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H.R. 658—THE ACCOUNTANT, COMPLIANCE,

AND ENFORCEMENT STAFFING ACT OF 2003

AND

H.R. 957—THE BROKER ACCOUNTABILITY

THROUGH ENHANCED TRANSPARENCY ACT

OF 2003

HEARING

BEFORE THE

SUBCOMMITTEE ON

CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON

FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

MARCH 6, 2003

Printed for the use of the Committee on Financial Services

Serial No. 108–9

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

SUE W. KELLY, New York, Vice Chairman

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

JIM RYUN, Kansas

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, JR., North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSELLA, New York

GARY G. MILLER, California

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

PATRICK J. TIBERI, Ohio

MARK R. KENNEDY, Minnesota

TOM FEENEY, Florida

JEB HENSARLING, Texas

SCOTT GARRETT, New Jersey

TIM MURPHY, Pennsylvania

GINNY BROWN-WAITE, Florida

J. GRESHAM BARRETT, South Carolina

KATHERINE HARRIS, Florida

RICK RENZI, Arizona

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

GREGORY W. MEEKS, New York

BARBARA LEE, California

JAY INSLEE, Washington

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

JOSEPH CROWLEY, New York

WM. LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arkansas

CAROLYN MCCARTHY, New York

JOE BACA, California

JIM MATHESON, Utah

STEPHEN F. LYNCH, Massachusetts

BRAD MILLER, North Carolina

RAHM EMANUEL, Illinois

DAVID SCOTT, Georgia

ARTUR DAVIS, Alabama

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

DOUG OSE, California, Vice Chairman

CHRISTOPHER SHAYS, Connecticut

PAUL E. GILLMOR, Ohio

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

FRANK D. LUCAS, Oklahoma

EDWARD R. ROYCE, California

DONALD A. MANZULLO, Illinois

SUE W. KELLY, New York

ROBERT W. NEY, Ohio

JOHN B. SHADEGG, Arizona

JIM RYUN, Kansas

VITO FOSSELLA, New York

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

GARY G. MILLER, California

PATRICK J. TOOMEY, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MELISSA A. HART, Pennsylvania

MARK R. KENNEDY, Minnesota

PATRICK J. TIBERI, Ohio

GINNY BROWN-WAITE, Florida

KATHERINE HARRIS, Florida

RICK RENZI, Arizona

PAUL E. KANJORSKI, Pennsylvania

GARY L. ACKERMAN, New York

DARLENE HOOLEY, Oregon

BRAD SHERMAN, California

GREGORY W. MEEKS, New York

JAY INSLEE, Washington

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

JOSEPH CROWLEY, New York

STEVE ISRAEL, New York

MIKE ROSS, Arkansas

WM. LACY CLAY, Missouri

CAROLYN MCCARTHY, New York

JOE BACA, California

JIM MATHESON, Utah

STEPHEN F. LYNCH, Massachusetts

BRAD MILLER, North Carolina

RAHM EMANUEL, Illinois

DAVID SCOTT, Georgia

(V)

C O N T E N T S

Page

Hearing held on:

March 6, 2003 ................................................................................................... 1

Appendix:

March 6, 2003 ................................................................................................... 25

WITNESSES

THURSDAY, MARCH 6, 2003

Kelley, Colleen M., National President, National Treasury Employees Union .. 5

McConnell, James M., Executive Director, Securities and Exchange Commission ........................................................................................................................ 4

Shulman, Doug, President, Regulatory Services and Operations, National Association of Securities Dealers ............................................................................ 16

APPENDIX

Prepared statements:

Oxley, Hon. Michael G. .................................................................................... 26

Emanuel, Hon. Rahm ....................................................................................... 27

Israel, Hon. Steve ............................................................................................. 29

Kanjorski, Hon. Paul E. ................................................................................... 30

Kelley, Colleen M. ............................................................................................ 32

McConnell, James M. ....................................................................................... 40

Shulman, Doug ................................................................................................. 46

(1)

H.R. 658—The Accountant, Compliance,

And Enforcement Staffing Act of 2003

And

H.R. 957—The Broker Accountability

Through Enhanced Transparency Act

of 2003

Thursday, March 6, 2003

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

COMMITTEE ON FINANCIAL SERVICES,

Washington, D.C.

The subcommittee met, pursuant to call, at 10:05 a.m., in Room

2128, Rayburn House Office Building, Hon. Richard Baker [chairman of the subcommittee] presiding.

Present: Representatives Baker, Kelly, Ryun, Hart, Tiberi, Harris, Renzi, Kanjorski, Sherman, Meeks, Inslee, Moore, Lucas,

Israel, McCarthy, Matheson, Lynch, Miller, Emanuel and Scott.

Chairman BAKER. [Presiding.] I would like to call the meeting of

the Capital Markets Subcommittee to order. Today, our purpose is

to receive testimony with regard to two legislative provisions, H.R.

658, the Accountant Compliance and Enforcement Staffing Act of

2003, and on our second panel, H.R. 957, the Broker Accountability

Through Enhanced Transparency Act of 2003.

With regard to the former, it is clear that the SEC resources

have been limited and the ability to engage appropriate levels of

technical assistance in the complex securities world we find ourselves in is of extreme concern to all members. The question before

us today is the appropriate mechanism by which we can secure professional staff to engage in the many new requirements recently

adopted by the Congress pursuant to many of the identified problems in the performance of the markets.

It is my belief that some immediate action should be taken to

provide needed resources. It will be difficult to instill a high level

of confidence in consumers, and therefore have them return to the

investing market, without the assurance that the SEC has the

strength, ability, and capacity to ferret out wrongdoing and provide

remedies for those investors who feel they have not been professionally treated.

In addition to that legislation, H.R. 957, is legislation which the

NASD and others have expressed interest in, to enable a clearer

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place legislation which I also believe to be of value in providing for

enhanced investor confidence.

I am looking forward to hearing the witnesses. I believe we have

good testimony, and I believe this will be helpful to the members

in making determinations about action that should be taken with

regard to both matters.

At this time, I recognize Mr. Kanjorski for any opening statement he chooses to make.

Mr. KANJORSKI. Mr. Chairman, thank you for the opportunity to

offer my initial thoughts about H.R. 658 and H.R. 957 before we

hear from each of our witnesses. As you know, Mr. Chairman, I

have made investor protection one of my top priorities for work on

this committee. As a result, I have regularly supported sensible

and well-crafted legislative initiatives designed to advance this

goal.

During the last year, and only after a series of large-scale corporate scandals, many of my colleagues finally joined me in recognizing the importance of maintaining a strong federal regulator to

protect the interests of American investors. Accordingly, we have

significantly augmented the resources available to the Securities

and Exchange Commission, including increasing the agency’s budget by more than $270 million, thus allowing it to hire more than

800 new employees.

Unfortunately, the SEC has encountered some difficulties in

identifying and hiring the best workers for these new positions,

particularly in a number of specialized professional fields. Accordingly, H.R. 658, the Accountant Compliance and Enforcement Staffing Act, would seek to streamline the hiring process for accountants, competent examiners and economists that the SEC uses,

similar to the rules all government agencies use to recruit and hire

attorneys. Former SEC Chairman Harvey Pitt suggested this accelerated hiring process for these professionals earlier this year in a

letter to the Congress.

We will also hear from a witness later today about H.R. 957, the

Broker Accountability Through Enhanced Transparency Act. This

bill seeks to provide investors with easy online access to critical information about securities firms and their brokers. These disclosures would include information on regulatory investigations, disciplinary actions, legal proceedings and customer complaints. The

bill also will give the National Association of Securities Dealers certain legal protections for providing this information over the Internet.

Since Congress required the NASD in 1990 to make such information available to individual investors without charge, this disclosure program has become increasingly popular. Today, the NASD

maintains information on more than 665,000 registered security

employees in this automated electronic system, and in 2002 investors made 2.5 million requests for information about these professionals. The vast majority of those requests were made via the

NASD Web site.

In general, I believe that both H.R. 658, in expediting the hiring

of SEC professionals, and H.R. 957, in expediting the access of investors to important information about their brokers and

brokerages, have merit. Nonetheless, I also believe that our panel

3

must answer a number of critical questions before proceeding with

any markup on these matters. Moving in haste on legislation could

cause multiple unintended consequences.

Regarding H.R. 658, we should, for example, discern how the

SEC will ensure a fair hiring system in the absence of competitive

service process requirements. We should also examine how we can

protect the civil service status of professionals hired through an expedited process. In my view, we may ultimately identify alternatives to the proposed legislation that achieves the same objective.

With respect to H.R. 957, we must make sure that the information distributed by NASD about brokers and their firms via the

Internet is accurate and proper, allowing individuals to dispute and

correct information contained in the database. After all, a broker

should not lose customers because they are guilty until proven innocent. The limited liability provisions contained in this bill should

also not provide immunity for willful and malicious actions. We

must additionally understand how the NASD resolves disputes concerning the information contained in the database.

In closing, Mr. Chairman, I look forward to the hearing from our

witnesses on these two important legislative proposals. I also look

forward to working with you to improve these measures in the

weeks ahead, and encourage you to move forward deliberatively on

these matters.

[The prepared statement of Hon. Paul E. Kanjorski can be found

on page 30 in the appendix.]

Chairman BAKER. I thank the gentleman for his statement.

Mr. Renzi, did you have an opening statement?

Mr. RENZI. Thank you, Mr. Chairman.

I thank Chairman Baker for convening this important hearing,

and for our guests; I am looking forward to your testimony. I also

remain thankful not only to the chairman, but to the staff for allowing me to be involved in this important legislation.

I think it is important that I make a statement that this kind

of common sense, simple legislation will help all investors. In particular, I agree with the comments that we have just heard, that

the information be accurate and reliable. It is the intent of this legislation, that the association be able to put in place, procedures

that allow for this accuracy and these proper reliable holdings to

be made on different types of brokers.

I would also point out that good, useful disclosure is the foundation of our security laws, and is the enhancement to investor protection that we seek in this bill. I think the bill increases transparency and fairness in the market and does so at no cost to the

investor.

So I look forward again to your testimony and thank you so

much for joining us this morning. Thank you, sir.

Chairman BAKER. I thank the gentleman.

Mr. Israel, do you have an opening statement?

Mr. ISRAEL. Mr. Chairman, in the interest of time, I will submit

my statement for the record.

Chairman BAKER. Mr. Emanuel, do you have an opening statement at this time? Are there additional members on our side with

opening statements? If not, then I would proceed to the first panel.

I would like to welcome here this morning two distinguished indiVerDate 11-MAY-2000 14:14 Jul 08, 2003 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\87797.TXT HBANK1 PsN: HBANK1
4

viduals, Mr. James M. McConnell, Executive Director of the Securities and Exchange Commission, and Ms. Colleen M. Kelley, National President of the National Treasury Employees Union. Your

official statement will be made part of the record. We would ask

if possible to make your statement within the five-minute period if

possible.

At this time, I would like to welcome Mr. McConnell to make the

opening statement.

STATEMENT OF JAMES M. MCCONNELL, EXECUTIVE

DIRECTOR, SECURITIES AND EXCHANGE Commission

Mr. MCCONNELL. Thank you.

Chairman Baker, Ranking Member Kanjorski and members of

the subcommittee, I appreciate the opportunity to testify before you

today on behalf of the Securities and Exchange Commission in support of H.R. 658, the Accountant, Compliance and Enforcement

Staffing Act of 2003. This legislation would provide essential authority to the Commission in its effort to quickly hire accountants,

economists and securities compliance examiners. We thank you,

Mr. Chairman, and the members of the subcommittee for your

leadership on this vital issue.

Dramatic changes have occurred in the Commission’s personnel

environment during the past year. Thanks in large part to the efforts of this committee, the Commission has been granted the authority to pay higher salaries, provide additional benefits, and has

received increased appropriations to fill over 800 new positions this

fiscal year.

While the new pay authority and increased appropriations have

eased the Commission’s crisis in hiring and retaining attorneys,

substantial difficulties remain in our ability to hire accountants,

economists and securities compliance examiners. The reason for

this distinction between attorney hiring and the hiring of other securities industry professionals is clear. Attorney hiring is excepted

from civil service posting and competitive requirements; the hiring

of Commission accountants, economists and examiners is not.

When we are filling a vacancy under the competitive service, the

process can take months to complete. Under excepted service authority, the hiring process can be completed in a few weeks.

In January, 2002, the Commission received its long-sought pay

parity authority as part of the Investor in Capital Markets Relief

Act. All Commission employees now have salaries comparable to

the other federal financial regulators. Additionally, in August 2002,

the Commission received a supplemental appropriation of $30.9

million, of which $25 million was earmarked for 125 additional

staff positions. Higher pay and the additional slots have worked

well with respect to our ability to hire and retain the attorneys the

supplemental provided. However, our experience in hiring accountants has been far less successful. Despite our best efforts, only a

few more than half of the new accountant positions made available

in the supplemental have been filled.

The Commission’s efforts to hire accountants under existing authority are further complicated by the special caliber of accountants

that our mission demands. In order to ensure the adequacy of public company disclosures and to review the books and records of

5

broker dealers, investment advisers and mutual funds, the Commission needs hundreds of accountants, most of whom must have

specialized experience in public accounting.

Our hiring difficulties are not limited to accountants. The complexity of the issues facing the Commission requires a similar level

of skill and experience in our economists and securities compliance

examiners. The solution to these problems is to allow us to hire accountants, economists and examiners as we have successful hired

attorneys for years.

Most of the civil service protections accorded to excepted and

competitive service personnel are exactly the same. These include

veterans preference, bargaining rights and union representation,

health care options, EEO rights, and retirement and leave benefits.

There are a few differences. First, MSPB appeal rights are limited

for a new employee’s first two years in the excepted service, as

compared to one year for the competitive service. However, the

Commission has historically provided a one-year probationary period for all staff, including excepted service employees, and we will

continue this policy.

Another difference might occur if the agency were to experience

a reduction in force, since mandatory protections are lessened for

excepted service employees in a RIF. A RIF is highly unlikely at

the SEC, and we have the authority to extend the protections and

we would exercise it to treat all employees the same.

Finally, an employee in the excepted service would not have the

same advantages an employee in the competitive service if he or

she wanted to transfer to another government agency. For all practical purposes, we simply do not lose program staff to other federal

agencies. For all these reasons, there is no meaningful distinction

between excepted and competitive service at the SEC.

Some may view the legislation you have crafted as highly technical and not very exciting, but I want to assure you that it is

among the most important actions that Congress can take to support the SEC and its mission of protecting investors and restoring

confidence in our markets. It is very exciting to those of us responsible for enforcing the securities laws.

Thank you for your support. I look forward to your questions.

[The prepared statement of James M. McConnell can be found on

page 40 in the appendix.]

Chairman BAKER. Thank you, Mr. McConnell.

At this time, I now call on Ms. Colleen Kelley.

STATEMENT OF COLLEEN M. KELLY, NATIONAL PRESIDENT,

NATIONAL TREASURY EMPLOYEES UNION

Ms. KELLEY. Thank you, Mr. Chairman, Ranking Member Kanjorski, and members of the subcommittee.

NTEU represents the 2,000 bargaining unit employees who work

for the Securities and Exchange Commission across the country, including the accountants, the examiners, and the economists. As a

professional accountant myself, I understand and appreciate very

much the work that they do. With me today also is Mike Clampitt,

the president of NTEU Chapter 293, which is our local chapter at

the Securities and Exchange Commission.

6

Mr. Chairman and members of the committee, you know as well

as I do of the serious staffing and morale problems at the SEC. For

all too many years, this went unaddressed. Pay and benefits were

grossly substandard; working conditions were not conducive to a

positive working environment; and morale was very low. The good

news is that we are making progress at the SEC. For example, a

newly negotiated agreement between NTEU and the SEC has

given employees confidence that they will be treated fairly on the

job. Under the leadership of the Financial Services Committee, pay

parity legislation was passed by Congress.

We are still, however, in need of the full funding that the president has requested, and we also need SEC management to fully

implement pay parity and benefit parity with other FIRREA agencies. As the SEC struggles to recruit more employees, it would be

a shame to lose qualified current employees to other agencies because they still offer better pay and benefits.

On the matter of new hiring, I think all interested parties are

substantially together on the need to be able to quickly hire qualified employees as authorized. The question is, what is the best way

to do this? I believe that the goals of this proposal can be fully realized without taking away the competitive service status from the

accountants, the economists and the examiners at the SEC. I believe we should preserve the competitive service status for these

employees because it does provide distinctions and advantages and

rights for the employees once they are hired.

Keeping competitive service status for these employees is important when applying for positions elsewhere in the federal government, such as at the FDIC, at the Treasury and other agencies.

Without it, employees cannot count their years of experience at the

SEC when applying for other government jobs.

One of the arguments for pay parity was that the disparity in

pay between the SEC and other FIRREA agencies meant that SEC

management lost out on the advantage of an exchange of employees among FIRREA agencies. The argument was that such movement of employees was a benefit to the development of experienced,

well-rounded professionals, and it was a benefit to the FIRREA

agencies as well as to the employees.

In addition, as you have heard, excepted service employees have

a two-year probationary period rather than a one-year. I am

pleased to hear that the SEC has made a commitment that in any

circumstances that would be a one-year time frame instead of the

two-year. But this is a significant issue, and it is still a pending

one prior to any formal resolution on the issue.

Competitive service is also important for bump and retreat rights

in the case of a RIF. While I am sure today no one can imagine

the SEC ever in that situation, we have seen agencies put in that

situation with unintended consequences. I would suggest that the

better approach would be to keep the SEC accountants, examiners

and economists in the competitive service, but to grant the SEC the

hiring flexibilities it needs independent of a change in status for

employees.

In electing to focus on hiring flexibilities, rather than a total

change from competitive service to excepted service, a model you

may wish to look at is the government-wide provisions that are inVerDate 11-MAY-2000 14:14 Jul 08, 2003 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\87797.TXT HBANK1 PsN: HBANK1
7

cluded in the recent homeland security legislation that were developed by Senator George Voinovich. This gives the OPM the right

to grant direct hiring authority to an agency that faces a critical

shortage of qualified applicants. The SEC may have concerns about

the length of time required to go through an OPM approval process, but Congress could directly grant this authority to the SEC.

In doing so, I believe it is very important that it should be directed

to first-level positions only. Obviously, employee morale would be

severely hurt if new hires were brought in at higher-graded positions and the qualified on-board employees were not given the

chance to be placed in these positions.

I would also urge that any such authority be temporary, and that

the SEC provide this subcommittee and other appropriate congressional committees with a report detailing the guidelines used, the

numbers, types and grades of employees hired under the authority,

and the benefits and shortcomings associated with any change in

the policy.

Again, I thank you for the opportunity to be here this morning

to share NTEU’s views with the subcommittee.

[The prepared statement of Colleen M. Kelley can be found on

page 32 in the appendix.]

Chairman BAKER. I thank you, Ms. Kelley.

Mr. McConnell, I want to make sure that I am understanding

the characterization of current SEC treatment of excepted service

employees. Although by statute I presume there is a two-year probationary period, by matter of practice you limit yourself to the

first year review, as is the case for competitive service employees.

That being the case, and apparently this being a significant issue,

is there any advisable reason why the committee should not simply

make that change in this bill as well, to simply state that excepted

service employees shall be subject to a one-year probationary period?

Mr. MCCONNELL. We would have absolutely no objection to that,

because that is the way we will operate. If you were to ask an attorney at the SEC how long their probationary period is, they

would say one year. So we would be happy to have that memorialized in whatever way.

Chairman BAKER. With regard to an excepted service employee,

prior to their engagement, it is my understanding that they are

given in writing a description of the consequences of going from

competitive into excepted service, meaning if there is an issue with

regard to a RIF or any other condition that might ultimately lead

to their dismissal, they are made aware of that prior to their engagement and their employment is voluntary. They could remain

in the competitive service by not coming to the agency, or taking

that particular position.

Mr. MCCONNELL. That is correct, yes, sir.

Chairman BAKER. So there is notice. Are there any other elements where excepted service employees are treated differently

from competitive service that you could offer to us that could be included in the bill to mitigate some of these concerns, beyond the

probationary period? We have not really talked about it.

Mr. MCCONNELL. There is. In cases of a reduction in force, we

actually have the authority to treat everybody the same. We have

8

specific authority to do so. We would do so, but you could add to

this bill a specific provision that says the SEC shall treat all employees using their authority in the same manner under the circumstances of a reduction in force.

Chairman BAKER. So that would then leave us with just the one

issue of a person who voluntarily applies for an excepted service

position, knowing that if they were to leave and go to another position in the federal government they would have potential liability

for lack of accumulated seniority, which is the only other point that

I understand is being raised as an objection to the legislation.

Mr. MCCONNELL. Yes, sir, that is my understanding as well.

Chairman BAKER. Given the fact that these folks, and let me

phrase a question; I am making an assumption that may not be

correct. The difficulty in hiring most of these individuals is that

they are not B-school graduates. It requires a certain level of skill

sets in order to do the work the SEC is looking for. Much the same

in the legal profession; that you are going after a certain type of

individual with a very narrow, but very good set of abilities to perform a very specialized task within the agency. Given that person

then is likely to be mid-career or advanced in career, this is a person who is fully capable of making a judgment about whether the

risk of excepted service is good for their long-term career or not.

How long, if nothing changes and we proceed with the current system, even though you have funding and authorization, to go from

where you are today to get to the end of the process of having 100

percent ability within the agency?

Mr. MCCONNELL. If we do not obtain this legislative authority,

I cannot tell you precisely how long it would take. I know that we

could not do it this year. We have looked at this very carefully. We

have analyzed it. I would like to be proven wrong, but I am confident that unless this legislation passes and passes quickly, the

SEC will not be able to hire the staff that it has authorized for

2003. When it may actually happen will be certainly, I think, well

into next year.

Chairman BAKER. And that is what the current statutory requirements that Congress has passed. If the Congress were to

enact any additional standards in any new area, that would even

make your job even more complex.

Mr. MCCONNELL. It would compound the problems we have.

Chairman BAKER. I think you have made a case for action, and

given your responses I think we can make some modifications to

the proposal that would go a long way down the road to eliminating objections.

Let me ask Mr. Kelley, while I still have a few seconds, if we

were to make those two modifications, would you still have strong

objection to the passage of the legislation?

Ms. KELLEY. Mr. Chairman, I would be very interested in seeing

whatever the language would say, of course, and I would surely

consider any suggested changes. It was very good news, as I said,

to hear Mr. McConnell say that this morning. I was not aware of

those commitments by the SEC. But the competitive service, the

way it operates today within the federal government, is as a rule

it is not given within an agency. It applies across the board to an

occupation. For example, the attorneys; attorneys throughout the

9

federal government are excepted service. So this would be putting

a whole new definition on excepted service. So I would want to

have a chance to look through and think over the ramifications of

that, and of course then react to whatever language you would be

suggesting.

Chairman BAKER. I thank you, Ms. Kelley.

Mr. Kanjorski?

Mr. KANJORSKI. Mr. McConnell, do I understand that it is the intention of the SEC to work closely with Ms. Kelley to resolve these

issues, and to see if we cannot get a very cooperative stance so that

we could move this legislation as speedily as possible?

Mr. MCCONNELL. That is correct, sir. We have worked closely

with the union so far. We have had several meetings and a good

bit of interaction. I understand that the local union supports this

legislation. I think we are very close.

Mr. KANJORSKI. Is it possible in the next week you could all meet

and send us a nice letter saying all the issues are resolved and we

should proceed through with this on suspension and get you this

authority before we go home for Easter?

Mr. MCCONNELL. I am certainly ready to make the effort.

Mr. KANJORSKI. Well, let’s do it. It sounds to me like the agency

is pliable in regard and sympathetic to some of the issues raised

by Ms. Kelley, and I think she has raised some important issues

that, rather than expanding and changing all these definitions, we

can get to expedited hiring very quickly, without a lot of major disturbances. So if I could recommend you do that over the next week

and communicate that back to my chairman so we can move on

this legislation as quickly as possible.

With that said, I wanted to take advantage of your appearance,

Mr. McConnell, and I apologize for talking about an issue completely unrelated to what is here today. But Senator Grassley the

other day I thought made a very significant point in raising the

question that there is about to be a settlement against some of the

corporations involved in the scandals, of about $1.5 billion. As a result of the structure of the settlement, the entire proceeds from the

settlement will go to the investors fund for payment for losses. But

because of the structure of the settlement, tax benefits will be derived by the corporations, which will reduce their tax burden and

payment to the federal government. The end result of the $1.5 billion fine will be a negative revenue flow to the federal government

of significant proportions.

I think he commented that he was surprised that the SEC had

informed him that they do not consider anything else other than

the immediate nature of the fine, and they do not consider the implications of the tax code and how that impacts on the revenues of

the United States government. As you know, that should be important to us, and since we just increased your budget to $720-odd

million dollars, you know, obviously we are going to have a shortfall, and we are going to be asking either for additional taxes or

additional debt. I suspect that we are not going to have additional

taxes. Because of the tax cut, we are actually imposing additional

debt on future generations of Americans.

Are you familiar with this issue I am talking about? Do you have

any reason why; I thought Senator Grassley was eminently correct

10

in his analysis of a federal agency imposing fines that directly impact in a negative way on taking more revenues from the tax payers, and those benefits not passing into the treasury, but passing

onto the benefit of investors who lost in the recent debacle in the

market.

Mr. MCCONNELL. Sir, I am not sufficiently familiar with that

topic or that issue to discuss it. I can assure that we will take it

back and have the appropriate people respond to the subcommittee

or directly to you in whatever manner.

Mr. KANJORSKI. I would appreciate it if you could do that very

quickly, and also respond to Senator Grassley, because I thought

it was an extraordinarily well-raised issue that generally does not

catch the light of day, but has a tremendous impact on $500 million or $750 million on the loss of revenue to the United States government at a time when we are struggling, and we have given your

agency a significant increase.

It would be a shame to see the significant increase that we have

given the SEC reverberate with the loss of funds for other vital

projects of the United States government through the loss of these

revenues as a result of your structured settlement. So if you could

address that issue, and if for some reason you are not familiar with

it, I happened to see it in a news statement by the Senator, so we

could contact whatever media that had that news conference. I suspect he must have written a letter on the subject. But I would appreciate a response for myself on that issue, and also to Senator

Grassley if that is possible.

Mr. MCCONNELL. Yes, sir. We will take care of it.

Mr. KANJORSKI. Thank you very much.

Chairman BAKER. I thank the gentleman.

Mr. Renzi?

Mr. RENZI. I yield back my time to the Chairman, for any comments he might have.

Chairman BAKER. Terrific. I appreciate the gentleman yielding.

While we are on the topic that Mr. Kanjorski was speaking to,

since we are speaking through you to other people, I will try to

keep it brief. I also have concerns previously expressed. From published press reports, I think the companies that have been found

guilty of wrongdoing should have the fiscal responsibility for paying the obligation and not have it engaged through insurance or

the shelter of tax provisions. But there is another important element of this as well, and that is that the defrauded investors get

some recompense as a result of these settlements. The proposed

settlement, as I have read it, was $1.4 billion, with approximately

$900 million previously identified in press reports as likely to be

given back to defrauded investors, as identified by the SEC.

The troubling thing that I have read in recent days is that some

states now are planning on whatever portion they may get back of

these funds, rather than using them for investor restitution, are

talking about DMV offices and a whole host of operational concerns. I believe that is highly inappropriate, unless of course, we

are going to repeal the driver’s license of some fraudulent investor

as a result of his DMV office. I think people would feel much better

if they got a small check in the mailbox saying, the United States

government has been working on your behalf, one, to put these

11

guys behind bars; secondly, to get compensation back; and thirdly,

this is your money. I liken it to the case where you are back home,

your car is stolen, you call the sheriff, you get a call back two days

later and he says, good news, we found your car; the bad news is

the sheriff’s going to keep it. Somehow that does not seem to me

to be justice.

This has been a bipartisan effort of this committee, to get investor restitution, and to have the biggest settlement ever by the SEC

and others hammered together over many, many months, I would

hope that this glimmer of provision would also be constrained,

much like the gentleman suggested with regard to corporate abuse,

that we constrain the disposition of that $900 million or whatever,

specifically to investor restitution. So when the folks are responding to Mr. Kanjorski’s issues—just please add mine onto the bottom

of the letter.

Mr. Kanjorski?

Mr. KANJORSKI. If you will, Mr. Chairman. I think you would join

me, that you would be displeased to see the Federal Treasury suffer the loss because of the tax credits that the corporations may

gain as a result of the nature of the structure of the agreement,

so that all the taxpayers become losers, even though a significant

amount goes to the investor fund, but it really is not corporate

money that is going there, it is taxpayers money because we would

be losing those revenues as a result of the corporate tax credits.

Chairman BAKER. I thank the gentleman for making that point.

I agree. The wrongdoers should be held accountable, no one else.

However we have to construct these settlements in order to ensure

that, I think that is of principal importance. Secondarily, if we are

going to have $900 million sent to anybody, it ought to go back to

the people it was taken from. I think those two points can be joined

together very successfully.

I thank the gentleman for yielding his time.

Mr. Israel—

Mr. ISRAEL. Ms. Kelley, you represent many workers in my district, including employees at the IRS’ Brookhaven campus and customs workers at JFK. Can you tell me how employees at other

agencies will be impacted by this bill? Is there a ′′camel’s nose

under the tent′′ problem here? What is the implication for other

agencies throughout the government?

Ms. KELLEY. I guess depending on how the language is written,

it could be argued that no one would be impacted but the SEC. But

as we all know, as soon as this starts, then it is just a matter of

how quickly it spreads. In thinking about the three primary issues

that have been identified; the one-year probationary period, the impact in a RIF and the ability to have years of service count

throughout the government; if the SEC is willing to commit to the

one-year probationary period and use their authority to say all employees are treated equally in a RIF, then it almost seems as if it

would be much easier to get to the crux of this problem to maintain

their competitive service status, and figure out how to get this hiring done faster, rather than making up new definitions for what

excepted service will or will not be.

I do have the fear that you expressed, because we have seen it

over and over again in this whole area of flexibilities, that once a

12

new definition arrives for a traditional word or phrase that has always existed, it tends to impact not just those originally intended.

So it is a very big concern—

Ms. KELLEY. Again, I think probably the easiest way would be

to say they continue as competitive service employees, but let’s figure out a way to do the expedited hiring, which is the only thing

that the agency has, or the primary goal the agency has identified,

which we agree with. We want to find a way to help make that

happen. If these other things that are traditionally in excepted

service are not going to be, then it does not seem to make a lot of

sense to rewrite that. I would hope we could focus in this next

week’s discussion on the hiring issue, and figure out how to do that

without impacting the status and redefining everything that everybody knows today.

Mr. ISRAEL. I yield back.

Chairman BAKER. I thank the gentleman.

Mr. Emanuel?

Mr. EMANUEL. I was just trying to stall until I came up with my

questions.

Chairman BAKER. I am sure that was sufficient time for a guy

like you.

[LAUGHTER]

Mr. EMANUEL. I appreciate that confidence.

Actually, I do first of all, without trying to brush over a point,

that if you can work it out, clearly you have had discussions. I

think that would be a great thing. I think what Ms. Kelley said in

relationship to using the model that was negotiated and recommended by Senator Voinovich during the homeland security debate could be a guiding principle, since we have been around this

bend with other employees, and it may be a good template here.

I do believe, as somebone who worked for a short period of time

as an investment banker, that clearly the SEC is overwhelmed.

Clearly, the SEC needs both not only financial resources, but also

human resources, and I think we can accomplish that goal without

doing any damage or long-term hurt, not here, but using it as a

model that other agencies then would take too far. My goal is, and

my wish, is that this would not be an attempt to get one’s goods

through customs, meaning that we would do something that would

damage, I think, worker protections that have been a long-term

and long-time standard here.

To the issue of what both the Chairman and the ranking member

talked about as it relates to the agreement reached on some of the

corporations, I have one clarification. Usually, it is not a choice.

This is not a choice between the investors and the United States

Treasury. That is a false choice. It really relates to how the company is getting the tax benefit.

I do not in any way want the language to come back, and it is

presumed that somehow we want Treasury to get the resources and

then do it as chump change to the investors. Those two are not the

trade-off. It is whether the corporation that has been in violation

that passes, and then getting extra credit in the tax structure. So

I would say, how you do that is very—and I know again, Mr.

McConnell, we are talking through you to others at the agency. I

think it is a very, very important point, because I do not think it

13

should be constructed or implied by any of the questions that we

somehow presume that it is a choice between the investors and the

Treasury.

Thank you very much to both of you, and good luck over the next

week.

Chairman BAKER. Thank you, Mr. Emanuel.

Mr. Scott?

Mr. SCOTT. Yes. What time frame does the SEC believe that it

will be fully staffed in order to meet the demands of the SarbanesOxley legislation?

Mr. MCCONNELL. That question depends on the success of this

legislation, it seems to me. Speed is of the essence with us obtaining the authority to be able to hire more efficiently. As I stated earlier, if this authority is not available to us for hiring, we will not

be able to do it this year. We will not be able to hire those people

this fiscal year. How far into next fiscal year it would go, I cannot

speculate. As you may appreciate, the same people who make the

hiring decisions are the same people who are implementing Sarbanes-Oxley and who are going after the bad guys. So we just cannot but throw so many resources at hiring. We have got to have

some help to do it.

Mr. SCOTT. The federal government is experiencing a large number of employees who are eligible for retirement coming up. What

impact would this have on the SEC? Are you all expecting a similarly large surge of retirements?

Mr. MCCONNELL. We are not facing that same sort of bulge that

a lot of other agencies do. We have a very young workforce. Our

turnover in the past has been so high that we have dealt with

planning for replacements as a regular course of business. With

pay parity, we have substantially improved our ability to retain

people. Our attrition rates are down dramatically and it has been

very helpful. But at the moment, currently we do not have that

same kind of retirement bulge that you see in a lot of other agencies.

Mr. SCOTT. Finally, if I have time, did I hear you correctly, did

you state that the unions are fully on board?

Mr. MCCONNELL. I do not think I can make that statement.

[LAUGHTER]

I believe that we have a very common interest all across the

spectrum on this, and it seems like we can work something out, but

there are certainly some differences.

Mr. SCOTT. What are those differences, may I ask?

Ms. KELLEY. Based on our public conversation this morning for

a half an hour, it seems like the only difference now is figuring out

how to get the hiring done fast. It is not about redefining or the

concerns that NTEU had raised about probationary periods, because it would be the same as in competitive service, so let’s just

leave them there. They would not have different rights in a RIF,

so let’s just leave them in competitive service.

So I think we have isolated the issue to quick hiring and the

Commission’s ability and authority to do that. I think that is the

open question, and hopefully we can find a resolution that we could

agree on that would maintain the competitive service and get these

14

new employees on board as soon as possible, which is what we all

want. We do have a common interest in that.

Mr. MCCONNELL. If I may, I would like to wade back in on that

same issue. Speed is critical. We need this authority right now.

Anything that delays it, delays our ability to bring people on and

to meet the goals of Sarbanes-Oxley and to meet the goals this

Congress has set for the SEC. I just have to leave you with that.

Mr. SCOTT. Thank you.

I yield back the balance of my time.

Chairman BAKER. Thank you, Mr. Scott.

Ms. McCarthy?

Mrs. MCCARTHY OF NEW YORK. Thank you.

We are hoping, too, that certainly with the passing of this legislation it is going to make it a lot easier for you to do the hiring.

But hiring is one part of the process; accepting the applications is

another part that you have to go through. From what I hear from

an awful lot of people, not just with the SEC, but from other job

applicants, they apply and then they hear nothing. Obviously,

when someone is applying for the job, they are not going to wait

a long time. Obviously, they want to get into the job market and

work faster. Just looking at how you take the applications and the

process that it has to go through before it can be moved on back

to the point of being hired, hopefully we can streamline that for

you a little bit.

I guess basically what it comes down to, do you have any idea

how long it actually takes from the time someone applies? Do you

actually call those people back, say, that they are in the pocket,

that they have a decent chance of being hired, or anything else like

that so they know? That is usually how the best applicants usually

end up going somewhere else.

Mr. MCCONNELL. I am afraid that I must admit that at the SEC,

like at many other agencies, it takes months sometimes for people

to hear. This legislation will give us the ability to move that along

in weeks, so people will know very quickly what their status is and

they can move on to other employment opportunities if that is necessary.

Mrs. MCCARTHY OF NEW YORK. What I would say which would

help obviously everyone is to really sit down, as the chairman has

mentioned, and work out your differences so we can get this on a

suspension bill and get you going. That would be the best thing for

everybody.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Ms. McCarthy.

Mr. Lynch? Do you have a question?

Mr. LYNCH. Thank you, Mr. Chairman.

I would like to thank both of the witnesses for coming here and

helping the committee with their work.

President Kelley, I just have a two-part question, if you will.

First of all, I understand under the legislation that current employees may be grandfathered under certain treatment under civil service, and then new employees would be treated somewhat differently. As a former union president myself, that always presented

a difficulty for me in trying to enhance solidarity and unity, while

having two sets of different rules for my employees.

15

My first question is, have you had discussions with your members about how this would be handled, and if you might relate to

the committee some of their concerns, if you have heard from them.

And also just a general question, how do you think this legislation

could be improved? What do you think might not be addressed here

within this bill that you would like to see addressed?

Ms. KELLEY. On the first question about the grandfathering, that

is a very interesting point. As a former union president, I can see

why it would be on the top of your list. The discussions with the

employees in large part have to start with the education process as

to what it means to be excepted service versus competitive service.

Once the discrepancies are understood, then there is a clear concern that, will they be impacted, too? While not often, but once in

a while, it is important for unions to agree that there has to be a

different treatment and grandfathering has to occur, but that is in

a case where I think there can be such distinct or specific cases

made as to why that is necessary to the success of the agency, as

well as the success of the government. I do not think that is the

case here. I do not think the separation between excepted service

and competitive service is necessary.

I think we have established today that really at the core of this

is just about expedited hiring, and not about the other things that

go along with the excepted service. So I can tell you that the local

chapter, Chapter 293, and the employees who we represent are opposed to the hiring of future employees as excepted service employees, and are interested in figuring out how, of course, to get the

Commission staffed up to where it needs to be, but to find the right

solution and not to create this grandfathering provision when it

really is not necessary. That is not the problem. The problem is

how do we get employees hired faster and the qualified employees

that the SEC needs.

So that is the first part. I guess to the second part of your question about what else, I have really been focused solely on this issue

because it is the one that touches the employees, both current and

future, and their working conditions. And also I view it as a responsibility of NTEU’s to help to ensure the ability of the SEC to

hire qualified employees. Employees who we represent want to be

successful in the workplace. For them to be successful, the agency

they work for has to be successful. So we come at this from the

same direction.

Mr. LYNCH. That is great.

Thank you. I yield back.

Chairman BAKER. Thank you, Mr. Lynch.

If no member has any further questions, I want to express my

appreciation to both of you and offer that if my office can be of any

assistance in facilitating a resolution on the pending matter, I certainly want to be involved and helpful. It would be my intent to

try to move this bill as quickly as is practicable. I think any protracted delay would not be good. Let me suggest that if we can informally visit over the course of early next week, perhaps we can

get to a point where we can move this to the suspension calendar

and accomplish what we all want to see happen.

I thank both of you for your appearance here today. Thank you.

Mr. MCCONNELL. Thank you.

16

Chairman BAKER. I would also at this time ask for our second

panelist to come forward.

The purpose of our second panel is to receive testimony relative

to H.R. 957, the Broker Accountability Through Enhanced Transparency Act of 2003. To that point, I welcome Mr. Doug Shulman,

President, Regulatory Services and Operations, the National Association of Securities Dealers.

Welcome, Mr. Shulman.

STATEMENT OF DOUG SHULMAN, PRESIDENT, REGULATORY

SERVICES AND OPERATIONS, NATIONAL ASSOCIATION OF

SECURITIES DEALERS

Mr. SHULMAN. Thank you, Mr. Chairman.

Chairman BAKER. Your formal testimony will be made part of

the record, and if you wish to present your views within the fiveminute expectation, that would be great.

Mr. SHULMAN. Thank you very much. That would be great.

First, I very much appreciate the opportunity to be here and testify on the Broker Accountability Through Enhanced Transparency

Act of 2003. This bill will allow NASD in summary basically to

take information we can now make available via toll-free line and

via mail, and move that information onto the Internet, which is

what investors are looking for now.

Let me give you quick background on NASD and our public disclosure program. As you know, we were chartered by Congress to

write the rules which govern the behavior of securities firms, investigate firms and do examinations of their conduct, and when necessary do enforcement actions and disciplinary actions on those

firms. Every broker-dealer who does business with the investing

public must be a member of the NASD. Our responsibilities range

over a wide variety of activities, including transparency in the fixed

income world, to our trade system, licensing and registering brokers, doing our traditional regulatory activities, investigation, enforcement, and dispute resolution.

Clearly, as a regulator, we have a couple of jobs. One is the traditional job, writing rules and making sure they are enforced. The

second, and vital to what we do, is getting information into the

hands of the investing public, so they can make informed decisions

when they enter the capital markets. In the case of what we are

trying to get done and what your bill would help us do today is getting information about the brokers with whom they do business.

A quick background on our public disclosure program. We have

665,000 brokers in the securities industry who do business with the

public. All of them register with us. We then make certain information available to the public to help them make decisions about

which broker to use. The information we make public is disciplinary actions, customer complaints, arbitration decisions, civil judgments in securities or commodities-related activities, felony and

misdemeanor criminal convictions that are investment-related, as

well as bankruptcies and unpaid judgments and liens. To give you

a sense of the volume of the program, we launched this program

in 1998. We had about 6,000 people look for information on their

broker in 1998. Last year, we had 2.5 million people come in looking for information on their broker.

17

To speak specifically about the bill, what we are looking to do is

to provide the same exact information we make available to people

via paper online in real time. In 1990, Congress passed the statute

which gave us statutory liability protection for our toll-free number

and for paper-based information that we give to investors. Clearly,

Congress was quite wise in insisting at that time that make a tollfree number available. The toll-free number was the way that an

investor could easily get information on their broker and quickly.

Over the intervening years, the last 13 years, we had the Internet revolution. Today, 96 percent of the inquiries that come into

NASD come in via the Internet. Simply put, what we are trying to

do is make the process for those investors to get the information

from NASD about their broker meet the investor’s expectation of

getting that over the Internet.

Let me comment, in speaking with some of your staff, a few

questions have come up, and let me comment on those directly.

One is the 1990 statute gave us good-faith liability. This statute

does not have the qualifier of good faith in there. There are three

reasons why we think this is sound. First is our desire to secure

a uniform federal standard. The good-faith criteria that was in the

bill, if it ever came to this and an investor disputed that, we would

have to basically look at and understand defamation laws in all 50

states. It would be cumbersome and expensive for us to do that.

Our rules are written under federal security rules approved by the

SEC, and we think establishing a uniform standard for all 50

states is a good thing.

Second, this bill would conform to the current case law that is

out there on NASD as an SRO with liability protection. We have

been given absolute liability without qualifiers in every case that

has come along about us doing our regulatory job. This bill, without

putting the good faith in there, would basically be a conforming,

and make sure the statute conformed to what the courts have

ruled.

Finally, this bill, and wisely so, you asked us to make sure that

we had procedures that were approved by the SEC to handle any

disputed information that goes out in the public about a broker. We

think those procedural safeguards are in essence the same thing as

making sure we operate in good faith, and hence obviating the

need to have that good faith standard.

Let me just finish up by saying that while this bill does not address what we put in the system, it only addresses how investors

can get this information from the system, you should know what

we go through and how we try to decide the balance of information

we put out about a broker. The word ′′balance′′ speaks clearly.

What we need to balance is transparency in the capital markets

and getting as much information out to investors as possible,

against the fact that we are getting information about a broker out

into the public and we need to make sure we are sensitive about

getting the right information about a broker, and that broker is

treated fairly in the public eye.

When we go through a process, which we are going through now,

which really has nothing to do with the bill, but when we look and

see what information we put into the public, we have extensive dialogue with the industry, both the firm representative and brokers,

18

with investor groups, with the states and other SROs, and finally

any of our proposals have to be approved by the SEC.

We continually strive to get that right balance. It is not an easy

balance to get. Our default is always towards getting investors

more information, with one major caveat. We are quite aware of

the issue of identity theft. We do not and will not put information

out about a broker that could be used to compromise that broker’s

safety or reputation, et cetera. The things we will not put out are

Social Security numbers, home addresses, physical descriptions, the

kinds of things that are used in identity theft. We are very careful

about that.

In conclusion, this bill is trying to get investors information in

the form that they clearly are demanding it. It is going to go a long

way towards letting us as a regulator do our job better, which is

to get information into the market, to keep markets safe, and to

make sure that investors are protected.

I would be happy to answer any questions.

[The prepared statement of Doug Shulman can be found on page

46 in the appendix.]

Chairman BAKER. Thank you very much.

I think it makes a lot of common sense, given individuals’ access

to the Internet to get information. I do not have any hesitancy to

think that this is a good thing to do. I guess the only point that

we need to have clarification on is the mechanisms to ensure that

accurate information is provided. With regard to a civil judgment,

felony, misdemeanor, bankruptcy; those things are pretty clean and

clear-cut. You are not going to put anything out just because they

are in court. You are going to wait until the appeals are final and

determinations or sentence is imposed.

The area where I have some sensitivity, though, would be customer complaint. If I called in and said I am entitled to return of

funds from my account and I have not gotten them in six months,

that is a complaint. If I call in and say I acted on my broker’s advice and I lost money, I do not know if that is a complaint. How

do we sort that out? What process do we go through before we report a broker has 26 complaints against him? What is the review

process that enables you to feel comfortable in moving forward and

having that on the Internet?

Mr. SHULMAN. That is a great question, Mr. Chairman. Let me

try to answer it.

First, let me just state what I said before, that this bill is not

about what information is out there, but clearly it will make sure

there is more information out there and that the right information

is out there. In terms of customer complaints, as I said before, it

is a very delicate balance. We do a couple of things to ensure that

when complaint information is out there, it can be put in context.

The first thing we do is when we release customer complaint information, that information, the broker has the opportunity to have

their side of the story right there next to each other. So basically

if it is in dispute that this is a legitimate complaint, that will be

flagged by the investor. Second, when we look—this is a longstanding procedure in the securities industry; it has been for years

we have released this kind of information; when we look at the balancing act around customers, first as I mentioned, the industry is

19

fully involved, lots of people are involved in this. If there is information on someone’s record that is clearly erroneous or defamatory

in nature, it can be expunged from the record.

What we try to do is have information out there that will engage

someone in a dialogue with their broker. So if someone comes out

and sees there is one customer complaint, first they will see what

the complaint is and see the broker’s answer. Second, we are trying

to put information in context separate from this legislation. We

have a review going where what we are trying to do is get authority from the SEC to put this information in context, so we would

be able to say 4 percent of all brokers have a complaint against

them; less than .5 percent of brokers have five complaints against

them, or whatever the information is. So we can put it in context

for an investor.

Chairman BAKER. Let me jump to another point before I expire

my time.

Assuming for the moment we have got a system in place that

minimizes erroneous reporting, that reflects accurately the professionalism of a particular brokerage firm, using your information

from 6,000 inquiries in 1998 to 2.5 million last year, once we are

fully online, it is not incomprehensible, given the ease with which

people would feel they could access this information, to have several millions of hits beyond the 2.5 million you currently are responding to. What about your resource limitations to be able to

adequately respond? I know in a congressional office, the number

of e-mails you get versus letters, versus telephone calls, a disproportionate share is moving radically in one direction. It makes

it very difficult to stay up with it.

Do you have concerns, or what is the prognostication a year or

two out from now if this is authorized? How are you preparing for

the additional inquiries?

Mr. SHULMAN. It is a great question. First, my team just told me

I said ′′1998.′′ I meant ′′1988.′′ So hopefully it will not escalate. We

want investors coming in, but we do not anticipate huge escalation.

This actually would make it much easier because right now we

have to go through the cumbersome process of getting the phone

call, putting the information in mail, mailing it out to the investor,

because the investor then cannot access the information quickly,

they might have to come back and ask for more information, et

cetera. What we think this would do is actually limit the resources

and save us resources, because the investor could pop it up online.

All we need to do is have the program coded correctly so that the

information can be accessed online.

Chairman BAKER. So this will not facilitate online complaint initiation. Complaints will still have to be originated in the traditional

way. This is only to send the information out, not to collect it.

Mr. SHULMAN. Exactly. This is just about the information that

the investor gets, not about all the channels that information

comes into the NASD and other SROs.

Chairman BAKER. Terrific.

Mr. Kanjorski?

Mr. KANJORSKI. This is just about publication?

Mr. SHULMAN. Yes.

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Mr. KANJORSKI. That is pretty important, isn’t it? Isn’t that the

whole issue in libel law and slander law; publication?

Mr. SHULMAN. Excuse me?

Mr. KANJORSKI. Publication is the important thing. It is one

thing to send a letter or information to an inquiry made over the

telephone, and another thing to hire a bulletin board and put up

information on it, that everybody that drives down the highway can

see, or everybody that uses the e-mail bulletin board can see. I am

very much interested in this whole idea of what happens with a

mistake. In your testimony you said you were worried about identify theft. Hell, I am worried about character theft. What if you

make a mistake? The person is dead. What happens if someone

makes a customer complaint or some information is put up on the

Internet that is absolutely false. You say there is a method to expunge it. If you get a court order, how much does it cost for an average broker or person who feels they are being slandered or libeled to get a court order? You are talking tens of thousands of dollars, and months of time, before you can get that off.

Mr. Shulman, I am very sympathetic that the best information

be made available, but I qualify it with ′′best′′ information, truthful

information; examined, studied, conclusive information. I hear you

talking about customer complaints, not final jurisdiction or a judicable issue that has been finalized, but something that is in the

process of occurring, where we do not know what the final result

will be. Once you put that on the Internet, it never leaves existence.

Now, I know you are not in public life, but I am and I know the

Chairman is, and all you could do is make one charge against a

politician that gets printed, and it can be the most ludicrous charge

in the world, and it can never be expunged from the obituaries that

exist across the country. You revisit that erroneous mistaken

charge a million times.

We are sort of enamored with a certain thickness of skin to accept that. But now we are talking about people’s livelihoods. What

more important thing to a broker does he have than his integrity

and his credibility? If you mistakenly put something up on the

Internet that is grossly erroneous, he probably will not find out

about it for a reasonable period of time, until some of his friends

at the bar several weeks later are joking about it, and he happens

to hear his name mentioned. I mean, no broker is going to get in

the morning and run to the office and throw on NASD and see

what they are saying about me today. So it is out there, and once

out there, it gets captured in many lines or recordings across the

country.

Something said in a U5 report would be put on the Internet, if

I understand this. That is a one-sided statement, as I understand

it, why a person was discharged. Have you ever been in a circumstance that there has been an employee-management disagreement, and either a discharge or a firing occurs, or a quitting occurs,

and there are different facts and circumstances as to why it happened?

Let me give you an example, that I would worry about just from

a sexual aspect. The young lady is not honoring indications from

her employer to be responsive in ways that are improper to be reVerDate 11-MAY-2000 14:14 Jul 08, 2003 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 C:\DOCS\87797.TXT HBANK1 PsN: HBANK1
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sponded to and she gets fired. He puts down that she was fired either for incompetence or she was fired maybe for being promiscuous. How in the world when it comes to that U5 is she ever going

to capture back her character or integrity?

Now, I think information, and this is the issue that I want to get

to; are there such corrupt brokers in the United States that we

really need all this information put up on bulletin boards in a permanent way? I mean, we are doing like a Megan’s Law here. I understand that with sex perverts, but these people are generally not

sex perverts. They have complaints filed against them; some proper, some improper. I am wondering, the standard you are using

here in your industry; even doctors who commit acts of negligence

or gross and wanton negligence in the majority of cases once resolved or settled, are sealed and no one can ever hear about it.

There was an actual court case where the damage that occurred,

proven or ceded to, means that everything is locked up.

Most lawyers who are subject to charges are limited as to what

part of the proceedings can be made public. Judges; well, they are

a special branch in our system. Very seldom do we ever find out

their dalliances. But most of these things are held in very tight

control because of the tremendous amount of damage to the individual, the irreversible nature of that damage to the individual if

improper facts or statements or conclusions are made and posted.

So it would seem to me that you have a burden to show us how

bad your industry is, that these crooks are running all over Wall

Street, and if we do not throw out the whole thing on the Internet,

that the financial markets are going to come apart. I do not believe

that is true. I do not think there is any more impropriety out there

than in any other profession or activity. We want to find a way to

protect the public against the 1 percent, that 2 percent, that 3 percent—whatever it is. But at the risk of damaging the other 97, 98

or 99 percent, with irreparable damage if mistakes are made, I do

not understand that. I think the balance is out here.

It is one thing about; hello, NASD; you have a broker Jack Smith

who I would like to find out information about. You send him a

confidential letter back to that one inquiry. That is just one single

person getting that information. Once you put it on the Internet,

anybody can use that for any purpose. If that information is not absolutely accurate and tested, it can never really be expunged because it exists somewhere in its improper form. Secondly, you literally have committed a character theft or assassination. Those

people can never get their reputations back.

I think we ought to slow down. We are not trying to prevent terrorists from attacking the country here. We are not trying to save

a life here; maybe some assets. But aren’t we running to open up

a field of uncontrolled flow of information based on innuendo and

charge, without substantiation, to the extent that it could be tremendously injurious to individual lives? What do we do? You are

asking here for immunity. You want to even take good faith out.

What, do you want to be able to put bad stuff on the Internet

under bad faith? Why wouldn’t you want to make a standard of at

least good faith?

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What if you had somebody working for NASD that did not like

their spouse, and they decided to open up, just write charges out

there? What do they do?

Mr. SHULMAN. If that happened, sir, clearly we have rigorous

SEC oversight. I think the SEC—

Mr. KANJORSKI. You what?

Mr. SHULMAN. There is rigorous SEC oversight.

Mr. KANJORSKI. Oh, you are going to call them in and discharge

them for a couple of weeks or give them a fine, or maybe even fire

them. What does that do to the person who is injured? They do not

give a damn. It just seems to me that we have an obligation. We

are dealing here with the most sacred and important thing and privacy that we have, the ability to destroy character and integrity of

individuals. Unless the injury, if it occurred in society generally, is

so much greater that we should waive that protection, I think we

have to walk very softly.

I hate to think that I was a broker for 25 or 30 years, and some

dissatisfied customer could write anything about me and make any

charge, and it gets up on the Internet and my career is gone, particularly if I am in a small town or a small community. It is gone.

What do I do? Who do I look to? I go to you and I say, that is not

right. There is no factual support for this. And you say, oh well,

it was done in good faith, but hell, we do not even have to have

good faith; we just have immunity. Congress gave it to us. We just

stripped you of your protections.

I would urge, Mr. Chairman, and Mr. Shulman, we should do

something to make sure we make information more readily available. But let’s not run down this road. I was just thinking here. I

remember in contract law in law school, hell, I think it is the law

in all 50 states of the union, you cannot post on a bulletin board

in a business place if somebody owes you money. Why? Because

you destroy that person. It is a private relationship and you destroy that person’s reputation.

And yet you can put on that somebody did not pay an account;

somebody owes money; somebody did not do something. You are vitiating all that expression of the long-time common law protections

for individual rights.

Chairman BAKER. Mr. Kanjorski, if I can suggest that with this

vote announcement that just occurred; there is a series of three

votes. Given the few number of members remaining, it might be

possible to proceed with other members?

Mr. KANJORSKI. Sure.

Chairman BAKER. And try to conclude.

Mr. Renzi, do you have a question? Mr. Renzi waives.

Mr. Scott?

Mr. SCOTT. I have one. I have some reservations about this as

well. I do not think I can more eloquently state them than Mr.

Kanjorski did—excuse me, I hope I pronounced your name correctly.

I would like to ask you about the toll-free number that you are

currently working under. How do you get that toll-free number out,

communicate it out to the investor community so they know that

it is there?

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Mr. SHULMAN. We use a variety of venues. We try to make it

available through PSAs in the past. We have done statement stuffers with securities firms so that they know that there is a place

to come and get that information. We continually talk about it in

public appearances. We do that on our Web site so people know

where it is. So we try all of the traditional mechanisms that you

would use to get information out into the public.

Mr. SCOTT. Okay. Thank you.

Chairman BAKER. Thank you, Mr. Scott.

Ms. McCarthy?

Mrs. MCCARTHY OF NEW YORK. Thank you.

Just to follow up, I live on Long Island and we have certainly a

number of brokers that are in my district, my son included. Where

exactly do you get the information that is going to go up on the

Web site, especially any information that might be damaging? And

just to follow up quickly because we are on time, being that people

seem to want this information, based on the hits that you have had

on the Internet, why wouldn’t the securities firms themselves actually as a service bring this up themselves? I do not know whether

they have ever been asked or not, but at least they would have a

little bit more control over the information that is going up, to protect their brokers from, in my opinion, God forbid somebody makes

a mistake. You can ruin somebody’s life.

We have seen that. Talk about reputations; we have to go

through campaigns every two years, and I look on the Internet and

what they say about me, I do not even know who they are talking

about most of the time. So I am very sensitive to this. But where

do you get your information?

Mr. SHULMAN. It is a great question. Let me answer it.

First, just for clarity, we are not planning on posting information

up on the Internet that people control. We are looking to get the

exact same information. When someone calls and does an inquiry

right now and says, send me information on that broker. What they

would have to do is go in, not look through a list, but query and

say, send me information on Joe Broker. The only difference would

be instead of receiving it via the mail, it would come up on the

Internet. But it is not a list.

The place we get the information is, information comes into

NASD; comes into the New York Stock Exchange and other SROs;

comes into states; comes in via registration forms where we run all

of that information; as well as complaints that go into the SEC and

other kind of information. So it comes from a broad range of federal, state regulators; from the firms themselves; as well as from

SROs, is where the information comes from.

Chairman BAKER. Thank you, Ms. McCarthy.

Mr. Sherman?

Mr. SHERMAN. One quick question. I share the ranking member’s

concerns. Would the broker be able to put right there a rebuttal to

anything?

Mr. SHULMAN. Yes, absolutely. The other thing I would say about

that is, these brokers, Congressman Kanjorski brings up many very

good points.

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Mr. SHERMAN. Let me ask one other thing, and that is, if something was posted about a broker, would that broker be notified immediately that something was posted or supposed to be posted?

Mr. SHULMAN. Yes. The debate that has gone on around this is

trying to weigh the investor’s interest if they are on the complaint,

which is clearly the most controversial; the investor’s interest to

know that there are complaints out there, against the broker’s privacy right. I just would remind you, this legislation does not address that issue. It only addresses the way that that information—

Chairman BAKER. Will the gentleman yield on that point?

Mr. SHERMAN. I yield after noting that a broker’s life can be ruined by bad and false charges, but an investor’s life can be ruined

by a bad or false broker.

Chairman BAKER. I thank the gentleman for yielding.

I just want to make a point which I think I understood previously, that prior to the publication, distribution, 1-800 number response, that the broker is informed prior to the final determination

and the information being released. Is that correct?

Mr. SHULMAN. The complaint usually comes directly to the

broker. There are multiple pieces of information, but we focus on

the complaint. That comes to the broker.

Chairman BAKER. But let’s take an odd case. Let’s take where

the person is sophisticated and does not go to the broker and make

the complaint, but goes directly to the SEC and files. Prior to publication of that information, does the SEC contact the broker? How

does that work?

Mr. SHULMAN. If it comes into us before, we make that information available to the broker.

Chairman BAKER. I think what would be helpful to us is if you

just gave the committee two or three practical examples. Joe

Broker hears the complaint stemming directly from the defrauded

investor or angry investor; it comes to the SEC; angry investor

comes to the broker first; angry investor goes to some local consumer organization and they file. In other words, give us a practical view of how your world works, and I think it will be a great

help to allay the concerns of the members that the brokers are not

going to be put in an untenable position by publishing this on the

Internet, as opposed to mailing it out or giving a phone call; that

the processes that you vetted over the past 13 years give ample

protection, or otherwise we would be getting significant calls from

brokers, I suspect right now. Is that a fair request?

Mr. SHULMAN. I think that is a fair request.

Chairman BAKER. If you could get that back to us at your convenience, it would be a great help to us in having the committee

reach a level of comfort.

If there are no further questions or comments, I certainly appreciate your appearance here today and your support of the legislation. We look forward to working with you in the days ahead.

Mr. SHULMAN. Great. Thank you very much.

Chairman BAKER. We stand adjourned.

[Whereupon, at 11:24 a.m., the subcommittee was adjourned.]

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A P P E N D I X

March 6, 2003

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