time has expired, and I hope somebody will ask about
the $1 million that we appropriated to reduce some of the test
burden.
But right now let's go to Mr. Serrano.
Mr. Serrano. Thank you.
I had a budget question to ask both of you, but I was
inspired by something you said, Ms. Buerkle, that I would like
both of you to comment on.
I am not interested in wrecking American business. But we
got to be the country we are because we said early on, before
many countries said it, the air you breathe should be cleaner
than it is, the water you drink should be cleaner than it is,
you shouldn't be poisoned, the clothing you wear should not by
simply going near a stove light up and burn you. Those are
regulations, and that is a bad word in some cases. So where do
you find the balance between protecting the American consumer
and not hurting American business?
Some people would say, well, he is a classical liberal
Democrat, he is against business. No, I want business to
survive. I am a capitalist. I want it to survive. But I also
want my children and grandchildren to be safe. I want to be
safe.
So, again, remembering that we, by setting up certain
regulations, went ahead of other countries in how we behave. I
mean, I remember, and I will close with this, growing up in New
York City when I was 15, 16--you may know this--by 6 o'clock in
the evening your eyes, your ears, your nose were dirty with
just the pollution that was coming off the chimneys. It took a
regulation to stop that and people don't breathe that way in
New York City any longer.
So where is the balance? To both of you.
Ms. Buerkle. Well, I will start.
Mr. Serrano. Sure.
Ms. Buerkle. I think you have identified what the problem
is and what the difficulty is when you are making a decision as
a regulator. We will go back to the import surveillance and the
need to make sure that the product brought into this country is
safe. Currently in place we have this Risk Assessment
Methodology that will look at the lines of product coming in.
The system that is set up assesses a priority or a risk, so if
it is a manufacturer who has had difficulties before that will
be highlighted and that product will be looked at.
So there is a system in place. It does need to be made so
it can communicate with CBP and the whole single-window
initiative, and that is a very important piece of this. But it
is not to say something isn't in place right now. The RAM pilot
can be a little bit misleading because it is not that it is not
at every port. It is. But I would say personnel and having
people collocated at the ports and being able to investigate
and look at that product is a piece that is missing, but
thankfully we got some additional money for new staff not only
to be collocated, but also to work on our compliance.
I think when we look at any regulation we have to find the
balance. And as I said in my comment, I have children and
grandchildren and we want safe products. But I think we have to
begin to have an appreciation that industry wants safe
products. They are people with families who want safe products.
They are people who want to have a good brand. No manufacturer,
no importer, no retailer wants to have a product that injures,
or worse, hurts or kills someone. That is not what they are
about.
And so if we can partner with them, I think that is going
to be very important so that when we promulgate regulations
they make sense, they are balanced, and they do protect just
what you are talking about.
Mr. Kaye. Thanks, Congressman.
It is certainly something we spend a lot of time thinking
about. I can promise you that. We recently, the Commission
approved a rule to require a performance standard for the first
time for small high-powered magnets. You may have seen this in
the news. These are tiny little spherical-sized or shaped
magnets that are basically adult desk toys. Kids were getting a
hold of them. They were swallowing them. They were ending up on
opposite sides of kids' intestines. They were boring their way
through because they are so high powered. And they were
creating awful, life-altering injuries, and in one case of an
Ohio child, unfortunately, it took her life.
This was a very challenging rulemaking for us because you
had on one side some phenomenally interesting, entrepreneurial
companies that were doing great things with these magnets, and
on the other side you had this rampant spate of injuries that,
unfortunately, continues while there is still product out
there. And you had doctors coming in and surgeons saying, you
have to do something about it, you have to save these kids. And
parents were up in arms over that. They couldn't control them
in their household. They didn't even know they were in their
household. They were coming in attached to backpacks and belt
buckles, and the parents didn't know that the kids had picked
them up at school.
And so we weighed that very heavily. That was a very, very
difficult choice, and it was actually the first time that I was
the chairman of the agency when the magnets rule was finalized,
and during my statement, I spoke to the owner of the company
who is going to primarily be affected by that. And I weigh
those all the time. It is constantly on my mind. And we try to
do the best we can. The law, the Regulatory Flexibility Act,
requires us, and we follow it, to focus on small businesses and
the impact on small businesses. So that is always at the front
of our mind. But this idea that there are these faceless
bureaucrats in Washington who don't think about it is totally
false.
And I know that the time has expired. The last thing I want
to mention, though, is we had the longest hearing in the
history of the agency back on January 7 and it had to do with
recreational off-highway vehicles. And we spent, we started in
the morning, Commissioner Buerkle remembers it well, and we
finished it and it was dark out at night. And we had panel
after panel of all different types of folks coming in and
talking to us about our rulemaking. And the point of that was
to try to get it right.
So we do think about these issues. It is certainly at the
top of our minds and it will continue to be.
Mr. Crenshaw. Thank you.
Mr. Serrano. In closing, Mr. Chairman, we spend a lot of
time, as we should, worrying, being concerned about the working
conditions of people who make products overseas and so on, and
I think we spend less time concerning ourselves with the
products they are producing.
And my concern goes back to the fact that I am one who
believes we do live in the greatest country on Earth, but we
didn't get here without a certain behavior. And if that
behavior is overburden, people are overburdened, we should look
at it. But we should not just discard it as just more
government oversight or whatever that is bad.
Mr. Crenshaw. Thank you.
Ms. Buerkle. If I could just answer----
Mr. Crenshaw. No, we are going to try to give everybody a
chance.
Ms. Buerkle. I am sorry.
Mr. Crenshaw. Mr. Rigell.
Mr. Rigell. Thank you, Mr. Chairman.
And, Chairman Kaye and Commissioner Buerkle, thank you very
much for being here.
And I noted with appreciation, Mr. Chairman, your emphasis
on civility and collaboration and constructive dialogue, and
that was affirmed in the Commissioner's written testimony as
well, and I appreciate that.
I would like to draw your attention, Chairman Kaye, to the
disposition of the interpretive rule. I am not an expert on
this, but we are going to pursue this line of questioning
because I think it would be helpful here, and the process by
which firms work through the Commission to implement voluntary
recalls.
The budgetary pressure that you are under is going to
continue, essentially into perpetuity. That is just the nature
of where we are as a country and the sharp increase in the
number of seniors and just some other things that are taking
place. We are seeing it on every single line item of our
federal budget.
So within that framework, and with the shared goal of
ensuring that American people can buy products with confidence,
that these products are not going to hurt them or their family
members, we need to look for efficiency and to be very creative
in how we approach the governance side here. And it seems to
me, based on the information that I have, that we are going in
the wrong direction when we make it more difficult or we put in
roadblocks and disincentives to voluntary recalls.
I would like for you to respond to that, please. And if
there is a difference in view with yours and the
Commissioner's, Commissioner Buerkle, I would like to give her
an opportunity to respond as well.
Mr. Kaye. Absolutely. Thank you, Congressman. And before I
address that, I do want to thank you for the Drywall Safety
Act. We have discharged all of our obligations under that act.
Mr. Rigell. Thank you so much. So many have hurt so badly
financially, and I wish we could do more. But thank you for
what you have done very much.
Mr. Kaye. Yes, and thank you for that law.
So the voluntary recall notice rule that you referenced
began under a prior chairman, and at that time I did not work
on that rule. And everything I am saying I have said already in
the public, so I am not giving anything away here. It was not
something that was part of my portfolio. By the time I became
Chairman, I was interviewed in my office by our three leading
trade papers and media that came in to talk to me about my
priorities. And what I have said then, and I will say it again
now, is my priority is that the Commission work on safety
rules, rules that have a clear, justifiable impact on safety.
And so I think my track record since I have been chairman is to
focus on those kind of rules.
Now, there are folks behind me right now who have been
impacted by that work, who may not like that we are doing it,
but it has to do with products that have a demonstrated
history, unfortunately, of what I would consider to be an
unreasonable risk of injury.
So this is a way of saying I have a higher priority, or a
series of higher priorities than the voluntary recall notice
rule. I have not spent time on it since I have been chairman.
Mr. Rigell. So it is essentially static then? I mean, it is
set aside and you haven't picked it up and pursued it. I am
just trying to understand your position on it.
Mr. Kaye. Yeah, I have not. That is not to say that it is
meritless. I just have never studied it closely enough because
I didn't work on it. I have not yet read the comments. I think
that there is value to having some type of template for these
voluntary recalls so that they can move through the process
more quickly. But, again, I have higher priorities than that
rule.
Mr. Rigell. Okay. Thank you.
Commissioner.
Ms. Buerkle. Yes. With regards to the voluntary recall, my
concern with that is, and we have heard from both sides of the
aisle on this issue, we have a very successful fast track
recall program at the CPSC and this will impede the process and
the speed at which products with be taken out of the market if,
indeed, they are dangerous.
Mr. Rigell. To be precise, Commissioner, when you refer to
this, this would be the proposed rulemaking if implemented.
Ms. Buerkle. The proposed rule for, yes, voluntary recall.
Mr. Rigell. Yes.
Ms. Buerkle. Now, to the Chairman's comment, and it is
true, we have not taken any steps to further these two issues.
And I say two because there is a second one, information
disclosure, which we call 6(b), two very controversial proposed
rules. And what I would like to see is, because they are both
set in our operating plan for final rules in 2015, what happens
is, is there a lot of angst and uncertainty out with those
stakeholders who will be involved with this. And that is a
problem because there is uncertainty as to whether or not we
are going to move forward with these proposed rules.
And I would like to see some resolution on that. If we are
not going to take action on them, we really should get them out
of the operating plan so we can create certainty for the
stakeholders.
Mr. Rigell. That sounds like compelling logic.
And I thank you both for your testimony today, and out of
respect for my colleagues I am going to yield back. Perhaps we
can get another line of questioning in before they have to go
vote.
Thank you.
Mr. Crenshaw. Thank you very much.
They just called the vote, but I think we have two members
that would like to ask questions, and if we could all pay
attention to the clock I think we can have those questions, and
then we will probably have to go vote.
So Ms. Herrera Beutler.
Ms. Herrera Beutler. Thank you.
And you referenced, Chairman, the ROV rulemaking. As
someone who grew up in southwest Washington State I remember
riding different off-road vehicles as early as 6 years old. My
family would go out. We would go camping, go with other
families. It was one of the ways my mother kept my brother
focused because he was passionate about it. And in southwest
Washington we have a community that is just as passionate.
And, quite frankly, this is going to sound a little funny,
but we weren't wealthy. You can pick a hobby as a family and
you can find a way to do it that is reasonably affordable. So
when I am thinking about this community we are not talking
about millionaires and billionaires. We are talking about
average middle-income families who as a family have chosen to
do these type of activities together. And so the affordability
piece is incredibly important to me.
Two thoughts. You referenced the long meeting, and what
concerns me the most is that you made the decision, and anybody
who is going to use an off-road vehicle assumes a certain
amount of risk, whether it is a bicycle or a motorized vehicle
or whether you are going to go hiking. I mean, there is a
certain amount of personal risk that you have to take into
account. Parents, families have to make these decisions. And I
know over the years, things have, based on data, scientific
data, information that we have about incidents, there have been
appropriate adjustments and changes. Right? There have been
appropriate standards put in place. I am not talking about
that.
What concerns me is it seems or it appears that the
requirements were made, but we don't--I mean, actually, I have
one of your quotes here. ``Thus, we cannot estimate the
potential effectiveness of the dynamic lateral stability and
the vehicle handling requirements in preventing injuries.'' So
I don't know how you can say that and then make the rule about
it. Perhaps you could speak to that.
Mr. Kaye. Sure, I would be happy to. And all I would ask
from anybody who is going to look at this issue, and I don't
think that this is an unfair thing to ask, is that you not only
look at the materials that have been provided to you by folks
who have a specific interest in it, but you actually take the
time to please read the entire rulemaking package. I know that
is a lot to ask, and I appreciate from having spent 8 years as
a staffer on the Hill how limited your time is, but the
rulemaking is that serious and that big a deal, especially if
you have a personal history in these vehicles.
Ms. Herrera Beutler. So I guess I understand that. I guess,
specifically, though, I would like you to speak to that quote.
Mr. Kaye. Sure.
Ms. Herrera Beutler. That you are making a rule for which
you don't know and do not have the data to say it is going to
be effective.
Mr. Kaye. So I understand why the groups that are opposed
to that rule have latched onto that quote by our staff in the
draft package.
Ms. Herrera Beutler. I got it off Google as I am sitting
here.
Mr. Kaye. Right. And that quote has been used a number of
times. That quote was pulled from the economic analysis portion
of the rulemaking package, and it has been taken out of context
because what the staff was saying is we are not able to at this
point, based on the limited economic data that is available,
quantify the specific dollar amount of the benefits associated
with the rulemaking package. That is a very different concept
from saying we can't figure out whether or not what we have
proposed works, and I think that is an important distinction to
state in this hearing.
Ms. Herrera Beutler. So just a quick follow-up on that. So
you are saying you actually do have the ability to estimate the
effectiveness of the dynamic lateral stability and vehicle
handling requirements in preventing injuries.
Mr. Kaye. Absolutely.
Ms. Herrera Beutler. I didn't read anything in there
about--I wasn't talking about dollars. We are talking about
injuries. Obviously, that is the most important thing.
Mr. Kaye. Correct. And that is the frustration from our
point, is that that quote has been lifted out of a section that
had to do with economic analysis and figuring out specific
dollar amounts of benefits as opposed to injury reduction.
The staff figured out, based on an analysis of vehicles
that had been subject to a recall, the line, from their
perspective--and I am not a vehicle dynamicist, so I am telling
you what our technical experts--we all rely on technical
experts and scientific experts--they figured out that if these
vehicles were designed in such a way as to lower their rollover
resistance, there would be a line between the current ones on
the market that don't meet the standard, that have a propensity
to roll over all too frequently and kill people, and those that
wouldn't. And they can definitively state from their technical
analysis that they believe that will make a tremendous
difference in the number of deaths and injuries associated with
these vehicles.
I also want to speak to your point about assumption of
risk, and I completely agree with you. But what is lost in that
discussion often is that the consumer is informed. I think we
all believe and agree that a consumer has to be informed before
a consumer can properly make an assessment about risk. What has
been difficult for us with these products is many of them are
designed in such a way that when the consumer goes to turn the
vehicle, and maybe you experienced this when you were riding on
them with your family----
Ms. Herrera Beutler. I rode a three-wheeler.
Mr. Kaye. Okay. Well, thankfully those----
Ms. Herrera Beutler. So if you really want to talk about
it.
Mr. Kaye. Yeah, exactly. Well, those don't exist anymore,
or shouldn't.
The vehicles turn, when they start to turn, unlike a car,
they turn in a much more sharp fashion than the driver may
intend. From our experience, we are not so sure that drivers
fully appreciate that, especially new-time drivers to
recreational off-highway vehicles. And as I mentioned, since
that is the opposite experience that we have in automobiles,
that goes to being informed. We don't think consumers are
informed.
Ms. Herrera Beutler. And I agree with that. And I will
yield back. I guess, I mean, you are not going to put a 12-
year-old for the first time ever on a high-powered quad. I
mean, there is some----
Mr. Kaye. People do, though, all the time.
Ms. Herrera Beutler. So if I understand you correctly, then
you are taking it a step beyond that and telling parents when
and how. So there is a difference between information and
assuming that you have the right to parent everybody's
children.
Mr. Kaye. Absolutely. I totally understand that.
Ms. Herrera Beutler. And I do need to yield back, although
I do want--can she----
Mr. Crenshaw. Just very briefly.
Ms. Buerkle. Very briefly.
Mr. Crenshaw. We have got some time. There are 350 Members
haven't voted yet. But they all started voting.
Ms. Buerkle. I think the biggest issue with ROVs is that
there is this pursuit by the majority in the Commission to get
to a mandatory standard. In 2014 there was a new voluntary
standard that was passed and the Commission never looked at
that 2014 standard before it got to this proposed mandatory
standard. The industry is very engaged. They want to work with
us. And we have been directed by, bipartisan, two letters from
the Senate saying work hard to get to a voluntary standard, do
not push this to a mandatory standard.
And that has been my frustration, because I continue to say
there is so much uncertainty, there are so many questions we
all have to ask about this. We had a successful tech-to-tech
meeting in October. Let's do that again and again until we can
reach a consensus about what we agree on, what changes we can
make, so that we end up with a voluntary standard, which I
think is the intent of Congress.
Mr. Crenshaw. Thank you very much. Thank you.
Mr. Amodei.
Mr. Amodei. Thank you, Mr. Chairman.
Mr. Chairman, I am a process guy. And so I am looking at
the rulemaking stuff and I see that there have been some FOIA
issues where your own counsel says, hey, we have got a problem
and blah, blah, blah, we need you to disclose. So I am assuming
that, because you have indicated you are a process person too,
that there will be an extension in that comment period for
those folks to fully digest when they get FOIA compliance, so
that everybody has the amount of time that is anticipated by
the reg to do whatever they are going to do to have their best
shot, correct?
Mr. Kaye. So we have already had one extension of the
comment period, and as of I think 2 days ago now everything has
been turned over, that under the FOIA laws, that we should have
already turned over. And I agree completely with you. It is
unfortunate that we didn't get it right the first time. But
there is a process in place under FOIA, there was an appeal,
and the process worked. And so we did end up turning over all
that data.
We do have a pending request that you referenced in front
of us for further extension of the comment period. My
understanding is that we might be getting an additional request
from a different part of the industry community. We are waiting
to see if that one comes in.
And then I can't unilaterally do that. That is a Commission
requirement. And so when the staff sends up their
recommendation to us, we will take that into consideration.
We don't always go with what the staff said. We had a
recommendation on a different rulemaking last week where the
staff recommended we do not extend the comment period. We
overruled that recommendation and went ahead and extended that
comment period.
I can give you this commitment, and I am going to slightly
disagree with my colleague. There is a pursuit. But the pursuit
is not to do a mandatory rule. The pursuit is to get to an
effective rule. So I am going to continue to be committed. And
when I say effective standard, that could be a voluntary
standard. During that 7-hour hearing that I referenced, I
begged, and there are some of the individuals in the room
behind me right now, I begged those with the power in the
voluntary standards community to reopen the standards process.
That is the mechanism for us to join them at the table and
create an effective voluntary standard.
To date, they have declined to do that. I can't make them
do that. You probably could.
Mr. Amodei. And I appreciate that. But the question is not
what are you going to do on the substance. The question started
with, I am a process guy. And so when I have your own counsel
telling me that you didn't meet the law, and I have got single
digits of days from when that is complied with to when the
thing is at the end of it, and then you come tell me, and I
know you can't do it yourself, but in a general sense, it is
like if they have got 48 hours after you finally comply, after
your own counsel says we didn't meet the standards, I would
think that would be a strong case for giving these people,
whoever they may be, the benefit of the process.
Mr. Kaye. I agree. I agree. And my track record has been
fairness.
Mr. Amodei. I am not attacking your track record.
Mr. Kaye. No, and I appreciate that.
Mr. Amodei. I want to make sure that you are a process
person.
Mr. Kaye. I am definitely a process person, and I would
imagine that Commissioner Buerkle would agree.
Mr. Amodei. Thank you very much.
Ms. Buerkle. Mr. Chairman, could I just add one quick
comment to that?
Mr. Crenshaw. Certainly.
Ms. Buerkle. And that is the suggestion of opening up the
standard, the voluntary standard. The general way a voluntary
standard and the ANSI standards are done is not public. And if
CPSC opens up this voluntary standards hearing, it then becomes
public because of our limitations. So it is better to let the
ANSI process work the way it always works and not try to change
the ANSI process into getting a voluntary standard.
Mr. Crenshaw. Thank you very much.
Let me just finally say, this whole question about
balancing safety with the impact it has on commerce, I didn't
get a chance, but I want you to just be aware that Congress
said that we have got to relieve some of that test burden that
we are having. That is why we gave you an extra million
dollars, because we thought that whole concept was languishing
somewhere. I think your report was due on March 16. It has just
come in. We will look at that. But I hope you will continue to
make that a priority.
So with that, this hearing is adjourned. Thank you so much.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Tuesday, March 24, 2015.

FEDERAL COMMUNICATIONS COMMISSION

WITNESSES

HON. TOM WHEELER, CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION
HON. AJIT PAI, COMMISSIONER, FEDERAL COMMUNICATIONS COMMISSION
Mr. Crenshaw. The meeting will come to order. I want to
welcome our witnesses Chairman Tom Wheeler, and Commissioner
Ajit Pai, from the Federal Communications Commission. This will
be the second time, exactly 364 days, since you were both here
before, but who is counting? Welcome, and thank you for being
here today. The focus of the day's hearing is the FCC's fiscal
year 2016 budget request. The Commission has requested a total
of $413 million, or a $73 million or 21 percent increase over
the current level of funding. Within your fiscal year 2016
request is a $25 million transfer from the Universal Service
Fund to augment the commission's funding. A large part of your
requested increase is for a potential move from your current
location, and I have some questions for you regarding the cost
of this move. But a 21 percent increase is far more than most
agencies have seen in recent years.
While the FCC is fee-funded, these fees are directly passed
on to consumers, as is the funding for the Universal Service
Fund. Because of this, I believe the committee's oversight over
the FCC activities is especially important and I take this very
seriously. This committee has held the FCC's funding at a flat
level since 2012, because we believe that the commission can
and should do less with less. We believe you all should do a
better job of managing your resources and focusing on your core
operations. Unfortunately, the commission seems to be pursuing
politically charged issues, rather than the mission-critical
work of the FCC.
I heard Angela Merkel talk about the difference between
Europe and the U.S. in terms of Internet regulation, and one of
the things that she said was, in Europe, we tell them what they
can do; and in the U.S., you tell them what they cannot do. And
I think that is interesting, because when there is a lot of
competition there is not as much need for regulation. The
Internet has been an unparalleled catalyst for innovation, yet
the FCC, just a month ago, voted to constrain and control
something that has brought about innumerable technological
advances and American jobs. The recent rule-making puts both
broadband Internet and wireless Internet under a 1930s-era,
utility-style regulation regime, which I believe is outdated,
backwards, and most importantly, stifles job creation and
innovation. These rules will slow down critical broadband
investment at a time where our economy is still rebounding.
Today's U.S. Internet market exceeds Europe's in both
competition and investment. American Internet users have more
choices than our European counterparts, and yet we are moving
toward more onerous and restrictive regulation. I do not think
anyone could imagine where the Internet would be just five
years ago. The idea that the FCC is capable of anticipating all
possible future innovations, to me, is implausible, and I
believe this rule will result in damaging, unintended
consequences.
Aside from the recent rule-making, we have a number of
other significant topics to cover with you all today.
Commissioner Wheeler, you are asking for $117 million auction
administration cap to implement the largest incentive auction
of our lifetime. Just last year the AWS-3 Spectrum auction
closed after 341 rounds of bidding with a record $41.3 billion
in revenue raised. The upcoming 2016 incentive auction will
match broadcasters who have underused commercial spectrum with
wireless companies, who need more spectrum due to the so-called
``spectrum crunch''. This kind of auction has never been done
before at this level of either complexity or size. The
committee fully supports this auction, as it is expected to
generate billions of dollars of revenue for deficit reduction.
However, we are concerned with transparency within the auction
administration funds. We also expect this to be a fair and open
auction so all interested parties can fully participate, and to
generate the biggest bang for our buck.
While I understand net neutrality rules and the incentive
auction have dominated the headlines recently, I am eager to
hear from you about the cost of your headquarters move, the
Universal Service Fund oversight, and structural reforms of the
commission. The FCC has significant work to do, and I hope that
today we can talk about how this agency can be run in an
effective and efficient manner. So I thank you both for the
work that you do. Thank you to your staffs. I look forward to
your testimony. And now I would like to turn to my
distinguished ranking member, Mr. Serrano, for any opening
statement he might make.
Mr. Serrano. Thank you, Mr. Chairman. Before I start, you
were quoting a European nation telling us how to behave?
Mr. Crenshaw. I was telling you what a foreign nation said
about regulation.
Mr. Serrano. Okay. Just checking.
Mr. Crenshaw. And evidently, we are doing better than they
are.
Mr. Serrano. Yeah, just wanted the record straight. Thank
you, Mr. Chairman. I would like to join you in welcoming
Chairman Wheeler and Commissioner Pai back before the
subcommittee. We had an interesting hearing last year, and I
expect this year's will be as lively as well. The Federal
Communications Commission plays an increasingly important role
in our society and in our economy. As new technologies have
developed, entire new industries and methods of communications
have emerged for television, radio, satellite, and the
Internet, the FCC is the vital link in ensuring fair
competition, media diversity, and expanded access to these
vital parts of our economy.
Unfortunately, the subcommittee has hampered the ability to
meet these challenges by forcing the FCC to operate with the
same level of funding for the last two years. This is having
serious negative effects on the FCC's enforcement capacity, as
well as its abilities to meet the demands of a rapidly changing
environment. The agency is now operating at its lowest level of
personnel in more than 30 years. That is incredible. If you
think about it, over the past 30 years the FCC has had to
regulate entire new industries, but we are only providing
enough resources to regulate those that existed 30 years ago.
The FCC has had to do much more with much less than is needed,
and if we make matters even worse and go back to sequester
levels, then we are only courting disaster. In this context, I
believe that your budget request is reasonable and necessary.
It should be obvious over the past few months, there are
numerous important and pressing issues that the FCC is dealing
with beyond struggling with artificially low funding. I, for
one, strongly applaud the commission's actions last month to
ensure net neutrality and an open Internet. I firmly believe
that it is of the utmost importance for consumers and
businesses that they have assurances that their Internet
content and access will be treated the same way as everyone
else's. This principle is of crucial importance to innovation
in our country, and to consumers as well.
In particular I wanted to compliment your efforts to ensure
that mobile devices are treated in the same manner as wired
devices. A large number of Latinos and African Americans only
have access to the Internet via their smartphones, and rules
without these protections could have negatively affected their
access to the Internet. Additionally, I hope we have a chance
to discuss smartphone theft and kill-switch technology. Since
last year's hearing there has been some important progress on
this issue, both at the FCC and within private industry. While
I am pleased with these important steps forward, I believe
having a clear, enforceable standard is the best way to ensure
that smartphone theft continues to decline, and along with
Senator Klobuchar, I plan to reintroduce a smartphone theft
prevention act in the near future.
I understand that you both have testified for Congress
several times in the past few weeks. I can tell by the looks on
your faces. Thank you for the laughs. So some of these issues
may be very familiar ground; however, I welcome you to this
hearing, I look forward to this testimony, and before I close,
let me tell you that I clogged the airwaves this morning,
because on my iPad, I just said that we were at this hearing
both on Facebook and Twitter. So, we are working together.
Thank you so much, and thank you, Mr. Chairman.
Mr. Quigley. Were you neutral about it?
Mr. Serrano. I was very neutral about it.
Mr. Crenshaw. Thank you, Mr. Serrano. And I know that our
witnesses have been busy for the last couple of weeks, but they
have had a weekend to rest up, so they are here today. So,
Chairman Wheeler, I would like to recognize you for any opening
statement you might make. If you could keep your remarks within
the five-minute limit that will give us more time for
questions. The floor is yours.
Mr. Wheeler. Thank you, Mr. Chairman. Mr. Crenshaw, Mr.
Serrano, members of the committee, thank you very much for the
opportunity to be here 364 days later, sir. You know, I am a
businessman and you are my board of directors, and I would like
to present this in kind of the way that I would present to
boards of directors when I was in my previous life. So, there
are hopefully slides in front of you that I would like to walk
through. [Slide]
The first chart labeled Executive Summary, on the left
shows the current state of affairs for the agency. Our
headquarters space is too large and too expensive, our field
footprint is too large and inefficient, and we have major
opportunities to reduce our operating expenses through the use
of technology. We also have inappropriate allocations of costs
that are burdening those that do not benefit from those
expenses. So what we are proposing over on the right side, our
response, is a budget with the lowest number of full-time
employees in 20 years, the first full-time employee reduction
in 10 years, the first review of field operations in 20 years,
and a reduction of the big ticket items associated with the
headquarters and contractors.
Yes, it is up $84 million dollars; 70 percent of that is
unavoidable kinds of expenses that we will talk about in
detail, I am sure; 20 percent of that is for investment that
will reduce costs; 10 percent are things you told us to do, but
did not fund. And as I said, we tie our expenditures to our
activities. [Slide]
Quickly, the next two slides show how the agency funding
has been flat while the FTEs have been declining. [Slide]
The next one shows the volume growth in activities while
FTEs have been declining. [Slide]
But the important slides then are five and six, because on
five we talk about the cost savings that are underway; that the
FTEs are the lowest because we are not filling vacancies; that
the field office update is crucial. Nobody has looked at it for
20 years. We can cover 80 percent of the U.S. with eight
offices, and pre-positioned equipment, rather than the current
24 offices. We are eliminating in the process very high per
capita operating expenses. We are cutting the number of
contractors through the use of technology. Contractors, as you
know, are significantly more expensive than FTEs. And we are
going to continue this kind of approach going forward. [Slide]
So, if you look at slide six and how we build the budget,
the columns are the three sources of revenue, if you will: that
which we generate from fees on those we regulate; then revenue
generated from the auction; and from the Universal Service
Fund. The first three items, office move, inflation, and
inspector general request, which are what I have categorized as
unavoidable; actually, if you take those unavoidable expenses
out of the bottom line you will see that we actually would be
requesting a decrease. [Slide]
Slide seven is what those expenses look like on a
proportional basis, and as you can see, 71 percent of them are
associated with things that we have to do. The next largest is
IT, which is how you save money going forward: 5 percent for
the broadband map and a Do Not Call Registry for 9-1-1
providers, which we were mandated to do but were not funded to
do; 4 percent to begin the broadcast relocation work for the
incentive auction; and 2 percent for cyber security. [Slide]
Since IT is the next biggest expense after the move, take a
quick look if you would, please, at page eight, which is what
the IT expenditure allows us to do, in terms of infrastructure,
to move to the Cloud, which will save us between $1 million and
$2 million a year; allow us to have a single architecture for
our data, which also will increase productivity and reduce
operating costs; and allow us to move to a core platform, which
again, will save another $1 million to $2 million a year. But
the big-ticket item, the big enchilada, is the move and the
impact of that is discussed in slide nine. [Slide]
Here is why it needs to happen. We need to move to a
smaller space, and we need to pay less per square foot. We are
currently in about 650,000 square feet. We should be in about
475,000 square feet. We are currently paying about $60 a square
foot. We should be paying about $55 a square foot. This
requires an up-front investment to save $190 million, $119
million net, but you can see the impact over time of what this
investment would get us.
And then lastly, the last chart, is we looked at, what if
we did not move, what if we downsized in place, and what would
that cost? And it actually ends up costing us more because the
rent goes up even higher, the relocation expenses associated
with it, details of the cost associated with shrinking offices,
office sizes, et cetera. So, I look forward to discussing this
and any other issues with you. Thank you very much.

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Mr. Crenshaw. Thank you. I would like to recognize
Commissioner Pai.
Mr. Pai. Thank you. Chairman Crenshaw, Ranking Member
Serrano, and members of the subcommittee. It is privilege to
appear before you today. Thank you for inviting me to testify
on the FCC's budget request. Although all commissioners are
asked to vote on a budget proposed by the chairman that is
delivered to the Office of Management and Budget, I have not
been asked to participate in the development of the agency's
budget request. Unfortunately, after reviewing this proposal, I
am unable to support it. To be clear, this subcommittee should
give the FCC the resources necessary to carry out its core
responsibilities. The FCC staff is filled with talented
individuals who are dedicated to serving the American people,
and we tackle a wide variety of tasks assigned by Congress,
from freeing up more spectrum for mobile broadband to
protecting public safety.
But the Commission is requesting a baseline budget of $413
million, a 17 percent increase over last year. That is
dramatically higher than it has been at watershed moments in
the FCC's history. For instance, the agency's baseline budget
after adjusting for inflation was only $277 million when it
faced the monumental task of implementing the
Telecommunications Act of 1996. In that light, the current
request is not fiscally responsible, and so I would like to
offer three specific suggestions for improving it.
First, I do not favor transferring $25 million from the
Universal Service Fund to the Commission. Put simply, this is a
stealth tax increase on the American consumer. The money that
goes into the Fund comes out of the pockets of consumers when
they pay their telephone bills each month, and this proposal
would require those consumers to pay an additional $25 million
this year. That amount would be on top of the $1.5 billion
annual tax increase that the FCC adopted last December to fund
additional E-Rate spending, which will go into effect later
this year. Since the beginning of 2009, the Universal Service
contribution rate, that is the FCC-imposed consumer tax rate,
has already jumped over 83 percent. Congress should not take
action to push it even higher.
Second, funds for moving the FCC's headquarters or
reorganizing how we use our existing facilities should not be
included within the FCC's general budget authority. Over the
long term, moving or reorganizing is likely to save money, but
the funds that we spend on that effort will be a substantial
one-time expense. I therefore believe that it makes sense for
Congress to give us specific budget authority for this purpose.
If these funds are included within our general appropriation
amount, it may paint a misleading picture of our baseline
budget and make it harder to reduce that budget when there is
no longer the need to spend money on moving expenses.
Third, Congress should forbid the FCC from using any funds
to implement or enforce the plan it just adopted to regulate
the Internet. Not only is this plan bad policy, absent outside
intervention, the Commission will expend substantial resources
implementing and enforcing rules that are wasteful,
unnecessary, and affirmatively detrimental to the American
public. Heavy-handed regulation does not come cheap. The FCC
has already wasted millions of dollars on this unprecedented
action, and we are on course to waste millions more. The
implementation and enforcement of these new rules will not only
impose significant burdens on the nation's thousands of
Internet service providers and harms on consumers; they will
also consume substantial FCC resources.
In my limited time I will offer just one example. The order
allows parties to seek advisory opinions from the FCC's
Enforcement Bureau. Given the breadth and vagueness of many of
the new regulations, especially the new Internet conduct
standard, I expect that many parties will seek clarification.
Drafting advisory opinions will require careful consideration
of the circumstances involved in each and every request. This
inevitably will be resource-intensive. The Bureau must process
each request, review the facts behind each filing, make a
decision, and then draft an opinion, which will undergo layers
of review. And since the Bureau lacks specialized expertise in
this particular area, it will likely rely heavily on the
expertise of other Bureaus especially those that helped craft
the order.
At a time when the FCC is struggling to fulfill some of its
core responsibilities under the Communications Act, it should
not spend millions of dollars to regulate the Internet. This
subcommittee is well aware that budgets are finite. Funds spent
on regulating the Internet are by definition funds that cannot
be spent on critical priorities. So instead of trying to fix
something that is not broken, let us use our limited budget to
fix something that is broken, such as the FCC's information
technology systems or its widely-panned, user-unfriendly
website.
Chairman Crenshaw, Ranking Member Serrano, members of the
subcommittee, thank you once again for inviting me to testify.
I look forward to answering your questions and to working with
you and your staffs in the time to come.

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Mr. Crenshaw. Well, thank you very much. And let us begin
the questions. We have got a full house, and I know there are a
lot of questions, so let us try to observe the five minute rule
both from the questioner's standpoint, as well as the
responder's standpoint.
Let me talk a little bit about net neutrality, and ask
first of all, Chairman Wheeler, this question. It has been
pointed out that you have been here on Capitol Hill testifying
quite a bit recently, and you know that Chairman Upton and
Chairman Thune are working on legislation in this area. But
ultimately, the funding that allows the FCC to work on any
rules, like net neutrality, comes from this committee. That is
where the money comes from. And we have kept your funding
purposefully low for a few years in hopes that the limited
funding would push you all toward prioritizing the most
important work of the agency. But instead, it seems that this
agency has prioritized politically polarizing rule makings at
the expense of some of the statutorily mandated and other
important work that this agency has to do.
Let me give you a couple examples of statutorily mandated
work that seems to be taking a second seat. There is a mandate
that requires the commission to annually report to Congress on
the status of competition in the market for the delivery of
video programming, and the Commission did not issue such report
last year, even though the statute mandates that. There is
another section of the Telecommunications Act that says that
you have to annually initiate a notice of inquiry concerning
the availability of advanced telecommunications capable to all
Americans. Now that notice was initiated in August of 2012, but
the report was not finalized for another two years. And then
lastly, there is a mandate that requires the commission to
report every three years on statutory and regulatory barriers
to small businesses, and the last report was back in 2011.
And so it seems to me that this net neutrality rule may
have bumped into a lot of the statutory requirements that are
there on the books. So I have to ask you, Chairman Wheeler, can
you figure out how much time, how much energy, how much money
was spent on working on these net neutrality rules, and then
the question is, do you believe that you have spent some of the
resources on this rule at the expense of some of the other work
that this commission is supposed to do? Chairman Wheeler.
Mr. Wheeler. Thank you, Mr. Chairman. You know, you
mentioned, for instance, the video competition report, which
was a reality that I walked into where there were not votes on
the commission. The report got done, but there were not the
votes on the commission to adopt it. So what I said was, okay,
let us stop the process and let us go to the next iteration,
meaning we have to start again as to how do we find consensus
inside the commission on this report; and that I promised to
the Congress that this would be done in less than the requisite
time for a new report. And so we will have the new iteration of
that to the Congress in June of 2016.
But you know, one of the challenges we have, is we do need
to get the requisite number of votes. As I said at another
hearing that Commissioner Pai and I were at, five type A
individuals, but just to discuss specifically open Internet
order. I mean, the fact of the matter is that the Internet is
the most powerful and pervasive platform in the history of
society and there becomes a basic question of do you have rules
and do you have a referee? In reviewing the transcript it
appears that Representative Crenshaw asked a question regarding
the status of the Video Competition Report. Chairman Wheeler's
response was related to the Media Ownership Quadrennial Review
item. With respect to the Video Competition Report, the
Commission recently released that item on April 2, 2015.
Mr. Crenshaw. Let me encourage you all to be concise
because the question is, I mean, I assume you do not think that
you have spent any time, and money, and energy on the rule that
would have been better spent on other priorities.
Mr. Wheeler. I think we have prioritized correctly, sir, if
that is your question.
Mr. Crenshaw. Okay, thank you. So and then let me just ask
Commissioner Pai to respond to that, not only the overall
rulemaking, how it is going to impact consumers, but also do
you think there are some other things that might have been
prioritized instead of the time and energy spent on this rule?
Mr. Pai. I do, Mr. Chairman. I would respectfully disagree
with our chairman in terms of the priority that net neutrality
received. I think that by definition net neutrality took our
eye off the ball of some of the other critical priorities, from
removing barriers from infrastructure investment, embracing the
IP transition, getting more spectrum into the commercial
marketplace, both licensed and unlicensed. I think the staff
that spent an inordinate amount of time and effort on net
neutrality could have been focusing on those priorities. And
ironically enough, the Title II net neutrality order takes us
in the opposite direction. It adds barriers to innovation and
investment, and it will actually reduce competition in the
marketplace.
Mr. Crenshaw. Thank you. Mr. Serrano.
Mr. Serrano. Thank you. I was not going to speak about net
neutrality at this point, because I did not think it would come
up this early. Silly me.
First of all, I have been in Congress 25 years and, most of
the time, I would say, high amounts of time, when the other
party does not agree on an issue, I may not agree with them,
but I understand what the issue is and what their complaint is.
I really do not understand the opposition to net neutrality. To
make it open, to make it better, to diversify it, to give
people at the bottom a shot at having the same protections and
the same freedoms as people who are more powerful in this
society. I do not understand what the argument is. And in
addition, I do not understand the argument or the conspiracy
theory that in some way the President had inappropriate
influence on the net neutrality rules that were just released
to give Internet users the strongest protections possible.
So I would like, Chairman Wheeler, for you to please talk a
little about the public input and how it influenced the
Commission's decision. And just let me tell you that in front
of me, and for the record, Mr. Chairman, although they were
addressed to us, I have letters from the Alliance for a Just
Society, Black Alliance for Just Immigration, Black Lives
Matter, Center for Community Change, Center for Media Justice,
National Rule Assembly, and they all were in favor. So what
role did the public play, and is it the way I think, that the
public played the major role in the input for the final
decision?
Mr. Wheeler. Thank you, Mr. Serrano. I mean, I think it is
fair to say that this is the most open and transparent
proceeding in the history of the Commission. We had 4 million
comments from Americans, and never had any of that kind of
outpouring before. Basically, it seems as though things have
boiled down to a situation where you have three major
companies, Comcast, AT&T, and Verizon, differing with other
Internet service providers, such as Sprint, T-Mobile,
Cablevision, Frontier, small rural carriers, the competitive
carrier association, and the small wireless carriers. And
differing from what we heard from thousands of entrepreneurs
who said they needed to have an open Internet, and investors
saying that they could not invest if there was not an open
Internet, and those millions of inputs. So there was a full
discussion of the issues involved, and I think the American
people fully expressed themselves as to the importance of this,
the most important network we have ever seen.
Mr. Serrano. Thank you. Mr. Pai, I will give you an
opportunity to disagree with everything he said.
Mr. Pai. Thank you, Congressman, for the question. I begin
from the proposition that everybody believes in a free and open
Internet. And the good news is the Internet has been free and
open for some time. One of our Democratic colleagues put it
well in hearing last week: Our Internet economy is the envy of
the world. And I would argue that we have reached this stage
precisely because of the bipartisan consensus that started in
the Clinton administration that the Internet would thrive free
from government regulation. And I think that's what part of the
problem is that the FCC in this case is regulating to solve a
problem that simply does not exist. Now, the question is: How
do we incentivize more broadband competition? That is a topic
on which I think there are critical policies that we should be
adopting. That goes to some of the policies that I mentioned in
my response to the Chairman. Those are things that could give
people more choices, better speeds, lower prices.
Unfortunately, Title II, the FCC's order, takes us in the
opposite direction. It saddles some of the smaller providers
with the regulatory burdens that they are going to be unable to
comply with, and it disincentivizes some of the bigger ones,
the ones who are responsible for the majority of our capital
expenditures, from taking those risks. And we see the example
in the comparison with Europe, which I know you referenced in
your colloquy with the Chairman. Over the last three years,
United States capital expenditures have been 73 percent higher
than Europe's in terms of broadband investment. And I would
argue that is precisely because we have historically had a more
free-market approach, whereas Europe has embraced the utility-
style approach which, ironically, the FCC just adopted.
Mr. Wheeler. Could I just do one clarification on that,
because the difference between us and Europe comes down to the
concept of unbundling. What Europe does, wrongly, I believe, is
to say that somebody goes out and builds the infrastructure,
and then they have to turn around and unbundle it. We
specifically say that we do not do that in this order, and
specifically remove from the order that part of Title II which
authorizes a future Commission to be able to do that.
Mr. Serrano. Right. Mr. Chairman, I know my time is running
out here, but let me give you my personal view on something.
You know, there is a big statement that is always made. If it
is not broke, do not fix it. But some things are so important
to us that even if we think they are not broke, they need
tweaking, they need adjustments, they need oversight, they need
support, and they need growth.
And I give you as an example the New York subway system.
For years, it ran so well that everybody said, Leave it alone.
And then it got into crises. Why? Because it got old, the
infrastructure got old, and no one had paid attention to it
because it ran so well. And now it is running much better, but
so I think that even if the Internet is the greatest in the
world, to make it better and more available and safer for use
is only to our advantage. And that is why I believe that what
was done by the Commission is the right thing to do and we
should all embrace it. I thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman. Well, I do not know how
expanding government's reach and control over this great
economic boom we have had with the Internet will somehow make
it better. And I cannot imagine that turning the Internet into
a regulated utility somehow will unleash investment and job
growth in a way that has not already occurred. In fact, I think
it will precisely do the opposite.
Commissioner Wheeler, I would like to continue to your
budget proposal, and I thought Chairman Crenshaw asked a very
important question regarding what the priorities of the FCC
are, and where our dollars are being spent. And his question
related to all the resources that were expended and an
estimate, maybe you could give, regarding the resources
expended to regulate the Internet like a common carrier over
these past few years that result in the rulemaking. But I would
like to know, as we go forward, I think your statement was you
expect lots of litigation, ``the big dogs to sue'', I think was
your quote at one point.
Knowing of that litigation risk, do we know what that will
cost the FCC, will cost the government? What are the future
expenditures? Chairman Crenshaw asked about the past
expenditures, I am interested in the future expenditures, and
will that fall under your pie chart here, under unavoidable
costs? What are those unavoidable costs to taxpayers?
Mr. Wheeler. Thank you, Mr. Yoder. We maintain a litigation
staff at the agency because no matter what we decide on
whatever issue, people turn around, as they have a right to,
and ask the court to review it. That litigation staff is in
place and that is the same litigation staff that would be used
to handle things.
Mr. Yoder. Mr. Pai.
Mr. Pai. I do think that the litigation component is one
part of the costs that will be involved, but I think there are
also other important elements as well. The subsequent
rulemakings, the FCC order tees up a number of other
regulations that are going to have to be adopted, the
adjudication of any complaints that are filed with the
Commission, as well as any advisory opinions the Enforcement
Bureau is called upon to render.
Mr. Yoder. So if the FCC could at some point estimate what
they think, and we might have different estimates of what this
will cost, but we would appreciate to know because we will have
to figure out a way to pay for the expense of implementing
these rules and litigation.
One of the other concerns I have heard from many relates to
taxes that may go up related to the government's designation of
the Internet as a regulated utility, therefore making it
eligible to be taxed under the Universal Service Fund. And I
would be interested to know, does the Commission intended to
use its new powers to impose these USF fees on the Internet?
Mr. Wheeler. Well, as you know, Congressman, there is an
exemption from making that decision. We did not make that
decision in this order. There is underway a review of the
contribution schedule for Universal Service Fund that is being
done by a committee of both state regulators and federal
regulators. They will be giving us a recommendation. I think it
is incorrect, however, to say that anything in what we have
done will lead to an increase in universal fee contributions
because the amount of the fund is set by the agency. It is not
set by what happens in terms of a Title II determination. And
that is the important thing to bear in mind, that that number
remains fixed, that that number does not increase because of
the fact that we have done a Title II reclassification.
Mr. Yoder. So just so I understand your answer, the
Commission has not decided whether to apply the USF taxes to
the Internet?
Mr. Wheeler. And if it did, based on the federal state
board recommendation, it would be not changing the numerator
but changing the denominator.
Mr. Yoder. It would change who pays?
Mr. Wheeler. Which would have a negligible effect on
consumers, if at all.
Mr. Yoder. Well, at this point, those fees are not being
charged on Internet services and they would be. Do you know
what that total would be?
Mr. Wheeler. You would have a reduction in one area that
may be accompanied by an increase in the other that should end
up washing out because the gross number is the same.
Mr. Yoder. Mr. Pai.
Mr. Pai. I do think that the order explicitly opens the
door to the imposition of Universal Service Fund taxes, and the
only thing the order assures the public is that those taxes
will not increase on the effective date of the order itself.
But I do think the writing is on the wall with respect to the
Universal Service Fund, given some of the promises the agency
has made with respect to the programs that are administered
under the Universal Service Fund, you know, E-rate, for
example.
Secondly, also it is important to remember that the
reclassification of broadband as a telecommunications service
itself triggers a number of other taxes: state and local
property taxes, for example. Heretofore unclassified broadband
providers are now going to see a boost in their property taxes,
which will have to be borne by the consumer. Additionally,
there are a number of other fees that are going to have to
increase, pole attachment rates, for example. Those, too, will
be passed on, and so reclassification is the first step down
the hill, if you will, in terms of the tax rates that Americans
pay for broadband.
Mr. Yoder. Thank you, Mr. Chairman. And I would just ask if
the FCC could somehow calculate the increase in costs and fees,
local, state, and federal, that will be passed on to taxpayers
and users and to be able to pass it on to the Committee.
Mr. Pai. If I may, one independent study from the
Progressive Policy Institute has put that figure at $11 billion
per year.
Mr. Yoder. Thank you.
Mr. Wheeler. And if I may, that specific study was given
three Pinocchios by The Washington Post.
Mr. Yoder. Sounds like we will have time to continue to
discuss this. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you, Mr. Yoder. And let me recognize
the Chairman of the Communications and Technology Subcommittee
of Energy and Commerce, Mr. Walden, who is joining us today.
Appreciate your interest. Now let us recognize Mr. Quigley.
Mr. Serrano. I would also like to welcome him.
Mr. Quigley. Thank you, Mr. Chairman. It is good to see the
Pinocchio caucus is in session.
Gentlemen, thanks for being here. A couple quick points:
Mr. Chairman, the auction that needs to take place. The
allocation to handle this is about $1.75 billion to the
television broadcaster relocation fund. Estimates we are
hearing now it is about $1 billion short. Our concern is who is
going to have to make this up. Your thoughts on that?
Mr. Wheeler. Thank you, Mr. Quigley. Congress said that the
max that we can spend is a $1,750,000,000 and we will adhere to
those rules. Some broadcasters have estimated that it could be
more, you know, everybody has their own set of figures, if you
will. It is possible that Congress could adjust that number,
but our challenge is we have to live within the number we were
given in the legislation.
Mr. Quigley. If it fails to be enough, are the broadcasters
the ones that would have to make this up, on your thoughts?
Mr. Wheeler. Well, the fascinating thing is that it really
is going to depend on how many broadcasters sell and how many
broadcasters stay, and it is something where the variables that
go into the equation determine what the outcome of the equation
is. And so anybody picks any set of variables and then come out
with a number that they want.
Mr. Quigley. Well, what would you recommend if there is
this kind of shortfall? Congress come out with more?
Mr. Wheeler. There have been efforts that we have been
engaged in to see if the wireless industry could create some
kind of an insurance fund, if you will, because after all they
are the ones who are going to be ending up getting this
spectrum. And they have, thus far, been unwilling to do that.
But I think that clearly, if we end up in that kind of a
situation, then we have to look at what those solutions might
be. That is one, the Congressional approach that you suggested
is another, but I understand the reality that you are saying,
and again, it is the variables in the equation that end up
determining the answer.
Mr. Quigley. And given the short period of time, can you
give me a couple minutes on how we have done improving
different topic positive train control issues that you have
play a role in implementing that?
Mr. Wheeler. Thank you, Congressman. You know, when I was
before you last year, we had our hands full so far as how we
were dealing with the necessity for the railroads to get
approval to have towers for positive train control along their
tracks. We had made spectrum available, we had facilitated
spectrum license changes, but the problem of the poles was a
big one. And this is because there were requirements that
Native Americans have the ability to approve the placement of
those poles.
The FCC, working with the tribal communities and others,
developed an expedited process and I am really proud to say we
are now in a situation where we have the capacity to handle
more applications for those clearances required by law than the
railroad industry has been able to fill the pipeline with. So I
think that we are over the hurdle. It was a serious challenge
that I do not want to make light of.
Mr. Quigley. No, and it is very important to my passenger
and the freight industry across the country. Mr. Pai, if you
want to add to this your thoughts?
Mr. Pai. No, I commend the Chairman for the steps he has
taken and I agree that it is a critical matter that requires a
lot of disparate parties to work together. And the good news is
that we do seem to be working toward a common end.
Mr. Quigley. Yeah, and at some point we have got to come to
the realization that people are not going to meet the deadline
at the end of the year. We are extraordinarily concerned about
the safety issues. We are going to have to find a way to move
forward that does not blindside the industry and hurt our
passenger rail as it moves forward. And just briefly, for both
of you, I appreciate your thoughts on net neutrality. I know
the passion that is out there is extraordinary, and as
Chairman, I tend to agree with where you are on net neutrality.
But I am listening to everyone, even those emailing me from
their parents basement with a Star Wars figurine staring back
at them. I have never seen such intensity about this issue, but
we have got to get it right. Thank you, Mr. Chairman. I yield
back.
Mr. Crenshaw. Thank you. Mr. Graves is recognized.
Mr. Graves. Thank you, Mr. Chairman. Gentlemen, good to see
you today. And I appreciate Mr. Quigley's comments there, and
certainly this issue will talk about today. And you guys have
made your tour, I know that, around Capitol Hill. And I want to
just drill down a little deeper, if I could today. So Mr.
Chairman, forgive me for directing my comments or questions to
Mr. Pai, but I would like to do that because Mr. Pai, you have
been on the record, very vocal recently, and a lot of different
statements in opposition to net neutrality. And I think you
will find there are many members of this panel that agree with
your position there as well.
But I wanted to see if you could help us a little bit more
with more detail and more specifics because your quotes are
very bold. In fact, you said the Commission's decision to adopt
President Obama's plan marks a monumental shift toward
government control of the Internet. It gives the FCC the power
to micromanage virtually every aspect of how the Internet
works. You also said the claim that President Obama's plan to
regulate the Internet does not include rate regulation is flat
out false. You have also said it is detrimental to the American
people, that was in your statement.
But then, on the other hand, we have the Chairman and Mr.
Serrano and others, and I mean Chairman Wheeler and Mr. Serrano
and others, who disagree with your statements. And they say
this not the case, that the FCC will not be able to rate,
regulate, control the speeds and services, and the Chairman
briefly mentioned that there are only three major companies in
opposition that have been outspoken. So if you could just help
this panel hear more from your perspective and drill deeper
with the specifics as to your statements and away from the
platitudes but a little bit deeper: how will this impact the
American people, and business, and the economy negatively in
your viewpoint here?
Mr. Pai. Thank you for the question, Congressman. I will
tackle each of them as I understood them. First, in terms of
the breadth of the FCC's Internet regulations, it does in fact
regulate every part of the Internet. Now, traditionally, net
neutrality was meant to encompass the relationship between
Internet service provider and a customer, the so-called last
mile of connectivity. But this plan goes far beyond that. For
example, it sweeps into its regulatory ambit interconnection:
the relationship between Internet service providers and edge
providers, going into the very core of the network. It applies
to that relationship, Section 201 of the Communications Act,
which allows the FCC not just to regulate rates, which I will
get to in a second, but also to even specify the physical
connections that have to be made and the through routes as they
are called over which traffic has to ride. And that is in the
text of Section 201 itself. That is something that the FCC, no
government agency, has ever done.
Similarly, with respect to service plans, forget about the
infrastructure itself, the agency is now arrogating to itself
an incredible amount of power that is going to be wielded in
uncertain ways. And so, for example, under the Internet conduct
standard, the FCC now puts on the chopping block various
service plans that have generally been beneficial to the
American consumer, things like T-Mobile's Music Freedom, for
example, which allows customers to stream music under their
smart phones exempt from any data caps. The FCC explicitly says
that this is a practice that may or may not violate net
neutrality.
And so if you are a wireless entrepreneur going forward,
especially one trying to make a splash in the marketplace
against the big guys, your ability to compete is going to be
restrained because you do not know whether or not that service
innovation may be proscribed. And I think it is telling that
after the FCC adopted the order, the agency admitted itself,
``We do not really know how this particular standard is going
to play out.''
The second thing you mentioned was in terms of rate
regulation. Now the order goes to great pains to say that we do
not engage in ex-ante regulation, regulation before the fact,
tariffing, the adoption of a cost methodology, and so forth.
But it explicitly leaves on the table ex-post rate regulation.
It invites complaints, for example, both to the Commission and
to federal court, about the justness and reasonableness of
rates. And I think what you saw last week before the Senate
Commerce Committee was an acknowledgment that, yes, the FCC
determining whether or not rates were just and reasonable is
essentially rate regulation. That is ultimately going to be to
the detriment of the American consumers.
Additionally to the point with respect to who is opposing
this, we have not just heard from the big boys, as has been
said, we have heard from a great many small providers. Twenty-
four small ISPs, for example, each with less than 1,000
customers, wrote to us and told us that Title II would be the
wrong solution, including Main Street Broadband in Cannon
Falls, Minnesota, which has four customers.
We heard from a great variety of municipal broadband
providers, government-owned projects, including some that the
president himself endorsed, who said that Title II would be a
``tremendous mistake.'' We heard from countless wireless ISPs,
who, without a dollar of federal subsidies, give people in my
home state of Kansas and the state of Missouri all kinds of
options they would not have otherwise. And so I think from the
standpoint of competition, ironically enough, Title II takes us
in the opposite direction from where we want to go. I hope I
answered the questions that you teed up to your satisfaction.
Mr. Graves. No, it is very helpful, and I appreciate your
explanation there. And then as we go through this proceeding I
would hope that both of you would really help us with the
specifics as to how this impacts the American consumer, take it
from the political partisan side and move it into the details,
and I appreciate your specific answer. Thank you very much.
Mr. Crenshaw. Thank you. Mr. Bishop.
Mr. Bishop. Thank you very much, Mr. Chairman. And I,
again, welcome our witnesses. I would like to explore
something: minority participation in the spectrum auctions.
According to your budget requests, the FCC has conducted 85
spectrum auctions, which landed 39,780 licenses for a total of
over $53 billion between Fiscal Year 1994 and Fiscal Year 2014.
I am concerned that small businesses, in particular minority
owned businesses, may not have the same access to take
advantage of these high-capital public auctions to the extent
that large corporations do. Do you have a plan to encourage the
participation of minority-owned businesses and what is this
plan? What information do you have on the participation of
minority-owned businesses in past auctions and what are you
doing with this information when planning future auctions?
And I will just go ahead and add a second question on a
somewhat different topic, and you can address both of them in
the interest of time. It is recently come to my attention that
the reclassification of the ISPs under the new open Internet
rules may lead to an increase in the fee that cable companies
pay for attaching their lines to utility poles. What is your
take on this, and how do you think that this will impact
consumers?
Mr. Wheeler. Is that to either one of us?
Mr. Bishop. It is to both of you.
Mr. Wheeler. Okay. So let me see. I will handle the first
one. I know you have spoken on the second one, so you can
handle the second one, okay? The Congress has said to us,
insofar as unique so-called designated entity groups are
concerned, that we need to make sure that there are
opportunities in the auction. This was a decision that Congress
made in 1993. There have been significant changes in the market
since then. You know, in 1993, anybody could create a wireless
company, and go out and compete. Today, the chances of, you
know, the Bishop Wireless Company being successful against the
behemoths is pretty slim and nonexistent.
So, we have to ask ourselves the question: how do we
maintain the mandate of Congress, or the instructions of
Congress, to create these opportunities in a changing
environment? And so, last November, I think it was, I moved a
proposed rulemaking to address this, specifically with the
upcoming incentive auction in mind. Yesterday, I issued, or
sent around to my colleagues for their vote, a public notice
making sure that, in that inquiry, we are addressing key
questions that have been raised, as to the operation of the
designated entity process in the most recent AWS-3 auction. We
need to get through those processes before we begin the
spectrum auction next year. We will get through those
processes, and I think that the Commission--I will not speak
for my colleague--but I think the Commission is united in its
belief that we do need to make sure that our rules are updated
for designated entities.
Mr. Pai. Congressman, I would agree with the Chairman. I
would add that the AWS-3 auction, in particular, highlights the
danger of not implementing serious reforms of our designated
entity rules. In that auction, as you may know, a Fortune 500
corporation gamed the system and used two shell corporations,
essentially, to claim $3.3 billion in taxpayer subsidies. That
is a bad deal for the taxpayers. But, critically, going to your
question, it also squeezed out a number of small businesses,
many of whom might have been minority-owned, we are not sure,
who either did not get a license altogether or had to just
relegate itself to other areas of the country where it could
compete. And I have listed in a public statement a number of
those companies who were seeking a license but got outbid,
essentially, by this Fortune 500 corporation. And so I think it
is critical for us to implement some strict controls to make
sure that this program, so long as it remains on the books,
really benefits small businesses, in particular, the
disadvantaged businesses you identified.
The second part of your question was a very important one
that regards the rates that cable companies and others pay to
attach broadband equipment to utility poles. One of the
unfortunate things about the FCC's order is that, instead of
those companies having to pay what is called the 224(d) rate,
which is a cable-broadband rate, they are now considered to be
telecommunications providers, and so, they are going to pay the
higher 224(e) rate that applies to pole attachments by telecom
providers. And there is one estimate that small cable providers
in particular, as mentioned by the American Cable Association,
will have to pay $150-200 million each and every year for those
higher pole attachment rates. That rate is going to have to be
passed on to the consumer, and a lot of these companies serve
underserved communities that already lack broadband options as
it is.
Mr. Bishop. Mr. Wheeler, you got 30 seconds.
Mr. Wheeler. Thank you. The interesting thing is that I was
involved, when I was president of the National Cable Television
Association, in passage of the pole attachment law, because the
cable operators were not being allowed on. Now, what we are
finding is that cable operators are saying to new competitors,
and others are saying to new competitors, You cannot get on,
because you are not a telecommunications provider. And so, the
fascinating thing is what we are doing is opening up access to
poles. That the current incumbents have been behaving exactly
how the anti-cable people were behaving 20, 30 years ago. And
what we have done is open it up, so that competitors do have a
chance to get on the poles.
Mr. Bishop. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you. Mr. Rigell.
Mr. Rigell. Thank you, Mr. Chairman. Thank you, both, for
being here. I had the opportunity to meet with Chairman Wheeler
privately, and I appreciate the time that you spent with me. It
was helpful to me. So, I wanted to direct my questions to
Commissioner Pai, and thank you for being here today, and your
service on the Commission. And I do so, these questions are
designed really to test my understanding and to improve my
knowledge about this topic. It is not to make a point.
But I got a call a couple days ago from a good friend of
mine. He is in this industry. I respect him greatly; he is
well-read. And he was really livid; I had to kind of hold the
phone away from my ear because he was just livid about this
decision. And he was really focusing on the process by which
the rule was advanced. And, you know, he was saying this was
basically unprecedented. And especially, the final rule, how it
was actually rolled out without a comment period. Yet, I also
know, I heard from Mr. Chairman Wheeler, we went into this
extensively, you know, 3 million people provided their input
here. So, help me to understand what, if anything, was
unprecedented. Let us set aside the allegations about the
administration. I want to set that aside for a moment. Just
look at the rest of the process. Was there anything in it that
you were very troubled by? And if so, what? I noted that it was
not in your written testimony today.
Mr. Pai. Thank you for the question, Congressman. And I
would be happy to include it in the record, my dissent, which
includes a full list of some of the procedural problems that I
see.
Mr. Rigell. Just one or two substantive ones, because I do
not have a lot of time.
Mr. Pai. Sure, absolutely. First and foremost, the FCC
never proposed Title II as a solution to this alleged problem.
The original proposal in May 2014 was based on Section 706 of
the Telecommunications Act, which is a somewhat lighter
solution. Moreover, after the President made his announcement
on November 10th, even then, the FCC was considering a so-
called hybrid proposal. Only on February 5th did it become
clear that Title II was going to be the course the agency
pursued.
Mr. Rigell. Is this a substantive difference? I mean, I am
not a lawyer, but I mean, when people were commenting, I guess
this would be somewhat directed to Chairman Wheeler, I can roll
back around here, but were they commenting on the rule that is
now before us? And that we are commenting on? Or were they
commenting on something that was not relevant to the final
rule?
Mr. Pai. By and large, they were commenting, over the
spring and summer of last year, on what they thought the
proposal was or should be. No one in the public was able to see
the proposal.
Mr. Rigell. The full scope?
Mr. Pai. I am sorry?
Mr. Rigell. The full scope was not out there.
Mr. Pai. The FCC never made the plan public until a couple
of weeks after it voted on it.
Mr. Rigell. Well, I am on a relentless pursuit of the facts
around here. And I think other members are as well, so I do
not, believe that I am the only one, but it is really tough to
get to the bottom of some of these things. Because 3 million is
very compelling if you do not hear it in context. But you make
a good point.
I want to move over to this substantive side of this thing
for a moment. You know, regulation of the Internet is
unprecedented, but so is this notion of providers throttling
and blocking. Now, let us just give you a hypothetical scenario
rule setting, where the capacities is run at maybe 60 percent.
People are watching Netflix, everything else. Everything is
just running smoothly. Now, do you believe that that single
source provider, they do not have any other options, that
provider should be able to throttle or block, because they got
a good deal with Netflix, and to be able to charge more because
of that. Is that your view?
Mr. Pai. Congressman, that is an important question. First,
there is no evidence in the record that that actually occurs.
So that is from a standpoint of regulatory rulemaking.
Mr. Rigell. But the notion that some providers would
throttle or block, this is not just a hypothetical. I mean, it
has been talked about by major providers, has it not?
Mr. Pai. It has not been.
Mr. Rigell. I mean, is throttling and blocking just
something I imagined?
Mr. Pai. It is nowhere in the order, Congressman.
Mr. Rigell. Not in the order, but, I mean, I am talking
about the marketplace. I am a proponent of a marketplace
environment, but that is not often the case with broadband
providers, especially in rural markets. This is why I am really
trying to get this right and work through it. In fairness to
the Chairman, I think I owe him at least 30 seconds. Chairman,
if you would address this idea that the comments were not
really about, you know, the substance of the rule. That would
be troubling to me, because you are quoting it as if it is.
Mr. Wheeler. Thank you very much, Congressman. During my
tenure, what I have tried to do is to put forward a rebuttable
presumption, the key thing being rebuttable. And then, to raise
all kinds of other issues in the notice, and say, ``We want
your comment on this''. Because what a rulemaking should be is
an evolutionary process; as you say, that gets everybody's
input into it, not that which comes down and says, ``This is
what it is going to be''. And so, what we wanted and had was a
very evolutionary process, and the question of Title II was
asked repeatedly in the notice of proposed rulemaking, number
one, and commented upon, repeatedly, by members of Congress and
all of those who filed in the proceedings. So there were no
surprises in that regard.
And let me, if I can go to the blocking and throttling
question really quickly. Congressman Walden, I guess, has left,
but in his bill, he says no blocking, no throttling, and no
paid prioritization. A Republican Commission, in 2002, started
this whole thing by saying to Comcast, ``You are blocking, and
you should not''. Last August, Verizon moved to throttle
wireless speeds, and I had to go to them and say, ``Wait a
minute, this is not right''. And they, to their credit, backed
off. But they were starting to say, If you buy unlimited
service, I am going to throttle you''.
And on the question of paid prioritization, there are two
things that are worthy of note. One is that Verizon's lawyer,
in court, said specifically, I have been instructed by my
client that I may say that one of the reasons we are appealing
the earlier rules is we want to do that. And secondly, in
response to a specific request from Senator Leahy, the major
ISPs refused to say they would not prioritize for pay.
Mr. Rigell. I thank you, both. I am well over my time. The
Chairman's been very gracious. I yield back.
Mr. Crenshaw. Thank you. Mr. Fattah.
Mr. Fattah. Thank you, Chairman. Chairman Wheeler, let me
start at a different place. ConnectED, which is an effort that,
I think, should be applauded throughout the land, in terms of
connecting up our young people in their schools with access.
And you got a lot of private sector partners, and it seems to
be well on track. If you could take about 60 seconds and tell
me anything that is important for us to know about where you
are in this.
Mr. Wheeler. Well, we have finished a rulemaking in the
last three or four months that expanded the E-Rate program to
connect schools. About two-thirds of the schools in America did
not have high-speed connections. And so, we are facilitating
those connections down to the students desk, because it is not
just the fiber to the school, it is the Wi-Fi to the desk.
Mr. Fattah. The administration just announced a broadband
summit. I was with the President yesterday at Select USA, and
some 2,700 people, guests from around the world, were
interested in direct investment in our country. And one of the
selling points that the President made was the tremendous
expansion of broadband in our country, in rural and areas that
heretofore have not been served. And it was a major selling
point. Some $13 billion was invested by these friends, these
guests, in companies here. And in part, your work is laying the
foundation for that. How will your role, the FCC's role, be in
this effort to further expand broadband?
Mr. Wheeler. So, our goal, Congressman, in the whole Open
Internet proceeding was not only to make sure that the Internet
stays open, but also to make sure that there are incentives for
business people to want to invest in competitive, ever-faster
broadband. And that is why we specifically did not rate
regulate and patterned what we did after what has been so
wildly successfully, insofar as wireless voice services were
concerned, where the wireless voice industry asked to have
Title II in forbearance and were wildly successful thereafter.
Mr. Fattah. And the last point is that I represent
Philadelphia, I represent Comcast. It is the largest employer
in my district, so I understand that they have a viewpoint on
these matters. But Americans have expressed some viewpoint on
net neutrality. You took in public comment, and was it 3
million? Or how many people commented on both sides?
Mr. Wheeler. It was roughly 4 million total. And the
comments ran basically 3 to 1 in favor of Open Internet.
Mr. Fattah. So, you know, I would just stop here, Mr.
Chairman, and ask your counterpart, who I understand represents
the different point of view in this. Do you think that these 3
million Americans, that their voices should be heard on this
matter?
Mr. Pai. Absolutely, Congressman. I think all of them
should be heard.
Mr. Fattah. Even someone in my position, I represent a city
in which one of the largest business concerns does not think
this is a great idea, but 3 million Americans is pretty
substantial.
Mr. Pai. I agree, Congressman, but I think, what is
critical is providing more competition in the marketplace,
rather than heavy-handed regulation, which counterintuitively
would disadvantage many of those 3 million consumers.
Mr. Fattah. Are you saying that you want to think on their
behalf, in this matter? You think they are wrong?
Mr. Pai. Well, what I think is the Title II takes us in the
opposite direction from the goals that they espouse.
Mr. Fattah. You think that their views should be honored by
the Congress? They have a position that is contrary to yours
and on a 3 to 1 basis. I am saying, do you think we should take
into consideration in the United States of America?
Mr. Pai. Congressman, as you and your colleagues know,
might does not make right in Congress, and same with a
regulatory commission.
Mr. Fattah. You think we should overrule, them?
Mr. Pai. I do. I think that the agency should focus on
broadband priorities.
Mr. Fattah. Thank you. I appreciate you, and I appreciate
you standing up for what you believe. Thank you, Mr. Chairman.
Mr. Pai. Thank you, sir.
Mr. Crenshaw. Also, I will just point out, we did not hear
from 307 million Americans, so we do not know what they said
either.
Mr. Fattah. Mr. Chairman, you are absolutely right. And I
remember when the President said in the last election, two-
thirds of the people did not vote. But the ones who did said
you are going to chair this committee.
Mr. Crenshaw. I believe in democracy.
Mr. Serrano. I also remember an election that was decided
in Florida by 500 votes, even though the other guy had gotten
half a million more votes.
Mr. Crenshaw. Ms. Herrera Beutler, you are recognized.
Ms. Herrera Beutler. On that, one thing, you know, we had
this whole argument about who spoke up and who did not speak
up. Unfortunately, because of the Commission's actions, it
seems to have been rendered moot. Because what I understood
from the timeline, and this was one of my questions for
Commissioner Pai, is that the commenters and the people who
spoke up did not even get to see what they were talking about.
I mean, what I was just told was that we, Members of Congress,
weighed on this, but we were not even really released the rule
until after you voted. So, to argue that you are somehow coming
against 3 million Americans, they did not get to talk about
this. It was hidden. It was withheld. It was not disclosed. Is
that accurate?
Mr. Pai. Congresswoman, I believe it is accurate. I think
that many of the emails and letters we got, they had no idea of
the full range of this Title II plan because it was not
disclosed to the public. They had no idea exactly how we would
cover interconnection; that it would tee up service plans for
net neutrality violations; that it would include ex-post rate
regulation; that it would include a lot of these different
rules, which, now, we are seeing now the plan is public, some
of the very same people, such as Netflix's CFO, Google's
Chairman, just last week have said, I am a little antsy now
about the government injecting itself into the Internet. And
unfortunately, we had to pass it for the American people to see
it.
Ms. Herrera Beutler. I have heard this before: We have to
pass it to see what is in it. And the last time I heard that, I
shook my head, because I thought, this is not a good idea. And
now, we are finding out what is in it. You know, along that
same line, you know, aside from the President's declaration, I
want to know, specifically, if there are any events that led to
the policy, I would say, policy shift at the Commission. And we
heard a timeline, May, November, and then February, and then
the vote. And then we see it. In the spirit of transparency, is
there a specific Commission meeting that I can point my
constituents to and say, ``This is where it happened.'' This
information was unearthed, and we had to evolve from point A to
point B behind closed doors. Is there something I can point to
them, and show them?
Mr. Pai. Unfortunately, and I say this as somebody who
both, as a commissioner and a staffer, cherishes the agency's
independence, the seminal moment was the President's
announcement on November 10th. That he had to plan for net
neutrality, and he was asking the FCC to implement it. And that
was the defining feature, I think, of this entire proceeding.
Ms. Herrera Beutler. That is so disappointing. I have heard
a very good discussion on, and I heard you mention, there are
ways to make sure that consumers have choices, that they have
better speeds, that they have better prices. We want to see
that. We want to empower the consumers. And that is what
actually has made the Internet great, is that it empowers
consumers. It is not the government empowering them. It is not
us choosing, picking, in choosing winners and losers. It is a
free market tool that allows someone in their parents'
basement, as was quoted over here, to compete, because of their
idea and their innovation, with a well-established company.
That is an amazing tool. And the reason you see such vigor
defending it is because we do not want to screw it up. I mean,
the reason I believe this country is where it is, is because of
the free market opportunity. It levels the playing field,
right?
Mr. Pai. Right.
Ms. Herrera Beutler. One of the things I am concerned about
and, you know, we have talked about, I kind of want to put a
different spin is everybody uses the Internet for different
reasons. A grandmother in Castle Rock, in my district, small,
rural area, may get online a couple times a week to check
Facebook, to see pictures of her grandbabies. When I think
about my mom, that is one of her uses, is to check up on her
grandbabies. While a student at W.C. Vancouver may get online
and want to download HD movies. Maybe they have 10 hours until
their paper is due, and they need to do some serious research.
Right? They need to spend some quality time on the Internet.
What could the Open Internet Order's general conduct standard
mean for service providers who want to offer varying pro-
consumer plans to meet each individual's meets? I mean, are we
raising the rates on grandma?
Mr. Pai. I think, ultimately, Congresswoman, that is a key
question. The Internet conduct standard is so vague that nobody
knows exactly what it will proscribe and what it will permit.
And I think, essentially, every Internet service provider in
America is now going to have to funnel whatever creativity they
have through the regulatory bottleneck of the FCC to figure out
whether or not it is going to be allowed or not. The order
itself tees up seven vaguely worded factors, such as the impact
on free expression that any service plan might have. But if you
are a small ISP in a rural area, first of all, you do not have
the cash to hire lawyers and accountants to comply with these
regulations. But second of all, even if you did, the time it
would take for you to get an answer back from the FCC could be
prohibitive. And ultimately, it is going to be to the detriment
of those consumers who lack broadband options as it is.
Ms. Herrera Beutler. Totally switching thoughts, question
for Chairman Wheeler, you talked about reducing the number of
field director positions from 21 to five, and the number of
field offices from 24 to eight. I am very concerned, living on
the West Coast, because it said you are going to have the tiger
team in Maryland. They can get on a plane, but if you ever had
to catch a plane last minute, or in inclement weather here, you
are lucky if you get out and get to the West Coast, which is on
a completely different time schedule. And as you can imagine,
that is a major concern for me.
I understand the field offices played significant role when
we are talking about FAA administration, experiencing
interference when it comes to our Doppler weather systems. How
will the Commission continue to perform these important
functions with this new plan? Particularly, in the Pacific
Northwest, where, now we are going to have zero offices.
Mr. Wheeler. Great. Thank you very much, Congresswoman.
That is an excellent question. As you know, we have a field
office in Seattle, today, staffed by one person. And that
person costs $190,000 a year to maintain there, and has the
second fewest cases of any field office in the country.
Ms. Herrera Beutler. How many? How many?
Mr. Wheeler. One R.F. case per week. We have one person.
Ms. Herrera Beutler. So, about 52 cases in a year. And they
serve all of Washington, or the whole Pacific Northwest?
Mr. Wheeler. Pacific Northwest.
Ms. Herrera Beutler. Okay.
Mr. Wheeler. But, as I say, it is the second fewest of any.
So, the question is, if we pre-position equipment there, and we
can fly people in, what we are trying to do is to say, how do
we evolve? Because 20 years ago, when this plan was put
together, what the offices did was they went out, and they
inspected broadcast records. Well, those are online now, so you
do not have to do it. They went out and they made sure that the
lights were on, and antennas. Well, there is now automated
monitoring of that. And from those old style kinds of
activities, the new responsibility has increasingly become
spectrum.
Ms. Herrera Beutler. So, those cases you are talking about,
they are primarily spectrum cases?
Mr. Wheeler. Spectrum cases. And those can get dealt with.
There is a concern, you go in, and you deal with it, and then
you move on to the next concern. Because they are not all in
Seattle, as you know. They are all over the place. And so,
today, we are flying people, or driving people, to deal with
those cases. And we can do it from California, you know, as
efficiently as we can, more efficiently, than we can from the
other 24 offices.
Ms. Herrera Beutler. I am going to watch this issue,
because I have never wanted to be lumped in with California
when it comes to dealing with any major concerns. They tend to
really house their own challenges, and they need all their
people to take care of their challenges. So, we like to
maintain our autonomy. This is an issue I am going to be
following closely. Thank you.
Mr. Crenshaw. Thank you. And I think we have time for
another round of questions, if people have questions. I
mentioned in my opening remarks that our Internet market
exceeds Europe's, both in competition and in investment. And
Americans have more choices than their European counterparts.
So that is a good point of comparison, I think in terms of
global competition. But they have restrictive rules just like
the ones that we are adopting, and yet, when you look, I think
we have had four times as more capital investment, and twice as
much investment in mobile. In Europe, there is less
competition, less access. So, let me ask a question, Chairman
Wheeler: you used to be president of, I think it is called the
Cellular Telecommunications Internet Association, the CTIA.
Mr. Wheeler. Yes, sir.
Mr. Crenshaw. And that is the trade association for the
wireless industry.
Mr. Wheeler. Yes, sir.
Mr. Crenshaw. And a lot of people are surprised that, as
that was your former job, that you would support not only
classifying broadband Internet under Title II, but also
wireless Internet. So, I am just curious, if you were still the
CEO of CTIA, what would you be telling your membership about
these rules?
Mr. Wheeler. Thank you very much, Mr. Chairman. Let me just
clarify one thing. You said, I think, that Europe has rules
just like the ones we are adopting.
Mr. Crenshaw. Not just like. But I would say they have more
restrictive rules than we do.
Mr. Wheeler. Yes, and these rules do not move us towards
that. We do not have rate regulation. We do not have Terrafin.
We do not have unbundling. We do not have all those kinds of
intrusive things. We do propose here is the same kind of
concepts that Mr. Walden and Mr. Upton and others are saying,
which is the no blocking, no throttling.
Mr. Crenshaw. But more restrictive, you would admit to
that, than we have now.
Mr. Wheeler. And I hope that we are not going to have
blocking and throttling, and that it is nothing like Europe.
Two weeks ago, I met with all the European regulators, and I
can assure you, it is nothing like what they have. But, let me
answer your question.
One of my ``Ah ha'' moments in this whole evolutionary
process was my realization that Section 332, which while I was
the president of CTIA I was advocating in behalf of the
wireless industry for in this body, had done exactly what we
ended up doing here, which was to declare wireless voice a
Title II Common Carrier, and to forbear from unnecessary
regulation from the old style of Title II. And that was a huge
success. And so what we are doing is building on that model,
and the success of that model, and saying that we think that
will work for the Internet as well. Now, you ask the question,
Why cover mobile? Because 55 percent of the access to the
Internet is now from mobile. And if mobile is going to be the
Internet's future, which we all believe it is, then we need to
make sure that there is one set of rules, and that there is
openness. I know from personal experience that in the early
days of the mobile industry, in mobile data, that the carriers
tried to build walled gardens, and that you could only get on
the network if you agreed to pay some kind of tribute, in terms
of revenue sharing. We cannot have that imposed on the
Internet. And so the openness that all consumers have a right
to, I believe, on the Internet, is not constrained by whether
you get it by wire or over the air.
Mr. Crenshaw. Thank you. Let me just ask, Commissioner Pai
to comment on that. In your view, do these rules seem to
restrict competition? Are they more restrictive? I mean, in
terms of competition, do you see them as a step back? And, I do
not mean to say we are looking just like Europe, but comment on
where you think that leads us in terms of competition and in
terms of restrictions.
Mr. Pai. That is a great question, Mr. Chairman. I think,
with respect to the comparison, the mobile aspect is highly
telling. In the United States, 86 percent of Americans have
access to 4G/LTE. In Europe, that is only 63 percent, despite
the fact that they have significantly higher population
density. That 63 percent is up from where it was just a couple
of years ago. Secondly, in America, we have 30 percent faster
speeds than you do in Europe. Now also, with respect to the
regulatory framework as applied to Europe, Europe does not have
any mobile unbundling, all that kind of thing. So I think the
regulatory comparison there is pretty apt.
Secondly, in terms of competition, the American wireless
marketplace is highly competitive. You see a great deal of
competition on price. You see carriers spending billions of
dollars upgrading their networks. You see spectrum auctions
raising a lot of money, and the reason is, not because mobile
voice was classified as a Title II service, I mean, voice is
the least important driver of the mobile revolution. It is
mobile data. And mobile data has been historically unregulated.
It has not been a Title II service. And especially with the
inception of the smart phone in 2007, what you saw was
consumers realizing, ``Ah ha'' This device that I can take with
me is suddenly a substitute for all kinds of other wired
Internet connectivity. So now you see people streaming video on
their iPads and the like. It is the mobile data revolution,
driven by a light regulatory touch, that has really spurred all
this investment in innovation. And that is what we are putting
at risk when we say, Lump it in with the wired Internet access
providers. We are essentially saying mobile is just another,
you know, pipe, so to speak. It should be treated like the
water company or the electric company. I do not know about you,
but I certainly do not think of those companies as innovative
as some of the wireless companies that have delivered us the
ability to do all kinds of things on the smart phone. That they
were unthinkable just a decade ago.
Mr. Crenshaw. Thank you very much. Mr. Serrano, do you have
any further questions?
Mr. Serrano. Chairman Wheeler, my Republican colleagues,
and I say this with all due respect, gave Commissioner Pai a
lot of time to speak about his opposition to net neutrality. I
would like to give you a chance to respond to his comments.
Also, can you comment on the public round tables you had? I
understand there were six, and the reports and other
information that was released by the FCC, regarding Title II,
even before the President's announcement.
Mr. Wheeler. Thank you very much, Mr. Serrano. A couple of
things that I was lifting my finger for a moment ago. You know,
I was an entrepreneur in my earlier life. I spent the decade
before taking this job as a venture capitalist backing early
stage Internet protocol-based companies. Through this process,
I met with hundreds of innovative start-up companies and their
financiers. And they were all uniform in the comment that
permissionless innovation is what is key. That I do not have to
go to the gatekeeper and say, Well, is this the kind of service
that you will let through? Or is there a potential that you are
going to charge my competitor something that will give him a
leg up on me? And so, on the question that Commissioner Pai was
asked earlier about the impact on innovation, the key to
innovation is open access. And that is what we provide here.
Secondly, there was a question about rates for Grandma. We
are not going to regulate rates. Carriers are free to provide
whatever packages they want. If they want to have an email only
package, and all the way up to some kind of super-duper online
real-time game playing package, I mean, that is fine. That is
terrific. We hope to encourage that. And then, insofar as the
other comments you made about round tables, we had half a dozen
round tables. I was the only commissioner that was at every
single one of them for every single minute. We brought in
advocates on all sides, and had many hearings, if you will, to
sit down and talk about technical issues, talk about legal
issues, and talk about marketplace impact issues. And those
were very helpful in informing the process.
Mr. Serrano. Let me do something a little different, Mr.
Chairman. For me to say that I did not know that this was going
to turn into a net neutrality hearing would have been foolish,
because I know that that is the issue of the day. It did turn
into that. But let me end on perhaps an interesting note: what
is next? To both of you, what new gadgets, what new toys?
We know there is a watch coming. We know there is a car
that is going to park itself, wash itself, run itself, and the
whole thing. What is next, that the FCC will have to be looking
at, and be ready for?
Mr. Wheeler. You want to go first, or you want me to go
first? Let us flip a coin. Go ahead.
Mr. Crenshaw. Mr. Serrano, you better be careful. This is
going to be some inside information.
Mr. Wheeler. This is, you know, we got a couple.
Mr. Serrano. But I am not investing in this, so.
Mr. Crenshaw. Neither are we, just for the record.
Mr. Wheeler. We got a couple of tech freaks up here.
Mr. Pai. One of the things I am most excited about, Ranking
Member Serrano, is unlicensed spectrum. I think the five
gigahertz band in particular holds special promise for
delivering some of these high bandwidth applications. Right
now, we have some very complex issues related to the so-called
U-NII-2B, and U-NII-4 bands, that if we can resolve them, will
deliver a 195 megahertz of high delivery rate spectrum that
could really revitalize Wi-Fi across the country. That is the
thing that I am most excited about, in terms of the tech
sector.
Mr. Wheeler. I think it is the marriage of two things. One,
the power of Moore's Law, and how computer chips are doubling
in processing capacity every two years. Which means that, 15
years from now, they will be a thousand times more powerful
than today, which is an amazing kind of thought. And secondly,
wireless. And that those two coming together are the greatest
transformational force that the planet has ever seen. And that
it will enable the kinds of things that use the kind of
spectrum that Commissioner Pai was talking about. That it will
enable the things you and I have never even begun to
contemplate. And everything will be connected. And everything
will talk to everything else. And the most interesting things
that flow out of that, then, are that creates new information.
And so this becomes a network that by the provision of services
creates a new asset, and that is the first time in history that
has ever happened. And secondly, it creates great privacy
issues that we collectively, in the Congress and in the
Commission, are going to have to deal with.
Mr. Serrano. And then, closing, Mr. Chairman, I know my
time is up. We have questions for the record which we never go
to, and I was part of it by asking the last question. I just
hope that you do two things: that you continue to do the work
you are doing, but that you also, both, the whole Commission,
pays attention to our schools, pays attention to those who do
not still have in this country access to the Internet, to
provide it for them. And remember not to set the Territories
apart from the United States. They get left behind on many
occasions. You knew I had to get that in. So thank you so much.
And I must tell you that my Twitter stream has a lot of people
watching because they have called us a lot of names, and they
are mostly positive.
Mr. Crenshaw. Thank you, Mr. Serrano. Now, Mr. Yoder has
another question.
Mr. Yoder. All right. Thank you, Mr. Chairman. I want to
commend both of you on, I think, doing a very nice job today of
laying out opposing viewpoints on an issue that is of critical
importance to our country, and I think it is been nice to watch
the interchange and debate, and I appreciate your testimony,
both of you today. You articulated issues that, I think, have
given both parties in this Congress things to think about, on
the other side.
I will say that what continues to give me pause, and I
think the net neutrality debate is a very interesting one, is
the potential camel's nose under the tent regarding future
regulation. And I think even Chairman Wheeler, you would be
wary of the FCC expanding these powers, I hope. And so whatever
the FCC can do, you know, obviously, I have raised the issues
of taxes and the USF fund. I have raised the issue of the cost
to implement, but the potential to expand and control rates,
and all these things, I think, would make many of the
proponents of this net neutrality proposal regret that the FCC
took those actions to get there, because it could ultimately be
a net loss in terms of freedom and opportunity here.
So it is not just net neutrality, I think that debate has
been very interesting, it is what else could happen. And we
have seen agency after agency in this government take very
limited powers and figure out ways to expand them. It happens
at the EPA. It happens at every federal agency. And we wonder
how the regulatory agencies end up getting away with all this
power, and they usually justify it by saying, well, someone
gave us a broad power long ago, and we have the power to expand
that within our own rules. And so I think Congress will really
have to look at making sure that this expansion of power does
not occur to some of these other potential problems that even
proponents of net neutrality would be opposed to.
That being said, I want to change the subject a little bit
to the repacking spectrum issue. And Mr. Chairman, I think we
can all agree that the broadcast incentive auctions are a very
important process for spectrum allocation, public safety
funding, and debt reduction. However, when Congress authorized
the incentive auction we intended that local television
stations that continue to serve their viewers and communities
would be held harmless. Accordingly, Congress allocated $1.75
billion to the Television Broadcaster Relocation Fund, to cover
the reasonable costs that stations will incur as a result of
changing channels. Some have estimated though, using the FCC's
own expert report as a basis, that repacking more than 13,000
stations to clear 84 megahertz of spectrum may cost more than
$2.6 billion, leaving a shortfall of over a billion from the
relocation fund, or more than $600,000 per station. If that is
the case the auction was intended to be voluntary, but if
stations are forced to cover the repacking costs, it does not
seem very voluntary. So I guess my questions are, is there
anything the FCC can do to limit the television station
repacking to $1.75 billion, and if the incentive auction clears
84 megahertz of spectrum, will the relocation fund be
sufficient to prevent broadcasters from being forced to go out
of pocket?
Mr. Wheeler. Do you want to try that?
Mr. Yoder. Either way.
Mr. Wheeler. In short the answer is that, as you point out,
$1.75 billion is a statutory number that we have to live with.
Many broadcasters have said to us that it is insufficient. We
have worked with broadcasters and with the wireless industry to
say, Is there a way we can have an insurance fund? We cannot
redirect auction revenues to do that. So we said to the
wireless industry, You guys are going to be the beneficiaries
here. You are buying it, okay? Understanding that it is going
to result in a decrease probably in what you would pay overall,
but why don't you guys create some kind of an insurance fund?
They have not been interested in doing that. This is an issue
that we are going to have deal with. We have a whole set of
rule-makings that will percolate over the next half a dozen
months leading to an auction this time next year. And the other
part about it is if Congress can help us with this, raise your
hand and say, ``We would love to work with you on it''.
Mr. Crenshaw. Commissioner.
Mr. Pai. I would add that this simply accentuates the
importance of structuring the auction in a way that tailors the
repacking to that $1.75 billion budget because for every dollar
above $1.75 billion that comes out of the broadcasters' pocket
will get taken out on the viewers of the stations, who have to
see less local news, et cetera, and so I think it is important
for us $1.75 billion as a marker, unless and until there are
other initiatives that Congress sees fit to adopt.
Mr. Yoder. Thank you. Thank you, both. Thank you, Mr.
Chairman.
Mr. Crenshaw. Mr. Graves.
Mr. Graves. Thank you, Mr. Chairman. And I would like to
agree with Mr. Yoder on your discussion today. Each of you have
done a wonderful job of explaining your positions eloquently.
And you clearly know the other person's opposing views very
well, too.
Mr. Wheeler. Mr. Graves, we are getting a lot of practice.
Mr. Graves. You are getting a lot of time together. But you
have been very respectful. I know each of you have to one
another. And this is a very passionate issue for a lot of
different reasons. And in my case, I mean clearly, I appreciate
Mr. Pai's position, your advocacy, and side with you on that,
and the reason primarily is I believe whenever you have very
difficult, challenging decisions, such as the Commission was
faced with in this, it is better to err on the side of less
government intrusion in the marketplace. I just do not think
you can go wrong when you lean in that direction, you err in
that direction, when there is clearly a lot of questions out
there.
But, if I could just follow up with one other item, and
then make a statement, Mr. Chairman, because I think it is
about transparency. A lot of this debate has been about
transparency and, you know, in our district, my constituents
want to know things are transparent, and they feel the
overbearing federal government and particularly here, as an
appropriator, transparency is going to be extremely important
to us as a committee. And so Commissioner Pai, you have said in
the past orders issued by bureau of the FCC could always go to
the full Commission for a vote. Is that still the case today?
Mr. Pai. It can, yes, if there is an application for review
that is filed, the agency can address the bureau's decision.
Mr. Graves. And so transparencies will exist in that case?
Mr. Pai. I certainly hope so, and I think in addition to
transparency, dispatch is a critical part of it. We cannot just
let that application sit there forever. And so that is
something that, working together, we have been able to
accomplish.
Mr. Graves. Well, I believe Ms. Herrera Beutler brought up
a great point about how there was a lack of transparency. It is
the appearance and perception and probably likelihood that the
Commission votes on something that is not released until a few
weeks later, and that causes a lot of questions. And so,
Chairman Wheeler, just know that the sentiment among my
constituents is distrust. It really is. It is with the
President, it is with the administration, and I know Mr.
Serrano had a point earlier. I mean, Mr. Pai had a point
earlier about, it was three to one supported this process.
Well, if I remember right, it was entitled Open Internet Order.
Who is not for an open Internet?
And so that is where transparency and distrust sort of
collide. Because you feel like, yeah, I am for an open
Internet, and now, there is this collision of ideas out there
that say, ``No, it is not that''. It is going to destroy the
Internet, or it is going to create these burdens or barriers
out there. So in this case with the FCC, I do not believe
technology should be partisan whatsoever. This should be a bi-
partisan effort. And it is my belief that if there were changes
made to the process, if there were perimeters in place to
ensure transparency, then it would be much easier for myself,
and I know my colleagues here on this panel, and the Chairman
of the Committee here, to embrace the budget request as you
have presented. But lacking that I imagine there are going to
be some changes made, or suggestions, and we are going to
continue this debate in the future. So, Mr. Chairman, I
appreciate the time today.
Mr. Wheeler. Do you want me to respond?
Mr. Crenshaw. Feel free.
Mr. Wheeler. I thank you for very valid point, Mr. Graves.
I think there is a misunderstanding about the process that we
followed. The process we followed insofar as the release of the
item is the process that has been followed for every other
preceding at the FCC, large and small, you know, whatever it
is. And the information leading up to it was the most open and
transparent debate that we have had. I mean, we had full
involvement from members of Congress. I mean, I was constantly
up here, being told what to do. And I appreciate entirely your
point about openness because it is the key to credibility.
Mr. Crenshaw. Commissioner Pai.
Mr. Pai. Thank you, Mr. Chairman. I think transparency is a
critical issue because it goes to the basic question of can
citizens trust their government. And in this case, part of the
reason why I said that the plan should be made public so that
the American public can weigh in on it, on its particulars, not
just the concept, was because it affects something so critical
to American life. And that is why I think it is significant
that, for example, Peter Hart, a respected Democratic pollster,
found that 79 percent of Americans, regardless of what they
thought of the actual rules, thought that the net neutrality
plan should be made public. And tellingly by a 23 percent
margin, they believed that they order itself was inappropriate,
that we should have gone a different way.
Now moving forward, the question is, how do we change our
processes if at all? And one of the things I have heard a lot
about, and I agree with, is that going forward the FCC should
do something similar to what Congress does. When you drop a
piece of legislation you put it on the website. People can
comment on it. Then you have a markup for everything. All the
language is out there for people to see. Well, what if the FCC
did something similar? Three weeks before a scheduled FCC vote,
we say, Here is the proposal we are going to be voting on. The
actual document. America, tell us what you think, and we would
be happy to get your input. And then by the time we vote no one
can say that they were not apprised fully of all the
particulars. That is something where, even if people do not
agree with what the FCC ultimately does, nonetheless, they
would have the ability to say that they were informed about
what was about to happen, and that can go a long way to
restoring trust.
Mr. Crenshaw. Thank you. And, I have one last question
about direct appropriations. I think, as Mr. Serrano pointed
out, we have talked a lot about net neutrality, which is a
rule. But as we said early on this is the committee that
decides where the money comes from to go to do things, like
proposing rules. So let me get back to just one last specific,
appropriations aspect. And that is the move, the restacking, or
the move. There is a $44 million request there, and I think it
points out that it will cost $71 million over a two year period
to move, and ultimately, that will save $119 million over a 15
year period. So just for the record, tell us a little bit about
how you come up with those numbers? Does GSA? Where do those
numbers come from, and where are we? I think OMB is reviewing
that now.
Mr. Wheeler. Thank you, Mr. Chairman. This is a process
that we are working through with GSA. I mean, we are not the
landlord experts here.
Mr. Crenshaw. Not the real estate people.
Mr. Wheeler. We are not the real estate people. But our
Office of the Managing Director, working together with GSA, has
developed these numbers. And we are following the processes of
GSA in terms of what you do about location/relocation, or
whatever.
Mr. Crenshaw. Got you. Well, if there are no further
questions, let me just add my words. Mr. Serrano.
Mr. Serrano. Can I just say, very briefly, because I do not
want to take advantage of the Chairman. Are we getting any
closer to the kill switch on smart phones? For those who may
not remember, the kill switch is an issue where phones are
stolen here, are sent overseas in many cases, they restart it
over there. And the kill switch would not allow that to happen.
I know some manufactures are doing it on their own. Are we
getting any closer? I know you guys have been talking about it.
Mr. Wheeler. So Mr. Serrano, July of this year, carriers
have told us that all phones going forward will have remote
lock, wipe, and restore capabilities. Beyond that, however,
there is a standards group in the wireless industry called
3GPP, which has said that they will come back by the end of
this year with an identification system that is even better
than that, and becomes like the non-wipeable vehicle
identification number that we now have on automobiles, that
were so successful on automobile thefts. So we are making
progress.
Mr. Serrano. Yeah, what we are hoping for is, you know,
close to this, that it is the kind of technology that does not
allow someone to just wipe it and locks it, and does not allow
anyone anywhere else to restart it. Mr. Chairman, Commissioner
Bratton from New York at a press conference we had with the
Attorney General of many states, says that 30 percent of all
robberies in New York City were with smart phones.
Mr. Crenshaw. Well, again, thank you for your testimony
today. Thank you for the important work that you do. And we
appreciate you being here to share that with us today. This
hearing is adjourned.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Wednesday, April 15, 2015.

SECURITIES AND EXCHANGE COMMISSION

WITNESS

HON. MARY JO WHITE, CHAIR, SECURITIES AND EXCHANGE COMMISSION
Mr. Crenshaw. The meeting will come to order.
I want to welcome today our witness, SEC Chair Mary Jo
White. We thank you for being here today. The committee always
likes to see you, and I am sure there will be a lot of things
that we will want to discuss.
The Securities and Exchange Commission plays a particularly
important role of encouraging capital formation, maintaining
fair markets, and protecting investors. A well-functioning SEC
is critical to keeping U.S. markets sound and operating
efficiently.
For the fiscal year 2016 the SEC is requesting a $222
million increase, or a 15 percent increase over 2015. And while
the SEC is fee funded, I take our oversight responsibilities
seriously, and as we have seen with other agencies, including
the SEC, it is not always just how much money that you receive,
but it is how you spend that money that you receive. And as you
recall, in 2015 this subcommittee was fairly generous. There
was a $150 million increase, or about 11 percent, and I think
since 2001 the agency has received an increase of about 255
percent, which is probably more than most other agencies in the
Federal Government.
So as we discuss your fiscal year 2016 request, we want to
hear from you exactly how you are going to spend that money,
and why last year's increase didn't carry you through. On a
positive note, for the last 2 years this committee has set
aside funding to fully fund the Division of Economic and Risk
Analysis. We think that cost-benefit analysis of SEC
rulemakings is very important, and I am glad to hear these
funds have been used to do more analysis of the Commission's
activities.
While we have a lot to talk about today, I am especially
interested in hearing your thoughts on market liquidity or
illiquidity, and what the SEC is doing to address this issue. I
have heard that burdensome and overlapping regulations are
creating a lack of liquidity in the U.S. markets and on our job
creators, and if we don't address that in a timely and
consistent manner, then illiquidity could introduce potentially
damaging volatility to our markets that could have far-reaching
impacts on our ability to grow the economy, and, quite frankly,
would be contrary to the SEC's mission of fostering access to
capital.
I am also concerned a little bit by certain decisions made
by the Financial Stability Oversight Council, the so-called
FSOC. You are a member of that. FSOC's regulations affect
entities under the SEC's supervision. And I am not sure that
all of the FSOC's actions are matching its mission. Because the
process of designating systematically important financial
institutions is important, and it has some troubling
implications. Entities should be given the opportunity to
address the systemic risk before they are designated. I don't
think you should just be in the business of only designating
more SIFIs. You should be looking for ways to mitigate systemic
risk for the good of our economy as a whole.
I want to bring one more thing to your attention, two
letters that I sent, along with my counterpart in the Senate,
Senator Boozman. We wrote a letter that talked about believing
the SEC should take the lead on addressing the Department of
Labor's proposed rule to amend the definition of fiduciary. I
would argue that Dodd-Frank gave the SEC the responsibility of
studying and potentially developing a uniform fiduciary
standard of care for broker-dealers and investment advisers,
not the Department of Labor. But I have read that you believe
that broker-dealers and investment advisers should be held to a
similar fiduciary standard and maybe are working on crafting a
rule on this important issue. So I hope we can discuss that as
we move forward.
I also sent a letter to Chairman Ketchum of the Financial
Industry Regulatory Authority, the so-called FINRA, on their
proposed central database rule. Now, they are a self-regulatory
organization, a so-called SRO, and I am concerned that the SEC
sometimes addresses critical market structure issues by
delegating the responsibility to SROs. I am sure that part of
the reason may be that you want to protect your resources. But,
again, just more money is not the only way to solve problems. I
think you could have reforms as simple as allowing affected
market participants to provide meaningful input. That could
improve the governance structure, and I hope to learn more
about that.
You are the securities regulator and expert. I expect the
SEC to be leading the charge to help further grow our economy.
You have a central role in helping businesses and investors
gain access to capital and participate in securities markets,
as well as protecting U.S. investors from the bad guys. That is
an important responsibility, and I know you take it very
seriously.
So we appreciate what your staff does, and appreciate you
being here today. I look forward to your testimony.
Now I would like to turn to my good friend and ranking
member, Mr. Serrano, for any open statement that he might like
to make.
Mr. Serrano. Thank you, Chairman Crenshaw. I join you in
welcoming Chair White back before the subcommittee to testify
on the fiscal year 2016 budget request for the Securities and
Exchange Commission.
Usually we have the IRS visit us on tax day, but we have
changed it up a bit this year. Besides, they scare everybody in
the room regardless.
The SEC plays a pivotal role in ensuring fairness,
openness, and truth in our financial markets. As the markets
have grown more complex, and as new technologies have taken
root, the needs of the agency have grown as well. I am pleased
that last year this committee was able to come together and
provide a substantial increase in funding for the agency, with
a total of $1.58 billion in fiscal year 2015, an increase of
$150 million over fiscal year 2014.
Although the funding increases were helpful in enabling the
SEC to rigorously enforce the law, last year's appropriations
process was a source of much concern as well. In fiscal year
2015, a series of controversial riders were added to this
portion of the bill, which limited SEC activities in a whole
host of areas.
Additionally, one amendment made in committee, which I
oppose, was simply the legislative text of authorizing
legislation. Although most of the riders were removed, the
authorizing language remained in the final text of the bill.
That language opened up loopholes in Dodd-Frank and once again
allowed certain types of risky financial transactions to be
made by financial institutions without sufficient protections
from the Federal Government.
Many House Democrats opposed the omnibus bill last year
because of this provision, including myself. And I must say
that we were on our way to having a bill which probably was
going to be as bipartisan as we have had an appropriation bill
in years, and this one provision stopped us from doing that,
which is so important. It was the single biggest impediment to
bipartisan agreement in the House. I believe that further
attempts to limit the SEC's ability to protect financial
markets and the economy would greatly harm the prospects for a
Financial Services appropriations bill.
This year's request asks for further targeted investments
that will help the SEC protect consumers and investors. I
always like to say that the SEC is the cop on the beat for Wall
Street. If I may extend the analogy, the amount of territory
the SEC is required to cover grows each year, and the agency
needs more cops to enforce the law properly.
Chair White, I fully support your request to increase the
number of personnel in enforcement and compliance, as well as
in other key areas. Your proposed budget is key to ensuring the
safety and security of America's financial markets and the
economy as a whole, and I hope that this subcommittee takes
your request seriously.
Lastly, before I finish, I think everyone here needs a
reminder about the problems that sequestration caused the SEC.
The agency was severely hampered by these mandatory budget
cuts, and that put our economy needlessly at risk. We cannot
allow another sequester to return. Otherwise we simply increase
the risk of another financial meltdown. The SEC is a vital
piece of our efforts to ensure the safety, security, and
fairness of our financial system. We have given the agency
significant new responsibilities over the past few years, but
without the proper resources they cannot adequately enforce the
law.
Chair White, once again welcome, and I look forward to your
testimony.
And thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
We now turn to Chair White for your opening statement. The
floor is yours.
Ms. White. Thank you very much, Chairman Crenshaw, Ranking
Member Serrano, and members of the subcommittee. Thank you for
inviting me to testify today in support of the President's
fiscal year 2016 budget request for the Securities and Exchange
Commission. I appreciate the opportunity to discuss both what I
believe is the compelling basis for funding the agency at a
level of $1.72 billion and how the SEC would effectively use
the requested funds in the coming fiscal year.
The U.S. securities markets are complex and constantly
evolving, and the activities within our jurisdiction are not
static. Understanding the growth in the size and complexity of
the SEC's responsibilities and in our markets, market
participants, and investment products is critical to assessing
the agency's funding needs.
From fiscal year 2001 to the start of this fiscal year, for
example, assets under management of SEC-registered investment
advisers increased approximately 254 percent, from $17.5
trillion to approximately $62 trillion. Assets under management
of mutual funds grew by 143 percent, from $6.4 trillion to
$15.6 trillion. And annual trading volume in the equity markets
more than doubled, in excess of $67 trillion.
During this same time the scope of the SEC's
responsibilities also dramatically increased. The agency now
currently oversees more than 25,000 market participants and has
new or expanded jurisdiction over securities-based swaps,
private fund advisers, credit rating agencies, municipal
advisors, and clearing agencies, among others. There are also
longstanding agency needs, including having sufficient
resources to examine the 11,600 investment advisers regulated
by the SEC.
Improvements to technology and operations have made the
agency more efficient and effective, but to continue to fulfill
our mission we must be able to keep pace with the size and
complexity of our markets and the entities participating in
them.
The SEC's fiscal year 2016 budget request would allow us to
build on our recent progress and advance several key priority
areas, including increasing examination coverage of investment
advisers and other key entities who serve retail and
institutional investors. A decade ago the SEC had approximately
20 examiners per trillion dollars of assets under management,
while today we have only 7.
We would also be able to further leverage technology to
increase the efficiency and effectiveness of our programs,
increase the protection of investors by expanding our
enforcement programs investigative capabilities and
strengthening our ability to hold wrongdoers accountable,
strengthen the SEC's economic and risk analysis functions,
critical functions for the agency, and hire the experts
necessary to enhance the agency's ability to meet its expanded
and increasingly complex responsibilities.
Since I testified before this committee last April, the SEC
has accomplished a great deal. Over the last year, the
Commission has adopted a series of very important rulemakings,
including a number mandated by the Dodd-Frank Act and the JOBS
Act. Completing critical reforms to money market funds, credit
rating agencies, and asset-backed securities, and significant
enhancements to market resiliency and Regulation A were among
the agency's accomplishments this past year.
In other core areas, we advanced our assessment of U.S.
equity market structure to ensure that our markets remain the
deepest and fairest in the world, and intensified our efforts
to improve the market structure for trading fixed income
securities. SEC staff also significantly progressed in
developing measures for enhancing risk monitoring and
regulatory safeguards for the asset management industry,
advanced our initiative to improve the effectiveness of the
public company disclosure regime, and neared completion of its
comprehensive review of the accredited investor definition.
Our Division of Enforcement also achieved very significant
results, bringing 755 enforcement actions and obtaining orders
for more than $4.16 billion in disgorgement and penalties in
fiscal year 2014, both at record levels.
These accomplishments represent substantial achievements
for the agency, but more remains, and there are significant
funding challenges as we strive to maintain and intensify this
momentum.
As I have outlined in detail in my written testimony, the
SEC's 2016 budget request seeks to address those challenges
really head-on by providing the resources that will allow the
SEC to hire an additional 431 staff in core areas, including
180 for investment adviser exams and to further advance our
information technology.
The SEC's funding mechanism is deficit neutral, which means
that the amount Congress appropriates to the SEC will not have
an impact on the Nation's budget deficit, will not impact the
amount of funding available for other agencies, and does not
count against the caps set in the bipartisan congressional
budget framework for 2015 and 2016.
Nonetheless, and responsive to the chairman's comment, I
fully understand that we have an important responsibility to be
effective and prudent stewards of the funds the agency is
appropriated, and I believe we have demonstrated that we take
that responsibility quite seriously.
I want to thank this subcommittee's support for the
agency's vital mission, and I would be happy to answer your
questions.

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Mr. Crenshaw. Well, thank you very much.
Mr. Serrano, do you have a thought?
Mr. Serrano. Mr. Chairman, I apologize for interrupting you
and I thank you.
I think one of the things that makes this country great is
that we deal with our past and we try to correct mistakes we
have made in the past. I would just like, as a baseball fan and
as an American, to remind people that on April 15, 1947, Jackie
Robinson took the field for the first time. Some would say he
integrated baseball. I think he played a major role in
integrating America, and I think all of us owe him and his
memory and his legacy a great debt of gratitude.
So I know at a hearing for the SEC the farthest thing from
our mind is baseball, but I think April 15 is not just tax day.
It is the day that Jackie Robinson changed America forever.
Thank you.
Mr. Crenshaw. Well, thank you. And I can assure you that
Chair White appreciates that as a big baseball fan.
Unfortunately, she is a Yankees fan, so she is struggling this
year.
Ms. White. Already.
Mr. Serrano. So am I.
Mr. Crenshaw. So am I. Well, thank you for that.
Let's start with some questions. I mentioned in my opening
statement about the fiduciary standard, that I wrote a letter
to OMB Director Donovan. I am concerned about the Department of
Labor deciding they are going to amend the definition of
fiduciary. In my view, Dodd-Frank gave the SEC the
responsibility to do that, to study it, to potentially develop
a uniform definition, and DOL seems to be moving on their own.
In my view, the SEC ought to move first because my concern is
that you end up with, like we have on occasion, regulatory
conflict; two different rules. And I don't know what the
impacts are going to be on ordinary investors.
So what I want to know is, is this something that you all
are aware of, that you are making a priority, that you are
doing the necessary work on, and are you coordinating with DOL
as they move along ahead of you. Because here is the thing: it
seems like everybody wants to protect investors from market
risk, and inherently markets are risky. So I am not sure that
you can protect investors against all losses just because you
have a different standard in terms of fiduciary relationship.
So we want to be reasonable.
Tell us a little bit about how closely you are looking at
the existing regulations, why they are not sufficient, why we
need to amend that definition, and primarily what kind of
impact might it have on low- to moderate-income investors if
all of a sudden they get priced out of the brokerage services.
Ms. White. And I think, Mr. Chairman, that it is an
extraordinarily important area and potential rulemaking for the
benefit of investors, fairness of our marketplace, and
particularly as our investors, our retail investors in
particular, have their retirement savings much more invested in
the market than ever before.
This is an issue the SEC has been looking at for actually
many, many years and has sought and received a lot of very
useful data. I think I said at the time of my confirmation
hearing, when I was introduced to this issue, that I thought
that, knowing that we had the authority, not a mandate--under
Section 913 of Dodd-Frank to impose that uniform fiduciary duty
on broker-dealers and investment advisers, really to act in the
best interests of the investor, putting the professional's
interest secondary to that, that I thought as a regulator you
had to think long and hard when you are really talking about
essentially identical activity, providing advice, securities
advice, personalized advice to investors, particularly in the
retail space. You had to think long and hard about not having
identically high standards. So that is sort of where I come
from on that.
Now, having said that, we have continued to study it. I
have intensively studied this really throughout my tenure with
the staff. It is a hard, complex issue. And I do think, my own
view, and I am speaking for myself now, because this is
something to be advanced within the Commission, and
Commissioners have different views on a number of topics, but I
think we should proceed with it. I think we should proceed
under Section 913, which itself contains a number of parameters
that really are addressed to the existing marketplace, and
particularly the existing broker-dealer model. For example, it
is not to be considered a per se violation of any fiduciary
standard that you charge a commission.
Achieving the right balance is very, very difficult to do.
And obviously if at the end of the day what we succeeded in
doing was applying a new standard, but we essentially deprived
investors, particularly the smaller investors, the mid-size
investors, of reliable, reasonably priced advice, we would have
failed in that effort. So those are issues that we have been
focused on and we will be focused on as we go forward.
The other part of this, and I have said this publicly, is
that I think what we need to be sure of is that we are
sufficiently examining those investment advisers that I spoke
about earlier. And so I have asked the staff to actually
provide a recommendation on some kind of program of third party
exams to supplement what we can do there, because if you have a
uniform fiduciary duty, you have to ensure compliance and
enforcement with that.
The Department of Labor, what we have done on that front is
we provided pretty extensive, at the staff level, technical
assistance as they have gone through their process. They had a
proposal, as you know, in 2010. I think yesterday the
reproposal was published. So we provided extensive technical
assistance to them on that, bringing our expertise of the
broker-dealer space to bear on that.
But they are a separate agency, and so they have to decide
under their own statutory mandate, which is an important one,
over the ERISA retirement accounts, how and when to proceed. I
agree with you, though, that it is very important for the
agencies to continue to consult and coordinate.
Mr. Crenshaw. So you are working to coordinate that, you
are giving them assistance, but they are proceeding. You are
proceeding a little more cautiously and more, I would hope, in
depth. They just decided they are going to run out and pass a
rule.
Ms. White. Well, I would say this. I mean, the staff
provided the technical assistance. The staff reported to me
that the Department of Labor was responsive to receiving that
assistance. We really are at the beginning of this process with
my decision to advance it within the Commission. I am one of
five votes, obviously. But we will proceed if we are
proceeding, and that is my intent, to proceed very carefully,
balancing all of the considerations.
Mr. Crenshaw. Thank you.
Let me ask you a question about the budget. I mentioned a
$222 million, 15 percent increase. That is 431 new staff
positions. Now, last year you got a pretty generous increase,
and this subcommittee was happy to help in that regard. I
looked at the last quarter report and the SEC has $69 million
in carryover funding left over from fiscal year 2015. I am
going to ask if that is still the case. Then you have got this
reserve fund that you can tap into, $100 million, anytime you
want to that is outside the appropriations process, that is
there for you.
So the point is you have a lot of resources, and as I
pointed out earlier your budget has increased even long before
you got there, but over a 13-, 14-year period it has gone up
255 percent.
So maybe tell us a little bit how you go about, when you
put your budget together, what do you look at in terms of your
ability to be more efficient, more effective, cut costs, and
things like that.
Ms. White. We go through a very thorough budget process,
and since I arrived at the Commission have looked really across
the agency for both what are our most compelling needs, as well
as for cost savings. And so we are doing that across the
agency. We have achieved a number of savings by our investment
in technology, other changes to our business practices, and I
think that is very important to do.
And again I very much appreciate the subcommittee's support
on last year's budget. What we had requested was, I think, 639
positions. I think we got 208. But, again, very appreciative of
what we did get. But I just want to assure the subcommittee
that before we put that budget or this budget together, I went
over it in great detail and tried--I use the word surgical, and
that is the word I mean--to really try to pinpoint what we are
asking for.
One of the reasons I went through, and I think it is in my
written testimony as well, some of the metrics about our
responsibilities and how our markets have evolved and our added
responsibilities is to try to show the case, the compelling
case, for precisely what we have asked for.
I mean, the one subject we talk about, and I think we did
last year as well, that kind of has sort of jumped out at you,
is our ability, even with those increases, to cover or not be
able to sufficiently cover examinations of investment advisers.
Our current budget request, and I think I mentioned this, I did
mention this in my oral testimony, 180 of those positions that
we asked for would go precisely to that clear stark need.
Our other needs are also ones where I think we have shown
the value add from what we are seeking to further invest in and
really further to continue, for example, the requests for
additional resources for our Division of Economic and Risk
Analysis. Our DERA group is a huge success story at the SEC. It
is our fastest growing division. It not only helps us on our
rulemakings, which I think everyone talks about and knows
about, makes us a better rulemaker, but they are also managing
a large amount of data risk metric tools for all of the
divisions. And so that is another area that we are very focused
on.
We do have new responsibilities to implement, as I
indicated in my oral testimony. So we have tried to make it a
conservative statement of what our real compelling needs are.
Mr. Crenshaw. Do you ever have a problem, like with 431 new
positions, is that hard to fill in a short period of time?
Ms. White. It certainly can be a challenge. And, again, one
of the things that I spend a lot of personal time on when we do
our request is assessing if we are given the funding for this,
which we think we so badly need, can we hire them. We are an
agency unlike many of the other Federal agencies that have no-
year funds.
So one of your points, about balances, and I can talk to
that as well, if we get to the end of the year, and to some
degree it depends on when we get our appropriations, as to when
we are able to spend money, but if we get to the end of the
year where we haven't spent all the money we have been
appropriated, we can actually have it carry over.
So we are doing smarter hiring, frankly. The last thing we
want to do is just fill those positions and not with the right
experts and the right people.
And so we attend to the balances that we have, they have
been going down over time. I think about $21 million of the
balances for this year are actually from great financial
planning, from de-obligating moneys on completed contracts. So
that is $21 million of it.
But we do take into account those balances in planning the
budget request and planning the next budget year. One of our
requests in this budget year, as it has been in at least a
prior year since I have been here, is to add the necessary HR
resources so we really could hire that many people smartly. It
depends to some extent on when we would get our appropriation.
Mr. Crenshaw. Do you ever--and I know you don't have a
crystal ball because you would invest in the market if you
did--but do you ever see, when you look down the road, do you
see a time when there won't be as great a need for increased
funding, is that something you think about, or do you just take
it year by year? Will there be a time when the budget stops
growing, or is that hard to tell?
Ms. White. I mean, we certainly don't have a number that we
say once we are at that additional resources aren't needed.
And, again, that kind of goes back to the fact that we have got
evolving, increasingly large, complex markets to deal with. If
that changes, we may get new additional responsibilities. We
certainly aren't asking for resources in order to grow for
growth's sake.
I mean, for example, on the investment adviser front,
clearly our planning is a multiyear plan. It is not as if we
won't be here next year trying to further close that gap. I
think if we got the funding we are seeking this year, we think
we could increase our exam coverage from 10 percent to 14
percent. But if you look on the broker-dealer side, with our
resources and FINRA's, we are about 50 percent a year in terms
of who we examine.
I can't tell you that isn't an area, as well as a number of
the others, where we are going to need for at least some years
to come additional funding, but we look at that very, very
closely because we are not in the business of just saying let's
grow to grow.
Mr. Crenshaw. Got you. Thank you so much.
Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman.
Chair White, you have been at the SEC in very uncertain
budgetary times. Can you remind us the effects that
sequestration had on the SEC and what cuts would you have to
make to get to sequestration levels? What would you not be able
to do if the SEC budget was reduced back down to that level?
And let me just say that I am still one of the perhaps few
believers that it was a lack of oversight by the SEC that
helped cause part of the problem on Wall Street that has led us
into the situation that we still find ourselves in. In fact, I
tell a story which changes a little bit every year, but is
still sticking pretty much to the truth. The SEC is the first
agency I have ever seen in my 41 years of public office, both
in the state assembly and here, to come before us one year and
basically tell us they didn't need any more money. And later we
found out it was because they weren't using any money for
oversight.
And so on the long term, what do you see? And on the short
term, what do you have to deal with?
Ms. White. Let me be clear that wasn't me that came and
said we don't need any more money.
Mr. Serrano. Oh, no, no. That was quite a while ago.
Ms. White. Because, again, I am obviously trying to carry
out the responsibilities, and they are critical ones, to the
investing public and our markets with sufficient fundings, and
the resources are a significant challenge.
Sequestration clearly had a significant negative effect on
the SEC, and it would again. I think everything you see us
prioritizing in this budget request and the last one either
were compromised or would be compromised if sequestration were
to occur again. It means there is not staff to do those exams
where something, some huge fraud may be occurring, and because
we are not there, we don't have the resources to be there, we
don't catch it as soon as we would otherwise. And that is true
of enforcement, as well as our exam program.
Our technology projects, which are so critical to getting
the SEC to where it needs to be to keep pace with the market
and the market participants, a number of those projects had to
be what I would call underfunded and clearly retarded and
slowed that progress. I think everybody--maybe not everybody--
but most people agree that having the SEC raise our own
technology bar is necessary to keep up with the markets. I
think I read something recently where four of the largest
investment banks spend $7 billion to $10 billion a year on IT
alone. Our whole budget request is $1.7 billion. And,
obviously, those are our registrants, those are the people that
we are proceeding against.
So really every priority area that you see we had to cut
back and slow down our spending and therefore our progress on
those. Obviously, we always try to do the least damage to our
core mission priorities when we are faced with a situation like
that.
Mr. Serrano. Notwithstanding all these problems, do you
think we are in better shape now? And maybe this is just a
question, a softball. Are we in better shape now than we were
before meltdown? Are we more vigilant? Or is this something
like a street situation where every day I am amazed at how
people on the street find a new way to come up with something
outside the law. Is Wall Street the same way? As we speak now,
are some folks trying to figure out a way to get around the
system?
Ms. White. Well, as a cop on the beat, and also as a person
who has been around the securities industry either on the
public side or the private side for about 40 years, I mean, you
always have to keep up. There is always innovation. Some of
that innovation is very good for capital formation and
otherwise, but some of it is a new form of very complex
wrongdoing, that you have to be able to be there with the right
tools, the right personnel to be able to address that.
Are we better off? I think we are better off. I mean, to go
back to your initial question, certainly in terms of some of
the systemic risks we have talked about, that is something that
all the regulators are very, very focused on. I think in terms
of enforcement, in sort of catching the next big fraud that may
contribute to a crisis or certainly investor harm, at the SEC
we certainly are in a better position.
We have our TCR automized system to deal with tips and
complaints and referrals in a way that we were not able to do
before the crisis, or at least were not doing before the
crisis. That has been enormously successful. Our whistleblower
program I think has been enormously successful.
So we are stronger than we were, but one does not rest easy
on that.
Mr. Serrano. Right.
Let me ask you something very quickly. You are requesting
93 new positions in enforcement, 225 in compliance, 7 in
corporate finance, and 12 each in trading and markets and
investment. Could you please explain briefly what function
these will serve and why they are needed?
Ms. White. And, again, these are all core areas. I have
talked a bit about already in terms of the inspections and
examinations. We seek a total, I think, 225 positions there,
and we examine, besides investment advisers that we have talked
so much about, the 11,600, broker-dealers, SROs, exchanges,
clearing agencies. So that is really just to be able to carry
out those critical examination functions that are rightly
assigned to the SEC, and mean so much to investor protection,
both retail and institutional. So that is a critical need and
it is the largest number you see in our budget request.
Enforcement. There are three areas that we consider to be
critical to enhance. One is in our intelligence analysis that
we do in enforcement. That relates to how much more complex the
products are becoming, the strategies are becoming, in order to
keep up with those in, if not real-time, near real-time, to be
able to detect them, prevent them, prevent them more quickly.
It is the same for the request within that 93 for additional
investigative personnel.
And then we are going to trial more than we have in the
past. I think last year we had 30 trials compared to 17 the
year before. Why is that? Hard to say. But it is something that
I think may be a function of the fact that we have targeted
individuals more. Individuals tend to go to trial more than
institutions do. I think we have sought more aggressive
remedies, including admissions, as you know. You must have a
credible, strong litigation arm in order to be able to do
everything else you do in that space.
Mr. Serrano. Right.
Mr. Chairman, I just going to ask one more question very
quickly. It is part of my mantra, which is the territories.
Whenever we think about what Congress does, it is the 50
States, and then the territories are left out.
When it comes to the SEC, is the vigilance the same as it
is for the 50 States, both in help and in watching out for
wrongdoing?
Ms. White. We have tried to prioritize that, to be sure
that is the case. And certainly we are very focused on Puerto
Rico now and the bondholders there in terms of the crisis that
has occurred there. We do a lot of outreach to the territories.
Maybe not enough, but we certainly try to focus as many
resources on it as we can.
Mr. Serrano. Now, when you say maybe not enough, is that
just part of the usual behavior that Congress and the Federal
Government has had towards the territories or was there
something unique to the SEC?
Ms. White. No. When I say that, it is really kind of my
same theme of we have to use our resources wisely. They are
scare resources. I do think we are underresourced, and we try
to deploy them as effectively as we can. So if I were to say
are we spending enough time with investors in a particular
State, I would say the same thing, we do as much as we can with
the resources we have.
Mr. Serrano. All right. Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Mr. Womack, and then Mr. Bishop.
Mr. Womack. Thank you, Mr. Chairman.
And, Madam Chair, it is always great to have you here.
Always look forward to your testimony. Thanks for the work that
you do.
Just a couple of questions here up front that are totally
separate.
One: As you know, a few years ago we had several trading
glitches that occurred because of different types of mistakes.
Whether it was the ``flash crash,'' as we know it, the night
trading mistake, or problems caused by what a lot of people
refer to as ``fat fingers,'' errors highlighted gaps that
existed in the SEC's regulatory regime.
As a result of these treading errors, two separate industry
groups were formed to examine what could be done to address
them--one by the DTCC, the other by the New York Stock
Exchange. These two industry groups developed a number of
suggestions for addressing the problems.
Would it be a good alternative to have the SEC establish a
uniform core set of detailed policies across the trading
venues?
Ms. White. There could not be a higher personal priority
that I have in terms of increasing the resiliency of our
critical market infrastructures. One of the--and I think I
mentioned it in my oral testimony--one of the rulemakings that
I was very pleased to have done in this past year is our
Regulation SCI, which basically for the first time makes the
SEC rules mandatory across those critical market
infrastructures to increase the resiliency if something occurs,
including how to respond and where to respond. It increases our
oversight as well.
I would also say that when we had the incident with the
NASDAQ SIP in, I think, August of 2013, I called in the CEOs of
the various exchanges and really quite collaboratively urged
them to review not only the SIPs for greater resiliency, to
audit them and assess what changes should be made, but also to
review all other critical market infrastructures. What do you
do at the close? What do you do on IPOs? And a longer list.
And we got back, I think in November of that year, a number
of short-term, and long-term initiatives, that they either have
carried out, in consultation with the SEC, or are in the
process of carrying out. I mean, that again is something that
we can't be complacent about because the marketplace changes
all the time, as well. And I think the input from the New York
Stock Exchange and DTCC has been enormously helpful.
Mr. Womack. So has the SEC implemented all of the
recommended changes? I assume not.
Ms. White. I think not all of the changes. I mean, I have
to go back and sort of see which ones of ours we have
encompassed in the various undertakings, what we have done. So
I can't detail those as I sit here today. But we are really in
constant dialogue with them and other market participants, I
think, in a very constructive way.
It is a market confidence issue as well, and one of the
things that you find is, I think, folks will jump to
conclusions as to what is causing a particular systems issue.
Is it high-frequency trading? Is it something else? It may well
have nothing to do with that. But whatever it is, it decreases
confidence.
Mr. Womack. Honestly, I would like to have just a list,
kind of checklist of the things that have been recommended and
those that have been implemented just for my own personal
information.

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Mr. Womack. I want to move over to what is referred to as
market fragmentation in the trading of equities. Are you at all
concerned that access fees and rebates are contributing to the
fragmentation of the market?
Ms. White. Those, among other issues. One of the things
that I spoke about it at length last year, but probably since
then as well, one of the things our Trading and Markets
Division is doing for the equity markets is really, some call
it a holistic review, I call it a comprehensive review of the
entire market structure. Fragmentation is an issue. Conflicts
of interest based on compensation is an issue.
We have some short-term initiatives that I expect us
actually to carry forward this year, as well, that will
increase, for example, transparency of ATS's, dark pools. We
have taken a number of enforcement actions in the last 18
months where in fact the rules that we have in place now are
not followed in those very same spaces.
So all of those issues are not only of interest, but of
concern in the sense that what we want to do is optimize our
markets for investors and for the companies seeking to raise
capital. But it is something that you want to be data driven
about, and we are being data driven and thoughtful about that
as well, because you have some interrelationships of some of
those issues, and the last thing you want to do is sort of
decide precipitously to make one change that may seem
superficially to make sense but which doesn't, given how it is
integrated. But those are issues we are very much focused on.
Mr. Womack. Well, specifically have you looked at whether
or not access fees or rebates actually serve to distort the
price discovery process, and if they do, whether those fees
should be reduced, whether those fees should go to zero, and if
that would serve to increase transparency across the board?
Ms. White. Yes. We are looking at that. And as you know,
the industry is as well.
Mr. Womack. Yes. Thank you.
I am out of time, and I yield back.
Mr. Crenshaw. Thank you.
Mr. Bishop.
Mr. Bishop. Thank you very much.
And welcome, Chair White. I was interested in Mr. Serrano's
reference to Jackie Robinson. And I have to say that in your
industry, in your career, you are a superstar also.
Incidentally, Jackie Robinson was born in my district in Cairo,
Grady County, Georgia.
Let me ask you a question about virtual currencies. With
the expanding prevalence of virtual currencies, including the
popular bitcoin, the SEC has encountered an increasing number
of securities issues from companies that either facilitate the
sale or trade of the currencies or from companies that use
these currencies to purchase securities.
What is the Commission's position on virtual currencies?
And what major issues, if any, do you think stem from the use
of these currencies?
Ms. White. It is in several spaces. I mean, we have brought
enforcement actions, as you may know, involving bitcoin and
other virtual currencies when they are used as a part of an
investment fraud. We have done, I think, two separate investor
alerts on this subject matter, virtual currencies, because it
is obviously one of those kind of hot fire issues that
investors are intrigued by, kind of the excitement and the
novelty benefits of it. So we want to just make sure they are
very focused on what it is that is being claimed in terms of
some of those benefits if they are wrapped into investments or
offerings. So we have done that.
We also continue to look at whether bitcoin currency is an
investment contract. If it were an investment contract, then it
would be a security, and various regulatory measures on our
part, oversight on our part, would flow. We have not made that
conclusion, but it is something that we have, what I could call
at least, if it is not a formal working group, I certainly meet
with them often from our New York office, as well as our
Washington office and across the divisions to see how that is
developing. And one really must keep your eye on how it is
developing, and what more, if more, the SEC should be doing.
Mr. Bishop. Thank you.
The SEC and the Commodity Futures Trading Commission are
both required under Dodd-Frank to complete rules to increase
transparency in the swaps market by having trades conducted on
exchanges or other swap execution facilities. It is our
understanding, however, that the CFTC has faced some concerns
with respect to the international reach of this rule,
particularly from counterparts in Europe and Asia, with respect
to the CFTC's cross-border guidelines.
What is the SEC's experience with foreign regulatory
agencies, and are there any specific examples of potential
conflicts between our laws and regulations, including Dodd-
Frank, with the laws and rules of foreign governments? And if
so, has any government officially expressed concern or has this
been primarily driven by the U.S. investment banking community?
Ms. White. One of the, I think, more significant sets of
provisions in the Dodd-Frank Act was really to bring in that
over-the-counter derivatives market. Our piece of it at the SEC
is, I think, about 5 percent of it, but nevertheless it is a
market that was not regulated before. It is good that it is
now. We have, I think, 29 separate congressional mandates where
we have adopted about 17 of those or in the process of
completing those. It is a high priority for this year.
We coordinate very closely as you must in this marketplace.
It is uniquely global with both our international regulators
and the CFTC. And those discussions are still going on, as you
know. There are particular issues that the CFTC, but also the
SEC is dealing with, with our international counterparts on
recognition, and substituted compliance, so that you don't have
regulatory arbitrage in one place. The market will flow there,
could flow out of the U.S. if the standards abroad are not high
enough. But it is still a work in progress, a very important
work in progress.
Mr. Bishop. Have any governments expressed concerns?
Ms. White. Certainly the regulators have expressed
concerns.
Mr. Bishop. From Europe, Asia? From where?
Ms. White. I think all over, that consistency really is
essential. I think from our point of view we want to make sure
that we are carrying out the strength of the mandates that
Dodd-Frank gave us and gave to the CFTC and that we don't lower
that bar. And even if our international counterparts have
provisions that may not comply with Dodd-Frank, we don't want
to lower those standards that are intended to protect us from
all that risk within or flowing back to the United States.
Mr. Bishop. Thank you very much.
Mr. Crenshaw. Thank you.
Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman. I was listening
intently to your discussion about the New York Yankees and
other baseball teams. And I just thought, for the record, Mr.
Chairman, it ought to reflect that the Kansas City Royals are
undefeated and 7-0 in this season, and hope everyone will cheer
for American's team going forward.
Chair White, welcome back to the committee.
Ms. White. Thank you.
Mr. Yoder. As you are aware, there is a bill moving through
Congress that would deal with the issue of email privacy. We
have had this discussion before this committee before. And for
the sake of background, we know there is a 1986 law that
essentially says when digital correspondence is stored for more
than 180 days, or once it is opened, if it is an email, that it
is considered essentially abandoned and searchable and seizable
by the government without due process, without probable cause.
And many agencies, not just your own, have utilized that
provision in the past.
Most, if not all of these agencies have determined that
after State v. Warshak and other court hearings, and just the
modern use of email, that it is an inappropriate use of
governmental power to read Americans' emails without due
process, without probable cause, using the power of a civil
subpoena that doesn't have any protections for the account
holder.
There is legislation going through Congress that has over
250 cosponsors, including every member of this committee that
is here present today. There are a variety of organizations,
entities, ideological groups, from the far left to the far
right. This is probably one of the issues that unifies Congress
and the country more than anything. And then there is the SEC
against the whole world.
And so I guess I would ask you, Chair White, if the SEC is
continuing the practice of using an administrative subpoena to
subpoena third party Internet service providers to review the
digital correspondence of Americans.
Ms. White. Let me start on a positive note. I am from
Kansas City. So I like the Royals as well.
Mr. Yoder. All right. Check that box.
Ms. White. Okay. Okay. They used to be the Yankees' farm
team, though. I had to add that. Sorry. And did great last
year. Almost got there, right?
Mr. Yoder. Right.
Ms. White. We have discussed this issue, I think, several
times. I don't think it is actually just the SEC. The concern
is what it does to civil law enforcement, not a quarrel with
making certain that the privacy protections are sufficient.
And, again, we have civil law enforcement powers. We do not
have the warrant power. So if a bill were to pass that required
a warrant to actually obtain emails that have been deleted by
the subscriber from the ISP, we could not get them.
Mr. Yoder. And I just if I could clarify, that is not what
the legislation does.
Ms. White. Okay. All right. I know it has taken various
iterations, but it does at least as I have seen it. We do have
it. Again, I know we discussed it. I am sorry.
Mr. Yoder. Madam Chair, because I am short on time, the
legislation essentially says for criminal proceedings you have
to use a warrant, and for civil proceedings, when you use the
subpoena process, the subpoena is served on the individual, not
on the Internet service provider. It is served on the person
who holds the documents.
And I guess the question that a lot of Americans are asking
is, why does the SEC or any other Federal agency somehow decide
that they want to treat email differently than paper mail when
it comes to that civil subpoena? Why can't the SEC use the same
process? Why can't they use what they have in law that allows
their powers to go to the Internet service providers and to put
a protection to make sure no emails are deleted? They can use
that power today. There is no deletion of information.
Why can't the SEC serve a subpoena like they serve on
individuals for paper documents the same way as email
documents? And I know what many of us believe to be the answer
is that civil agencies like the SEC have used this as a
shortcut to get around the traditional notions of civil
subpoena process.
And so my questions are twofold. One, why does the SEC
believe that they can shortcut the traditional notions of the
civil subpoena process when it comes to email and not treat it
like paper mail or paper documents? And, two, is the SEC still
currently engaging in this practice, and can you give me
examples of where this is occurring and how you have utilized
it after State v. Warshak?
Ms. White. Two responses to that. First, I think we don't
and haven't used the civil subpoena authority in that way. I
think, as we discussed last year, what the SEC does, I can't
speak for every other agency, obviously, but when the SEC would
subpoena an ISP for emails, the typical course is to go first
to the subscriber. The subscriber may tell you, I have deleted
my emails or otherwise can't produce them.
And so then typically the pattern would be to subpoena the
ISP for those. They may be there or may not be there,
obviously, in compliance with the existing ECPA law. And the
SEC gives notice to the subscriber that we have done that so
they can object. In fact--you get notice and the ability to
come in--to object to that. So I don't think there is any due
process issue with respect to that. I think the SEC has been
very, very careful about that.
When I arrived at the agency, these discussions we are
talking about now, Warshak had occurred, and while the
discussions have been going on--I don't think, by the way,
Warshak does invalidate the procedure the SEC has used, the
civil subpoena authority, certainly as we have used it. But
while these discussions have been going on to try to
sufficiently balance the privacy and the law enforcement
interests, we have not to date, to my knowledge, proceeded to
subpoena the ISPs.
But that is something that I think is critical authority to
be able to maintain, done in the right way and with sufficient
solicitousness, and it is very important to the privacy
interests, which I do think can be balanced. But what I think
would harm civil law enforcement, particularly securities fraud
law enforcement, is if we in effect were unable--and I would
again say we would need longer to debate the legal issues, but
I don't think we do anything differently with respect to mail
and ISP. We follow that lawful, Supreme Court-endorsed civil
subpoena authority.
But, again, we have been and remain very interested in
working with you and others to balance those interests so that
we are not disabled from getting evidence that may not exist
elsewhere with regard to securities fraud.
Mr. Yoder. Mr. Chairman, I will utilize the next segment to
maybe continue this conversation.
But what I will say just in closing on this thought, you do
treat it, the SEC does treat email and paper mail different.
You are following the law, the 1986 law, but the majority of
this Congress, including everyone sitting here in this
committee, has cosponsored a bill to say that that 1986 law
that doesn't protect email the same way we treat paper mail is
inappropriate and is in effect a violation of the Fourth
Amendment. We think that an email ought to be secure.
And so just when your testimony is that you treat them the
same way, that is incorrect. If I have a paper document sitting
in my possession, you subpoena me, and if I don't produce it,
you have a whole sort of process in order to be able to go
forward and have me produce that document. There are many
rights that you would use to get paper documents.
All this legislation is saying is you have to use that same
process for email. If I don't produce the email, then you can
compel me to produce it. If I have deleted it, I can permit the
SEC to go forward and go to the Internet service provider.
But the entirety of this issue is the service of a subpoena
on an Internet service provider and not on the individual is a
violation of Americans' privacy rights. It is certainly a
violation of what many believe the Fourth Amendment stands for.
And it is inconsistent--at least I want to clarify this--with
how we treat paper mail. You can't serve an Internet service
provider for paper documents. You can't serve a third party.
You serve the person who holds the documents.
Ms. White. We can serve a third party with a subpoena, if
it is paper or physical.
Mr. Yoder. But not if I hold the documents, ma'am. If I am
holding a document right here, there is no such thing--if I
hold the only copy of it, and I am the one who holds the
document, you serve the subpoena on me.
Ms. White. We should have a longer conversation on that
because I think we do differ on that legal point. What we don't
differ on is making certain we are protecting those privacy
interests that you and others and all of us care about.
Mr. Yoder. And I will just conclude by saying, reading
Americans' emails by serving a subpoena on an Internet service
provider is violating their privacy rights.
And I will yield back, Mr. Chairman.
Mr. Crenshaw. We will have a little more time on the next
round, but let's go now to Ms. Herrera Beutler.
Ms. Herrera Beutler. Thank you, Mr. Chairman.
So when I came in, I apologize, I was actually at another
subcommittee markup, 'tis the season, so I came in on the tail
end of your responses to the chairman about a question that I
am going to be asking, was hoping to get your thoughts on it.
So I apologize if you have already heard it. I didn't get to
hear the whole thing.
In discussing your belief that the SEC should propose the
fiduciary standard for broker-dealers, you have indicated the
need to harmonize the standards that govern how the retail
brokers offer advice to investors. And more clarity could be
used to ensure that the individual investors are understanding
the differences between registered investment advisers and
broker-dealers. I think that makes sense. It is worth noting
that the separate regulatory infrastructure has worked really
well for the past 70-plus years.
So my question is, do you see the SEC's involvement in the
fiduciary standard as a first step in a broader effort to
harmonize the RIA and broker-dealer industries or is it more of
a kind of a one-off, for lack of a better term, to rectify the
individual issue of investor confusion? And if it is only a
first step, do you see other actions or other efforts affecting
each industry separately?
Ms. White. The SEC staff did a very comprehensive report,
actually, to Congress with staff recommendations on really kind
of both sets of issues. And they are big issues and complex
issues, all of them. One of them being should there be a
uniform fiduciary duty standard, which basically says broker-
dealers and investment advisers, at least when they are acting
essentially in identical spaces with retail investors, should
be subject to a best interests of the client standard. Then
also, because you do have separate regulatory regimes, based on
the historic development for broker-dealers and investment
advisers, should there be harmonization? If so, how much?
In terms of what I am talking about now, I am very sharply
focused on the first set of issues. That doesn't suggest that
there aren't more sets of issues that need to be addressed. I
think there are. But in terms of what I am talking about now,
it is really the uniform fiduciary duty standard.
But, again, among the issues, if we are to proceed with
imposing a uniform fiduciary duty on broker-dealers and
investment advisers is, what is the standard? What does the
standard require? What are the existing practices of both
investment advisers and broker-dealers which can continue?
Which have to be altered?
And, again, we also have the parameters set by 913 of Dodd-
Frank that tell us it is not a per se violation of any duty we
might impose, that the financial professional charges a
commission or engages in principal transactions. So there is an
awful lot of issues in that, an awful lot to balance. And as I
said, it is complex, getting the right balance is absolutely
critical, and it is not going to be quick.
Ms. Herrera Beutler. So it sounds like, yes, in part, that
you are going to be spending much more time and attention on
it.
Ms. White. Yes.
Ms. Herrera Beutler. Skipping over to a totally different
issue, I think you have recently talked--recently, probably in
the last year--my recent history is last 5 years anymore--about
the lack of liquidity in financial markets. And is this a
concern and potentially a major risk? And if so, do you believe
we should be examining our regulatory framework to address the
risk, like what I believe most of the world is currently doing?
Ms. White. Well, I think all of the regulators, certainly
including the SEC, are very focused on that. I mean, clearly
with the anticipation of the rising interest rates has
obviously focused everyone's attention on that. One of the
reports that actually the members of FSOC make to the House
Financial Services Committee quarterly is whether the Volcker
rule may be adding to or having an impact on liquidity. Thus
far the conclusion of those reports is that you can't say that
it does, but clearly you have got a whole regime of
regulations, capital requirements, et cetera.
What we have done at the SEC, I think it was January 2014
that our Investment Management Division put out guidance to
firms to alert them to the possible risks, particularly if
interest rates rise. We had the experience of I guess it is
called the taper tantrum when it looked as if interest rates
were going to be raised and what impacts that seemed to be
having--so that they are looking very closely at their own risk
management of their portfolios. But it is something that
everybody, and rightly so, is very focused on.
Ms. Herrera Beutler. With that, I yield back.
Mr. Crenshaw. Mr. Graves.
Mr. Graves. Thank you, Mr. Chairman.
Good to see you again. And I appreciate your time today,
your explanation of some very complex issues. And I would sort
of like to follow up a little bit on Ms. Herrera Beutler's
comments on liquidity, and I know the chairman addressed that
as well. And it does seem since the implementation of the
Volcker rule, so it was 2013, the markets have certainly seen
the effects of that. And it was once theoretical, and maybe had
great intentions, but now it is very practical. And this
interaction between all the rules, and I think you suggested
that, there is just a complexity of new rules and regulations
that are putting a lot of pressure on the markets.
Maybe you could just sort of follow up a little bit more on
the liquidity in the bond market. With the implementation of
Dodd-Frank and application of capital standards, we are
certainly seeing the effects of overregulation in the markets.
And as you may recall, last fall the U.S. treasury market
experienced what was called a flash crash that alarmed a lot of
the major market players and investors.
And last week Larry Summers, former Treasury Secretary
under President Clinton, echoed these sentiments, and he made a
good point, and that is that regulators seem to be more
interested in strictly keeping each individual institution safe
rather than taking a holistic approach and making sure that the
markets are open and liquid.
So maybe as a member of FSOC, and you referenced that
organization as well, can you just comment on some of those
concerns that are being widely commented on now?
Ms. White. And, again, there are lots of moving pieces that
may have potential impacts, and I think, as I said before, the
last report that the regulators did really did not conclude--
actually Volcker is not effective yet. Obviously firms have
adjusted practices in advance of that, but it actually doesn't
take effect until, I think, July of this year, and so there is
no cause and effect that can be ascertained from the work that
we have done. But the financial regulators are all very focused
on this, and particularly as we anticipate the interest rates
rising.
From my point of view, I think it is something that we have
to continue to comprehensively, continuously look at to see the
phenomenon. The last report we did suggested that liquidity in
the primary market, bond market, was solid, had tightened some
in the secondary market, but that tends to happen at year end,
and I think this report was based on year end. But we have to
look at everything we do for the impacts that are occurring,
positive or negative, and be prepared to make adjustments if
need be.
Mr. Graves. Okay. Thank you. And I will make a simple
point. I know maybe Volcker hasn't gone into effect until July,
as you say, but I do think it does have an impact. I mean, you
somewhat referenced that with the hint of interest rates
rising, and it has an impact on markets because there is an
anticipated change that is occurring. So I can imagine that it
has rippled through a lot of the markets in some way in
anticipation of what may come ahead.
So in your perspective, do you wait until after it is
implemented and then analyze what impacts have occurred or
haven't occurred? And if so, how do you measure that? Do you
measure that prior to Volcker being not adopted, but
anticipated to be adopted? And what metric do you measure that
against? Because if the markets have already made somewhat of
an adjustment, some would argue that it has been negative, do
you use that as the metric you measure the future against, or
do you go prior to that when the markets were normalized?
Ms. White. At least at the SEC, as we do our economic
analysis, you always look for the baseline before you do
something or are anticipating doing something, what did it look
like and then what might be the impact. And certainly we
studied that and analyzed that before the rule was adopted, and
certainly we are not not studying it before it becomes
effective in July, and I think that is the right way to
proceed.
I think among the issues, though, is what is the state now.
That may change when interest rates rise, for example. And then
the other is what may be causing an effect that at least some
may consider to be negative. Obviously, you are balancing cost
and benefits as you go. I mean, it is not as if the only thing
you look at is higher liquidity or deeper liquidity. You are
looking at what are the benefits of whatever may be causing
lowered liquidity as well. It is a very comprehensive, but it
really needs to be real-time and continuous.
Mr. Graves. Right. And I would be interested maybe in the
future you could share this with me. You speak of the baseline.
I think it is very important. Choosing that baseline is equally
as important. Is it a baseline of today? Is it a baseline pre-
2013? Or is it a baseline pre-2007 when the markets really were
impacted in a lot of different ways? And so maybe as you
formalize that through your own analysis and FSOC you could
share that with us.

SEC Chair White's Responses to Questions Posed During the House
Appropriations Subcommittee on Financial Services and General
Government Hearing--April 15, 2015

Response to Representative Graves
As a general matter, the SEC's approach to examining the impacts of
a new regulation is to look at the current state of the market
immediately before a rule is proposed or adopted and compare that to
potential or actual effects after the implementation of the rule.
Because the Volcker Rule is being phased in over time, generally with
an initial conformance date of July 21, 2015, an analysis of the
Volcker Rule's impact would involve a comparison to the state of the
market prior to the time that banking entities were required to conform
to the Volcker Rule. Importantly, however, we understatnd that market
behavior had been changing both in anticipation of the implementation
of the Volcker Rule and in response to the financial crisis.
Specifically, covered banking entities may have altered their business
modesl both in response to regulatory changes and as a rational
reaciton to changing financial market conditions. For example, covered
banking entities with proprietary trading and prviate fund operations
began closing their proprietary trading desks and private funds in
response to the passage of Section 619 of the Dodd-Frank Act, prior to
adoption of the final Volcker Rule. Additionally, covered banking
entities with market-making and dealing operationsmay have been
reassessing the profitability and riskiness of these operations in
response to the financial crisis. Any such analysis that may be
undertaken would take all of this into consideration.

Mr. Graves. And then, Mr. Chairman, I will just sort of
close on this.
It sounds like, and I don't want to put words in your mouth
and you can feel free to follow up, that you agree that it
needs to be a balanced, holistic approach as you analyze a lot
of the various measures that are being taken right now and not
be narrowly focused solely on derisking certain institutions or
banks, but it needs to be balanced and considered in a broad
manner to alleviate some of the liquidity issues. Is that sort
of what I took from your comments there?
Ms. White. I mean, I think that anytime you regulate or
take any other action you need to be assessing the benefits,
the unintended consequences that may be positive or negative. I
can't say where that sorts out as we do that review.
Mr. Graves. Great. Thank you.
Mr. Crenshaw. Thank you.
And I think we have time for another round of questions if
people have them.
Let me start by asking you about what I mentioned in my
opening statement about FSOC and the SIFI designations. As
chairman of the SEC, you sit on the Financial Stability
Oversight Council. I think there are eight other government
regulators on the Council. And your job as the FSOC is to
mitigate risks to U.S. financial systems. You are supposed to
identify and respond to emerging threats to overall financial
stability.
There has been a lot of interest in this designation of
SIFIs, and specifically people have talked about how you select
someone to be a SIFI, how you inform someone if they are a
SIFI, how you designate them as a SIFI. There are some ideas
floating around that might be commonsense improvements, like
more engagement with the primary regulator before the
designation, the ability of a company to derisk before their
designation, and an overall increase in transparency with the
whole designation process.
So I want to ask you, what are your thoughts on allowing a
company, say, to derisk, offload some of the risky parts of
their operations, as identified by FSOC, before the
designation?
As I mentioned earlier, in one sense you ought not to be
simply in the business of trying to go out and designate folks,
which subjects them to an additional set of regulations, but
just say, look, it would be better if we help you not become a
SIFI because that is part of our responsibility.
What are your thoughts about some of those proposed
commonsense improvements?
Ms. White. First, at the outset, I think it is clear that
FSOC is a relatively new organization. I think it is enormously
important to safeguarding the financial stability of the
country. It is a good thing that it brings together all those
regulators at the same--I think it is about once a month and
more often when there is a need to say what are you seeing in
terms of risks that may impact negatively on the wider economy.
So FSOC is assigned to identify those risks and then
address them if found with the authorities that FSOC is given.
A primary authority is obviously the designation authority.
Certainly a number of parties, and I think you are citing
some of the suggestions that a number of parties have made that
FSOC should move to increase transparency on a number of
scores. FSOC has engaged in that process recently, actually put
out some new procedures in that direction. Again, I think the
statute does basically assign to FSOC, if there is a finding
that a particular entity's material financial distress would
have impact on the broader financial system, significant impact
on the broader financial system, then it can be designated.
Now, one of the other sets of issues, of course, is once
you are designated there is also a process to be dedesignated.
And as it has developed so far, although I think that will
continue to evolve with more clarity and more transparency,
what are the specific things that a firm might do so they are
not creating a systemic risk. And clearly not creating a
systemic risk is a good thing. But I think what Dodd-Frank and
FSOC wanted to be sure of is you are not erring on the side of
not catching that risk that may have really very broad and
negative consequences.
So I really see it as it is evolving in terms of greater
transparency. I think that is a good thing that it is, and I
think it will continue to evolve.
Mr. Crenshaw. Well, on that point, let me ask you, the SEC
is the primary regulator of the securities markets. You have
the expertise in this area. And so it puzzles me to see now
that FSOC is looking into designating registered funds, like
mutual funds, that they might be designated as a SIFI. But they
are not leveraged, their losses are absorbed by the fund
investors, and they already have liquidity requirements. And I
don't know that there have been any runs on the funds even in
difficult times.
So it seems to me that is an area that you have got to
think hard about before you put them under the style of
regulation that might not be applicable to them.
So what is your view of registered funds? Are they all that
risky? And if so, how? As the SEC is the primary regulator, do
you have more say if FSOC is trying to make a decision like
that? And you touched on some of the areas that might be places
that you could reform and improve, again, understanding the
overall importance of making sure you deal with that risk.
Talk about that, just going beyond what you might think
ordinarily would be a systemically important financial
institution and moving into some other areas.
Ms. White. I think first the way it is structured now,
clearly the primary regulator is present. There is an insurance
representative, obviously the SEC is there, the CFTC is an FSOC
member, and the primary regulator is both consulted and also a
very active participant.
One of our jobs, the job of the staff and me, I mean, I am
the member, that is another one of the issues when you are on a
commission, but I am the member, and our staff brings to bear
knowledge in spaces where we are expert. Asset management
obviously comes immediately to mind. We provide extensive
support to the working groups within FSOC as they are analyzing
these issues. And I think that is very, very important to do.
It is important, in my view, and I have said this before,
that with respect to all of us on FSOC, we have certain
expertises that are deeper than others. Banking regulators have
banking regulation expertise. We have capital markets
expertise. The insurance member has insurance expertise. That
is extremely important, that it be at the table, be listened
to, its staff be listened to, and then if there is a need for
further expertise to understand a particular set of companies,
an industry, that FSOC brings in additional expertise.
So I think it is very important to get it right. I mean,
asset managers are basically, structured on an agency basis. It
is the client's money. It is not a balance sheet issue
typically.
FSOC, as you know, at the end of December put out a request
for further information from the public and the industry, as to
whether there are activities that are being engaged in by the
asset management industry that may create systemic risks of one
kind or another, and if so, what should the response to that
be.
If it is a regulatory response, and maybe it will be that,
maybe the suggestion will be there doesn't need to be a further
response, that would fall to the primary regulatory, the SEC.
We have regulated asset managers for 80 years. I mean, we are,
we think, expert in that.
And we evolve with how the industry changes. There clearly
have been changes in the asset manager space. I think I did a
speech the end of December talking about kind of our next phase
of enhancing regulatory oversight of the assessment management
industry, including getting more data in areas where we don't,
for example, you don't have today standardized reporting on
derivatives. Separately managed accounts, you don't have that
information in a way that you can analyze it as deeply as you
would like to.
So we are proceeding on several regulatory fronts, as we
have for decades, where we think it needs to happen. So that is
occurring at the same time.
I see what FSOC is doing is, clearly, if you have a
systemic risk, there are other market participants we don't
regulate that may be part of that risk. So I think what they
are doing in terms of getting further information on this
complements what we are doing at this point.
Mr. Crenshaw. Thank you very much.
Mr. Serrano.
Mr. Serrano. Thank you, Mr. Chairman.
Dodd-Frank implementation created a whole new set of issues
for you to deal with. There were 90 new rules, created five new
offices, and produced more than 20 studies and reports. Our
understanding is that most of it has been either proposed or
completed. What still remains to be done and what has hindered
progress on these remaining issues?
Ms. White. I will start at the end of your question. I
think between the Dodd-Frank and the JOBS Act, the SEC was
given almost 100 mandated rulemakings, of great complexity in
many cases. When I arrived, there were some, I think, very
important ones, frankly, both Dodd-Frank, JOBS Act, and other
areas of rulemaking at the agency that had been delayed or for
one reason or another needed to be advanced.
One of the things that I tried to do was to do parallel
workstreams on these rulemakings so that you didn't have the
same people working on four or five different rules. I think we
have made very, very good progress on the Dodd-Frank-mandated
rulemakings. I look at those in kind of eight separate buckets,
including the Volcker rule, the municipal advisors registration
regime that has been set up. Clearing agencies.
Securitizations. Credit rating agencies.
The two in that group where we have work to complete are
really Title VII, as we talked about earlier. I think 17 or 19
of those have been adopted, but we still have to build that
out. It is a high priority for 2015. And some of the remaining
executive compensation rules under Dodd-Frank, including
Section 956 of Dodd-Frank, which is a joint rulemaking with
other financial regulators.
So the challenge is really just the volume, the complexity,
and not to have the mandated rulemakings crowd out other core
things that we need to be doing that are not mandated by either
Dodd-Frank or the JOBS Act.
Mr. Serrano. Next question. You mentioned, both privately
when we met and publicly here, the imbalance with some of the
banks, for instance, that have so much of a budget for IT
compared to what you have. And so has that hindered enforcement
for you? And how will the new positions that you are asking
for, should we be able to get you some extra dollars, how can
you begin to work on balancing that act a little bit more?
Ms. White. First, I am extraordinarily proud of our entire
agency, including the enforcement function, including when they
go to trial. I think our success rate is very impressive given
the difficulty of our cases, and we often meet an army of
lawyers.
IT is very important.
Mr. Serrano. I understand it is 80 percent.
Ms. White. Yes, that is correct, in most years. Sometimes
it is higher, sometimes it is lower. And they are hard cases.
They are very, very hard cases. And part of what we are seeking
in this current budget request is to be able to bolster
enforcement, including at trial, including with IT to assist
what they do, hire more experts in order to be able to really
match what we are put up against. I think we do very well at
it, but we would clearly do better at it with those resources.
Mr. Serrano. Now, do you foresee this to be an ongoing
issue? One of the problems that we have here in Congress is
that we are always talking to all the agencies about their IT
situation, and then at home we find out that the iPad we bought
last year is outdated by next year. And now it is the iWatch
and everything else.
And so speaking from your agency alone, are we ever going
to catch up, or will Congress always, is the government going
to be behind in trying to bring all the agencies up to date?
Ms. White. Very good question. We have already talked about
the difference in numbers in the private sector and on the
government side, certainly with respect to the SEC, which is
why, by the way the reserve fund is so important to us, because
we use that for those long-term, mission-critical projects,
that you have to be sure you have got that funding. And one of
the issues we had last year was $25 million of that was
actually rescinded. So that can really set you back.
But our strategy on the IT front is all the enhancements we
are doing, all the restructuring and redesign that we are doing
is intended to both break down the silos, making sure all our
data, big data and other not-so-big data is accessible, more
easily useable, but also to build our IT network, if you will,
so that we can adapt quickly to new applications that we are
going to need in order to be able to assess what the latest
practice is.
So, I mean, I think you want to build it as smartly as you
can, but I can't sit here and tell you that you are not going
to be playing a bit of catch-up as we go forward.
Mr. Serrano. I suspect.
Thank you, Mr. Chairman.
Mr. Crenshaw. Thank you.
Mr. Yoder.
Mr. Yoder. Thank you, Mr. Chairman.
Mr. Crenshaw. Continue his conversation.
Mr. Yoder. Chair White, I want to briefly return to the
topic aforementioned, and then I have a couple other items I
wanted to visit about as well.
What I would just maybe say in summary is that I gleaned
from your testimony that after Warshak, I think you stated that
the SEC is actually not serving Internet service providers
directly for emails. Is that a correct statement?
Ms. White. I think what I have said is when I arrived they
had not recently served it. I don't think Warshak actually
speaks to our practices, frankly. But while these discussions
were going on to enhance the privacy interests we----
Mr. Yoder. And that is appreciated.
Ms. White. Yes.
Mr. Yoder. So since you have been chair----
Ms. White. Yes. But I am very worried about that, I can
tell you that. I am very worried about what we don't know we
are not getting.
Mr. Yoder. And, Madam Chair, this is what I wanted to get
to maybe to conclude our conversation here, is that in no way
is the effort to protect the privacy rights of Americans'
emails also an effort to try to stifle your effort to do your
job. And there has got to be a point there in which you can
access the information you need, and I believe that is in a
traditional way consistent with paper mail. And it sounds like
you believe it as well. We just need some interpretation and
understanding of how we make those things similar.
I would think the SEC, under your chairmanship and after
Warshak and you giving deference to, okay, this is an issue
that Congress is going to address so let's not go forward and
serve Internet service providers until maybe we get some
clarity, I would think the SEC would actually be banging on our
door saying what you just said: We don't know what we don't
know, and we need Congress to resolve this issue.
So I guess I would ask that maybe under your leadership, if
you could direct your staff or you take this issue on
personally to make suggestions and amendments that might
achieve my mission, which is what I believe to have the service
go directly to the individual, that it be treated just like
paper mail, and your mission, which is to make that you don't
somehow lose these emails in the process and that you have the
ability to use your traditional subpoena powers.
I think there is an answer there. I think it is the bill
that we have introduced. But if you have suggestions and ways
in which we could resolve this, and amendments, I would be
happy to entertain those. I would be happy to come to a
resolution with the SEC on this.
Ms. White. I would be very happy to engage in that
dialogue. We don't have to take the time of the whole
subcommittee now.
Mr. Yoder. Sure.
Ms. White. But there are a couple of things in our
exchanges where I think we may differ in either how we have
done things or what the law allows us to do, et cetera, and,
again I am concerned about. But I didn't think it was the right
thing to do as we are discussing trying to balance privacy and
law enforcement----
Mr. Yoder. I appreciate that.
Ms. White [continuing]. To go ahead and serve that subpoena
on the ISP.
Mr. Yoder. To not do that, right, and I appreciate that.
Ms. White. But I worry about it.
Mr. Yoder. Right. And I worry about it. So are you serving
the subpoenas directly on the individuals right now or are you
just not getting the emails?
Ms. White. No. We always have served subpoenas directly on
the individuals.
Mr. Yoder. Okay.
Ms. White. And sometimes you get documents and sometimes
you don't.
Mr. Yoder. Okay.
Ms. White. And sometimes you are told, ``We have deleted
them all.''
Mr. Yoder. Right.
Ms. White. Or you have an entire missing month, like the
critical month, and if it is still on the ISP, that is critical
evidence. While we discuss this, I worry about what we are
missing.
Mr. Yoder. Right. And certainly we are trying to receive
emails, Congress is, on a variety of issues too, and not every
American can have their own service provider at home, their own
in-home server.
So that being said, let's move on to a couple more issues
here. I am interested in the SEC's efforts related to universal
proxy ballots. And I noticed the SEC recently held a roundtable
to discuss universal proxy ballots. And this is a mechanism
favored by some special interest groups to increase their
ability to get board seats on public companies. It would
fundamentally change the way in which directors are elected,
likely lead to endless proxy fights, creating a huge ongoing
distraction for companies and their performance and the ability
of the, I think, really, the economy to grow and create jobs.
So the SEC has yet to adopt any universal proxy rules, but
the fact that you held a roundtable has raised some eyebrows,
made folks interested to know which direction the SECis going,
does the SEC plan to engage in rulemaking on universal proxy
ballots. Is this something that the SECis moving forward on?
Ms. White. There are a number of proxy issues that the SEC
has been talking about, been concerned about, and interested
in, for really a number of years. A concept released was
published a number of years ago. This was among those issues, I
think. Our Investor Advisory Committee was very interested in
this issue, and made a recommendation. Since the roundtable we
have gotten actually a rulemaking petition from, I think, the
Council of Institutional Investors.
So it is all under study and review, I mean, that is the
status, as are other proxy issues, under study and review with
the staff and at the Commission. So there is interest in the
issue, therefore we had the roundtable basically. One
commissioner requested it, but there was broader interest than
that.
And I think what I at least took away from the roundtable
is the concern that if you are physically present at the
meeting you in effect get a ballot that has everybody on it and
you can kind of see who is where. Management slate or the
proponent, shareholder proponent slate. When you do that, by
virtue of the current rules, by proxy, you are not able to do
that. So what the proponents are trying to do is replicate what
it would be like and what you could do if you were actually at
the meeting.
I think there are number of issues, a number of issues were
discussed about the complexities of that. There was a lot of
devil is in the details about, at least as I took in the
particular roundtable, a real difference of opinion on the
concept, but the devil is in the details. Do you do it
alphabetically? Who does the supporting statement for each
candidate? So there is a lot in that to study.
And so where that stands right now is it is basically being
further studied by the staff and discussed at the Commission,
but there is not anything on the slate as we speak now.
Mr. Yoder. So there is no intended rulemaking that SEC
intends to do at this point?
Ms. White. Well, it is under discussion, but it is not on
our Reg flex agenda to go forward.
Mr. Yoder. In the discussions, did the SEC identify a
market failure that would warrant the SEC consuming additional
resources and making this a priority?
Ms. White. Well, I think that the range of proxy issues,
and, again, there are different proponents on different sides
of the different issues, are really quite important to
companies, investors, management. This is one of them. And I
certainly thought, or I wouldn't have held it, I thought the
roundtable discussed other issues too. How you enhance retail
investor participation in the proxy process, which is an issue
of concern to a lot of people. I certainly thought that
consumption of resources and studying the issue was a wise one.
It is not an extensive consumption of resources.
Mr. Yoder. Then lastly, just quickly, you made remarks
about the priority to initiate crowdfunding rules for the SEC,
and I have got a big startup community in Kansas City, in my
district, and they are certainly interested in that process and
hopeful that it moves forward. And I just thought maybe you
could give us a sense of where this ranks on the priorities of
the SEC and the timeline regarding crowdfunding rules.
Ms. White. I always get kicked from behind when I do
timelines, but this is one that I think is enormously
important. I think it is our last major, significant rulemaking
under the JOBS Act. It is one that I have actually in the last
6 weeks or so had really extensive meetings with the staff.
They are progressing on this.
I mean, essentially the lay of the land on this is we knew
it was going to be a complicated rulemaking. We basically need
to be true to the statutory requirements, but also make it
workable and cost effective. That has proven to be even more
complicated, to get that right balance, than we thought. But it
is one where I am certainly prioritizing it for this year.
Mr. Yoder. Thank you, Chair White.
Thank you, Mr. Chairman.
Mr. Crenshaw. Ms. Herrera Beutler.
Ms. Herrera Beutler. Thank you. That was one of my
questions actually. So I appreciate that.
Your written testimony, Madam Chair, it began with an
outline of how much the SEC's workload has increased over the
last 15 years. Certainly we have talked about increases for
salaries and FTEs--not salaries--but the FTE pay and the
ability to take on and do more. Essentially the need for more
funding. And our job here is not just to appropriate money, but
also to find savings and help agencies operate efficiently.
The SEC is expected to finalize its pay ratio rulemaking
sometime this year. This rule requires that public companies
publicly disclose the pay ratio between their CEO and their
median income employee. And no one is going to argue that CEOs
don't get great salaries, they certainly don't need my
sympathy. But I had some concern as we are being asked for more
funding, and when I think about what could be argued a rule
that may or may not directly relate to the role of the SEC, it
is my understanding this rule doesn't do anything other than
make public certain people's high salaries in private companies
or nongovernment companies.
Further, the courts do have a history of throwing out SEC
rules that are specifically designed to shame people, as you
well know. So there is a good chance that this finalized rule
won't last long.
Now, I know in a letter you sent to the chairman of the
House Financial Services Committee in December that the SEC has
spent over 7,000 man-hours and a million bucks to just draft
the pay ratio rule. Do you have an estimate of what the final
taxpayer cost is for drafting this rule?
Ms. White. I don't have a final estimate, although I think
the costs estimated, and it really is an estimate, reflected in
that letter are now certainly most of the costs that is
involved.
This is a little bit like the crowdfunding discussion I was
just having with Congressman Yoder. I mean, it is a mandated
rulemaking by Congress. I do regard congressional mandates as
something we are obligated to proceed with. Pay ratio is one of
those. Reg A-Plus that we just did, under the JOBS Act, is
another one. I think they both didn't have deadlines, actually,
as it turns out.
Again, what we are doing there is we have to be faithful to
the mandate and faithful to the statutory requirement.
Ms. Herrera Beutler. So in your opinion, I wasn't here when
that was passed----
Ms. White. I wasn't either.
Ms. Herrera Beutler [continuing]. So is this something that
you would like help with not having to do? You are talking
about needing new resources to do real work, important work in
protecting investors, in protecting individuals. Do you feel
like this really supports that mission?
Ms. White. I think that is for Congress to judge, frankly.
There is no question that those 100 mandates I mentioned, in
answer to Ranking Member Serrano's question, that the SEC was
mandated to carry out under the JOBS Act and the Dodd-Frank Act
are challenges for the agency. It is probably the most
challenging period of rulemaking and most complex in its
history.
And so one of my jobs has been to make certain that we are
able to do other things as well that are very important to our
core mission. But at the end of the day, I think that is up to
Congress. What we do is we try to carry out those mandates,
whichever ones we are talking about, in as cost-effective a
way, as consistent with our mission as we can, with the
mandates we are given.
Ms. Herrera Beutler. Can I ask then, so then all the
mandates that you have been given you are putting time and
effort into every single one of them, or have you prioritized
those mandates?
Ms. White. Well, you do some prioritizing. I mean, when I
first arrived, though, again, I mentioned that----
Ms. Herrera Beutler. So none are sitting on the shelf?
Ms. White. We haven't completely finished all of them,
but----
Ms. Herrera Beutler. Have you started all of them?
Ms. White. Oh, yes. No question about that. No question
about that.
Ms. Herrera Beutler. Okay. Okay. Again, had I been here, I
would not have supported requiring you to spend time on what
could be superfluous efforts. Like you said, you have got a lot
of important work to do. We have already talked about some
other rules that are a lot more complex and directly related to
consumers. And some of us here would like to relieve some of
those mandates to allow you to focus on what you need to do. We
welcome your feedback in moving forward on that issue.
So with that, I yield back. Thank you.
Mr. Crenshaw. Thank you.
I think there might be some additional questions that will
be submitted for the record.
Mr. Crenshaw. But let me first say, speaking of historic
days, 150 years ago on this day Abraham Lincoln died. And,
interestingly I am told that the day before, before he went to
the theater that night, he signed the bill that created the
Secret Service. So whether that is true or not, I am told that,
but it is kind of interesting. And of course Jackie Robinson
played his first baseball game. And of course we have all have
to file our taxes today. So it is a significant day. And Mary
Jo White.
Ms. White. I think that fell to the bottom, but I
appreciate it.
Mr. Crenshaw. Let me just say thank you. You have an
important responsibility and you carry it out well, and we
appreciate all that you do. And thank you for being here today.
Ms. White. Thank you very much.
Mr. Crenshaw. This meeting is adjourned.

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Buerkle, Hon. Ann Marie.......................................... 1
Kaye, Hon. Elliot F.............................................. 1
Pai, Hon. Ajit................................................... 81
Wheeler, Hon. Tom................................................ 81
White, Hon. Mary Jo.............................................. 183