CAPITAL MARKETS REGULATORY REFORM: 

STRENGTHENING INVESTOR PROTECTION, 

ENHANCING OVERSIGHT OF PRIVATE POOLS 

OF CAPITAL, AND CREATING A NATIONAL 

INSURANCE OFFICE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 6, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–84 

( 

CAPITAL MARKETS REGULATORY REFORM: STRENGTHENING INVESTOR 

PROTECTION, ENHANCING OVERSIGHT OF PRIVATE POOLS OF CAPITAL, AND 

CREATING A NATIONAL INSURANCE OFFICE 

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

55–810 PDF 2010

CAPITAL MARKETS REGULATORY REFORM: 

STRENGTHENING INVESTOR PROTECTION, 

ENHANCING OVERSIGHT OF PRIVATE POOLS 

OF CAPITAL, AND CREATING A NATIONAL 

INSURANCE OFFICE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 6, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–84 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

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 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

October 6, 2009 ................................................................................................. 1 

Appendix: 

October 6, 2009 ................................................................................................. 85 

WITNESSES 

TUESDAY, OCTOBER 6, 2009 

Abraham, Janice M., President and Chief Executive Officer, United Educators 

Insurance, on behalf of the Property Casualty Insurers Association of America (PCI) ................................................................................................................ 56 

Atkinson, David B., Executive Vice President, Reinsurance Group of America 

(RGA), on behalf of the Reinsurance Association of America (RAA) ............... 58 

Bullard, Mercer E., President and Founder, Fund Democracy, Inc. ................... 11 

Chanos, James S., Chairman, the Coalition of Private Investment Companies 

(CPIC) ................................................................................................................... 45 

Crawford, Denise Voigt, Texas Securities Commissioner; and President, North 

American Securities Administrators Association, Inc. (NASAA) ..................... 8 

Herchel, Dennis S., Assistant Vice President & Counsel, Massachusetts Mutual Life Insurance Company, on behalf of the American Council of Life 

Insurers (ACLI) .................................................................................................... 60 

Houldin, Spencer M., President, Ericson Insurance Advisors, on behalf of 

the Independent Insurance Agents & Brokers of America (IIABA) ................. 62 

Kaswell, Stuart, Executive Vice President and General Counsel, Managed 

Funds Association (MFA) .................................................................................... 41 

Ketchum, Richard G., Chairman and CEO, the Financial Industry Regulatory 

Authority (FINRA) ............................................................................................... 10 

Lowenstein, Douglas, President/CEO, the Private Equity Council ..................... 43 

Maisel, Bruce W., Vice President & Managing Counsel, Thrivent Financial 

for Lutherans, on behalf of the American Council of Life Insurers (ACLI) .... 17 

McGuire, Terry, Co-Founder and General Partner, Polaris Venture Partners; 

and Chairman, National Venture Capital Association ..................................... 46 

Taft, John, Head of U.S. Wealth Management, RBC Wealth Management, 

on behalf of the Securities Industry and Financial Markets Association 

(SIFMA) ................................................................................................................ 13 

Tittsworth, David G., Executive Director and Executive Vice President, Investment Adviser Association (IAA) ................................................................... 15 

Vaughan, Therese M., Chief Executive Officer, National Association of Insurance Commissioners (NAIC) ................................................................................ 64 

Zielezienski, J. Stephen, Senior Vice President & General Counsel, American 

Insurance Association (AIA) ................................................................................ 66 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 86 

Garrett, Hon. Scott ........................................................................................... 88 

Abraham, Janice M. ......................................................................................... 89 

Atkinson, David B. ........................................................................................... 97 

Baker, Hon. Richard H. ................................................................................... 104 

Bullard, Mercer E. ............................................................................................ 120 

Chanos, James S. .............................................................................................. 126 

Crawford, Denise Voigt .................................................................................... 147 

Herchel, Dennis S. ............................................................................................ 161 

Page

IV 

Prepared statements—Continued 

Houldin, Spencer M. ......................................................................................... 168 

Ketchum, Richard G. ........................................................................................ 175 

Lowenstein, Douglas ........................................................................................ 188 

Maisel, Bruce W. ............................................................................................... 194 

McGuire, Terry ................................................................................................. 211 

Taft, John .......................................................................................................... 227 

Tittsworth, David G. ........................................................................................ 241 

Vaughan, Therese M. ....................................................................................... 273 

Zielezienski, J. Stephen ................................................................................... 280 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Written statement of the Financial Services Institute .................................. 294 

Written statement of the National Association of Insurance and Financial 

Advisors (NAIFA) .......................................................................................... 300 

Written statement of the National Association of Mutual Insurance Companies (NAMIC) ............................................................................................ 306 

Written statement of the National Association of Small Business Investment Companies (NASBIC) ......................................................................... 314 

Chanos, James S.: 

Written responses to questions submitted by Representative McHenry ..... 317 

Tittsworth, David G.: 

Written responses to questions submitted by Representative Cleaver ........ 318 

(1) 

CAPITAL MARKETS REGULATORY REFORM: 

STRENGTHENING INVESTOR PROTECTION, 

ENHANCING OVERSIGHT OF PRIVATE POOLS 

OF CAPITAL, AND CREATING A NATIONAL 

INSURANCE OFFICE 

Tuesday, October 6, 2009 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Waters, 

Moore of Kansas, Miller of North Carolina, Scott, Green, Cleaver, 

Bean, Klein, Perlmutter, Foster, Carson, Speier, Minnick, Adler, 

Himes, Maffei; Bachus, Royce, Manzullo, Biggert, Capito, Garrett, 

McCarthy of California, and Posey. 

The CHAIRMAN. This hearing will come to order. 

It is the next in a series in which I have lost count of specific 

legislative hearings on pending legislation. It is a long day. The 

gentleman from Pennsylvania, the chairman of the Subcommittee 

on Capital Markets, and his staff, along with the staff of the full 

committee, have done a great deal of work; and there will be a 

great deal presented today. 

I am now going to recognize the chairman of the Subcommittee 

on Capital Markets for 5 minutes. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

Today, the Financial Services Committee will examine the three 

legislative discussion graphs on investor protection, private fund 

adviser registration, and insurance information that I released last 

week. 

If we have learned anything from the financial crisis, it is that 

excessive deregulation is dangerous. My three bills work to reverse 

this trend by closing loopholes and fixing problems in the broken 

regulatory structure, especially in our securities and insurance 

markets. 

As we work through these drafts and the many other pieces encompassing financial services regulatory reform, we should listen to 

commonsense ideas and seek out consensus where it exists. I am, 

therefore, open to making changes in these draft bills. 

In working to enact meaningful regulatory reform, however, we 

must ensure that special interests do not weaken particular solutions to the point of becoming toothless. Looking ahead to next year 

2 

and beyond, after this round of reform is done, we must remain 

diligent guardians of the public interest and of the financial system’s health as a whole. Financial innovation and capitalism always seek to outpace the development of laws and regulations. This 

is the nature of our system. To correct this bias, vigilance is our 

only hope. 

That said, the three draft bills before us today will no doubt enhance regulatory authority and improve access to information. For 

example, the Investor Protection Act provides the U.S. Securities 

and Exchange Commission with more firepower to perform its 

mandated duties. Like the Administration’s reform plan, this bill 

includes the requirement that all securities professionals providing 

advice have a fiduciary duty toward their customers. Through a 

harmonized standard, brokers, dealers, and investment advisers 

will have to put investors’ interests first. 

The draft Investor Protection Act also significantly expands the 

ability of the Commission to reward those whistleblowers whose 

tips lead to successful enforcement actions. This legislation will further permit the Commission to adopt rules to bar the inclusion of 

mandatory arbitration clauses in securities contracts. 

Additionally, this legislation significantly expands upon the proposal put forward by the Administration by closing loopholes identified by the Madoff and Stanford financial frauds, updating the Securities Investor Protection Act, and modifying the authorities of 

the Public Company Accounting Oversight Board. Moreover, the 

bill doubles the Commission’s available funding over the next 5 

years. 

But enhancing the Commission’s firepower and providing more 

money are simply not enough. As a result, the draft bill calls for 

an independent, comprehensive study of the entire regulatory 

structure that oversees the securities industry by a high-caliber 

body with expertise in organizational change that will identify further improvements to the implementation of our securities laws. 

The second draft bill, the Private Fund Investment Advisers Registration Act, requires advisers of hedge funds, private equity 

firms, and others who have previously escaped direct regulatory 

oversight to register with the Commission and disclose certain vital 

information. Transparency has been nonexistent in this area for far 

too long, and the financial crisis revealed that our system cannot 

tolerate such omissions going forward. 

The third bill would create a Federal Insurance Office to provide 

national policymakers with access to the information and resources 

needed to respond to crises, mitigate systemic risks, and help ensure a well-functioning financial system. The credit meltdown highlighted the lack of expertise within the Federal Government regarding the insurance industry, especially during the collapse of 

the American International Group and last year’s turmoil in the 

bond insurance markets. My bill would rectify these shortcomings 

and promote stability in our insurance markets. 

In closing, Mr. Chairman, our job today is to swing the regulatory pendulum back toward the interests of hardworking Americans. The three draft bills before us will accomplish that objective. 

Billionaires on Wall Street have had their day, egged on by a culture of greed, deregulation, and a survival-of-the-fittest attitude 

3 

that ignored the harsh effects those things inflict upon larger society. Today’s hearing advances the effort to correct these excesses. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Alabama is recognized for 

31⁄2 minutes. 

Mr. BACHUS. Thank you. 

The catastrophic failure of AIG and the Madoff and Stanford 

Ponzi schemes provide clear evidence that our current regulatory 

structure is in need of reform. Republicans and Democrats have 

both offered legislation to address these concerns. 

Chairman Kanjorski’s draft bill, which is the subject of today’s 

hearing, incorporates key portions of the Republican financial regulatory reform plan, including providing the SEC with enhanced enforcement powers and giving victims of financial fraud additional 

relief. The legislation represents a solid foundation on which to 

build a bipartisan consensus on investor protection issues. 

The draft bill also contains provisions sponsored by Representatives McCarthy, Lee, and Jenkins that have already passed the 

House this year on suspension and clarify and provide corrections 

to securities laws in addition to promoting transparency and financial reporting. It includes provisions of H.R. 2873, introduced by 

Representative John Campbell, to provide the SEC with increased 

enforcement powers. 

All these provisions enhance investor protection, modernize our 

capital markets, and begin to restore investor confidence in our 

markets and in the SEC; and I commend Chairman Kanjorski for 

incorporating them. 

Other elements of the draft bill require further study, in my 

view. For example, the bill could substantially increase dispute resolution costs for investors and compliance costs for firms by providing the SEC with the authority to restrict and eliminate arbitration agreements. 

In addition, the discussion draft does not go far enough in restructuring the SEC. The Inspector General’s report detailed a 

massive failure of the SEC and their staff to detect the Madoff 

Ponzi scheme and is the best evidence for the need of SEC reform. 

The Office of Compliance, Inspections, and Examinations needs to 

be eliminated, in my view, and its functions returned to the divisions from which it was created. 

Chairman Kanjorski has released draft legislation to address private pools of capital and insurance. The Private Fund Investment 

Advisers Registration Act mandates SEC registration for previously 

unregistered advisers of hedge funds, private equity, and other private pools of capital. 

While no private pool of capital was the source of systemic risk 

or contributed to the current financial crisis, greater transparency 

in this part of our capital markets could serve as an important 

safeguard in the future if done right. However, we must ensure 

that any new regulatory powers granted the SEC are appropriate 

and do not interfere with the comprehensive due diligence that investors already perform or discourage innovation and capital formation. 

Finally, today’s hearings will examine the Federal Insurance Office Act of 2009, which would create a new Federal Insurance OfVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
4 

fice housed within the Treasury Department to deal with insurance 

issues. This draft builds on the bipartisan insurance legislation reported by this committee in the 110th Congress. Judy Biggert and 

Chairman Kanjorski introduced that. 

Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. 

Now the gentleman from California, Mr. Royce, for 2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Earlier this year, in an op-ed in the Washington Post, Secretary 

Geithner and Larry Summers noted the importance of international coordination among regulators; and they wrote this in the 

Post. They said, ‘‘We live in a globalized world, and the actions we 

take here at home, no matter how smart and sound, will have little 

effect if we fail to raise international standards along with our own 

standards. We will lead the effort to improve regulation and supervision around the world.’’ 

Well, with our fragmented regulatory regime over insurance, I 

think it is very clear that we are lagging behind the rest of the 

world. Solvency II will be implemented by the EU in the coming 

months, and that will bring all of Europe under one market for insurance. Yet the United States continues to struggle with 50 individual markets. 

Certainly, creating a Federal Insurance Office would be a beneficial first step, but I am afraid that it will not go far enough. The 

current State-based regulatory system is, as the Treasury Department said in its White Paper when it did its analysis, they said: 

‘‘It is highly fragmented, it is inconsistent, it is inefficient. In short, 

it costs consumers, and it makes our regulatory model weaker.’’ 

So, as Chairman Bernanke and Secretary Geithner have stated 

in previous hearings, we should consider establishing a world-class 

regulatory alternative to what is currently a fragmented Statebased system. 

I believe any regulatory reform effort will be incomplete without 

the inclusion of a world-class Federal insurance regulator, and I 

look forward to hearing from our panel of witnesses today. I hope 

some of them will comment on that. 

I yield back, Mr. Chairman. 

The CHAIRMAN. So as not to change the subject, the gentlewoman 

from Illinois is now recognized for 2 minutes. 

Ms. BEAN. Thank you, Mr. Chairman, for yielding and for the 

time and for holding today’s hearing. 

I want to recognize the leadership of Subcommittee Chair Kanjorski and the three bills before us today as part of the broader financial regulatory reform designed to restore investor confidence, 

all of which are critical to making sure that what happened last 

year doesn’t happen again. 

I am proud to again be an original cosponsor of the National Insurance Office Act. I believe this bill is an important step towards 

addressing the lack of insurance expertise and oversight at the 

Federal level. It will establish for the first time a Federal voice for 

insurance matters and a Federal official who can negotiate international agreements that are important to the competitiveness of 

the U.S. insurance industry. 

5 

However, since last Congress, much has changed in our financial 

system. The collapse of AIG, the world’s largest insurer, has proven 

to be one of the most costly and dangerous corporate disasters in 

our Nation’s financial history. With nearly $180 billion of Federal 

tax dollars committed to AIG, plus billions more offered to other insurers, the Federal Government has made an unprecedented investment in an industry over which it has no regulatory authority. 

There has never been a greater need for national insurance regulatory oversight. Not just an office to collect information, however. 

Through two Capital Markets Subcommittee hearings this year, we 

have heard general agreement that there should be a Federal role 

in the regulation of the insurance industry. 

The call for reform was most recently echoed 2 weeks ago before 

this committee during a hearing on systemic risk. In his written 

testimony and during the question-and-answer period, former 

Chairman Paul Volcker advocated that establishing a national insurance regulator was a critical component to broader regulatory 

reform in order to ensure oversight of an important pillar of the 

U.S. financial system. 

Mr. Volker’s statement follows the call for insurance reform by 

the Obama Administration. The Treasury proposal specifically cited 

six principles for reform, including, ‘‘increased national uniformity,’’ 

and recognized again our current— 

The CHAIRMAN. The gentlewoman will get 30 additional seconds. 

It will come from my time. 

Ms. BEAN. Thank you, Mr. Chairman. 

—and recognized that our current insurance regulatory system is 

highly fragmented, inconsistent, and inefficient. 

It supported consideration of a Federal charter. The creation of 

a National Insurance Office is helpful, but without the authority to 

require consistent regulatory rules enforcement and accountability, 

it falls short. As we work to modernize our financial regulatory 

structure, we should address the failure of the current insurance 

regulatory system that increases risks and costs to customers. 

Today, we have that opportunity. I look forward to working with 

my colleagues on the committee to do just that. 

Thank you. I yield back. 

The CHAIRMAN. The gentlewoman from Illinois for 11⁄2 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I would like to thank 

you for holding today’s hearing. 

First, I would like to thank a few organizations represented on 

panel one—FINRA, Thrivent Financial for Lutherans, and ACLI— 

for their work to promote financial education. 

As we all know, empowering consumers with financial education 

and the tools they need to thrive in today’s complicated marketplace is the best kind of consumer protection. It is also important 

that we crack down on fraud. 

Second, I would like to thank the witnesses on the second panel 

for their work to invest in America and America’s entrepreneurs 

who create jobs. 

Lastly, I want to say a few things about proposals to create a national insurance office, which will be the subject of panel three and 

something that Congressman Kanjorski and I are working on. 

6 

Through the last decade, it has become increasingly apparent 

that our Federal Government has little or no knowledge or understanding of the insurance industry. After 9/11, the Federal Government had to step in and provide terrorism risk insurance. Federal 

regulation lacked expertise and failed to completely understand a 

multifaceted business like AIG, a global company with savings and 

loan and insurance and derivatives business. 

Almost a year ago, we worked to stabilize the financial market’s 

treasury. Due to a lack of understanding, dismissed proposals modeled after insurance and State guarantee funds. And, finally, there 

is no in-house expertise in the Federal Government to represent 

the U.S. positions on insurance during international negotiations. 

I look forward to today’s discussion. 

The CHAIRMAN. By the way, we have very outdated equipment. 

Let me explain to people. It does not do 30 seconds. It only does 

minutes. I am going to see if we can get the Legislative Branch to 

spring for a more modern one. So that is why, before the red light 

goes on, it may happen sometimes. But we are working on that. 

The gentleman from New Jersey is now recognized for 11⁄2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. Thank you to this 

panel and all the panelists who are coming here. 

The first item on the agenda, the investor protection piece, I 

think really offers us an opportunity for bipartisanship as we work 

forward; and I look forward to doing so. 

But I think we need to be clear about what we are doing here 

today and what this panel and panels are all about and the hearing. It is really just checking the boxes. In order to stay in line 

with some artificially imposed deadline, really, the Majority has 

scheduled today’s hearing on a Members’ travel day. That is why 

we have so few people here. Today’s hearing is not one, not two, 

but three completely separate issues over the course of three panels. Also, the Majority can say we have had a legislative hearing 

on each one of these items and they are fully examining these important issues. 

Unfortunately, what we have here before us today is, rather than 

fulfilling a good-faith commitment to a deliberative process, some 

people are saying it makes a mockery of it; and there is a risk in 

making a mockery of the entire hearing process. 

These witnesses, for instance, only had one business day to review a 114-page draft before having to submit their testimony yesterday; and witnesses won’t give their due consideration like they 

otherwise should to their testimony if they don’t think the committee will take it seriously. 

Secretary Geithner already said that he doesn’t take seriously 

the testimony of independent regulators. But that is another issue. 

The issues before us today really are all very important. In another Congress, they would each receive careful deliberation. But 

not in this one. Here, we set unrealistic politically imposed deadlines which rush the legislative process and threaten really unintended consequences throughout large swaths of our market and 

our broader economy as well. 

I thank you. 

The CHAIRMAN. I now recognize myself for 21⁄2 minutes. 

7 

I apologize to the gentleman from New Jersey. We gave him no 

substance to complain about, so he had to manufacture some artificial complaints about process. 

First he said, wholly inaccurately, that this was scheduled for a 

travel date. When this hearing was scheduled, we did not know 

that there would be no votes last night. So, no, it was not scheduled that way. 

Second, I do not apologize for telling members that we have to 

have more than 2 days a week in which we can work. This defense 

of a work ethic that says, oh, we can’t be expected to sit at a sensible important hearing because there aren’t votes until 6:30 leaves 

me wholly unimpressed. If members choose not to—there was only 

recently an announcement that today would be a no voting day. 

So, secondly, as to arbitrary deadlines, in April of 2008, George 

Bush’s Secretary of the Treasury urged us to start acting. Many 

people think we have delayed longer than we should. We have a 

lot of hearings, and I guess for some members it is a problem. They 

were elected to Congress. We have legislative responsibilities. But 

leaving their home districts or whatever political activity they are 

engaged in or specific activity to come to a hearing to the gentleman of New Jersey is an imposition on them. No, I think it is 

part of our responsibility. Yes, it will be a day of hearings. In fact, 

it will work out well, because we will not be interrupted by votes. 

We will have a full day to have these hearings. These are not new 

subjects. 

And, again, I stress that the gentleman from New Jersey appeared to me to be a little frustrated because he could not find anything to disagree with. He began by saying that this could be bipartisan. But that moment of bipartisanship apparently unsettled him 

to the point where he had to then launch into a wholly inaccurate 

and unjustified partisan attack: We are having too many hearings. 

We are trying in a financial crisis to adopt legislation too quickly. 

We have, as he said, got a bipartisan agreement here. The gentleman from Alabama noted that there is a great deal of bipartisan 

agreement, that this bill incorporates a number of things that had 

been presented by members on both sides. There is a difference 

over arbitration. I think we have a very good debate about that. We 

have talked about that, and we have had hearings about it before. 

So I want to say that the gentleman from Pennsylvania in particular I think does not deserve that kind of partisan attack. He 

has, as the gentleman from New Jersey knows, reached out to try 

to be cooperative. The result is a product that people say is bipartisan but I must say a very unfair attack on the procedure by 

which we will move it into law. 

The gentleman from California is now recognized for 11⁄2 minutes. 

Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. 

I look forward to the testimony of all the witnesses and hearing 

their thoughts on the issues before the committee. Specifically, I 

am interested in their views on harmonizing the duty of care for 

all financial investors and how that would affect the entire investment advising community and their customers, from individuals to 

sophisticated institutional investors. 

8 

Additionally, I am concerned about the draft’s movement to restrict arbitration. I look to our panelists to provide additional comments about how this significant change will affect the marketplace. 

I also have a particular interest in the SEC’s structural issues. 

I see that section 304 of the Investor Protection Act requires the 

SEC to hire an outside consultant to inform the SEC on how to better organize itself. While this may be helpful, I would like to point 

out that I have introduced legislation that would solve some of the 

structural problems within the SEC without additional studies. 

The SEC Inspector General’s Report regarding the Madoff Ponzi 

scheme was a colossal regulatory failure. It is perfectly clear to me 

that reform is needed now, not more studies. H.R. 2622 would 

move the Office of Inspection and Examinations back to the original functional location within the Division of Investment Management and Trading and Markets. This would streamline operations 

at the SEC and reduce their current stovepipe structure where 

those charged with inspecting and examining organizations are entirely separate from those who set the policy. 

Thank you, Mr. Chairman, and I yield back. 

The CHAIRMAN. We will begin with the testimony. 

Our first witness is Denise Voigt Crawford, who is the Texas Securities Commissioner; and she is here on behalf of the North 

American Securities Administrators Association. 

STATEMENT OF DENISE VOIGT CRAWFORD, TEXAS SECURITIES COMMISSIONER; AND PRESIDENT, NORTH AMERICAN 

SECURITIES ADMINISTRATORS ASSOCIATION (NASAA) 

Ms. CRAWFORD. Good morning, Chairman Frank, Ranking Member Bachus, and members of the committee. I am so honored to be 

here today to discuss legislative changes that are most relevant to 

Americans who are looking to rebuild and safeguard their financial 

security. 

While the recent financial crisis was the result of many failures, 

I am very proud to say that a failure of State securities regulation 

was not one of them. Today, I will focus on several proposals. 

First, fiduciary duty. Financial service providers, generally stockbrokers and investment advisers, are regulated under two different 

statutes. The migration of stockbrokers to the advisory business 

has fueled confusion among investors. This is such an important 

issue for investors that Congress should explicitly direct the SEC 

to adopt rules no later than 1 year from passage of the Act mandating compliance by broker-dealers with the fiduciary duty standard established by the 1940 Investment Advisers Act. There should 

be no equivocation in the language, And any rulemaking should be 

limited to simply effectuating this requirement. 

As you note, some industry groups have also called for the imposition of a fiduciary duty. However, their ‘‘new Federal fiduciary 

standard,’’ a harmonized standard, is not the 1940 Act standard. 

Second, increased States’ regulation of investment advisers. As 

evidenced by the Inspector General’s report of the Madoff affair, 

the bulk of federally covered investment advisers are examined infrequently. When examinations are conducted, the SEC has demVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
9 

onstrated a lack of understanding as to the business of these registrants. An oversight gap exists. 

NASAA members, State securities regulators are fully prepared 

and equipped right now to fill this gap by accepting responsibility 

for the oversight of investment advisers up to $100 million in assets under management. Investors can walk into our offices so that 

proximity ensures accessibility. Plus, NASAA members are the only 

regulators that actually license the investment adviser representatives, the individuals who actually provide the investment advice. 

I would add that the lengthy experience of NASAA members in 

the application of fiduciary duty sets us apart from SROs. 

Third, securities arbitration. Today, virtually every broker-dealer’s customer account contains a pre-dispute mandatory arbitration 

provision that forces investors to submit all disputes to mandatory 

arbitration run by FINRA. The only chance of recovery for most investors who fall victim to wrongdoing on Wall Street is through a 

single securities arbitration forum controlled by the securities industry. This clause in brokerage accounts is inherently unfair to investors. It is time to end mandatory industry-run arbitration. 

Short of an outright congressional prohibition, section 201 of the 

discussion draft is a positive step. NASAA believes it should be 

amended, however, to require that the SEC prohibit this mandatory predispute arbitration and offer a meaningful choice to investors, including civil litigation. If arbitration really is as fair, inexpensive, and quick as its proponents claim, then these benefits will 

prompt investors to choose arbitration. If, on the other hand, arbitration does not offer these advantages, then this mode of dispute 

resolution should not be forced upon the investing public. 

Fourth, establishment of a systemic risk council. Any solution 

must provide enhanced communication among State and Federal 

regulators. A systemic risk council would establish a crisis management protocol with clear and regular lines of communication among 

all regulators. Generally, since State regulators are the first to 

identify risks and trends that contribute to systemic risk, we really 

do need some State banking insurance and securities regulators to 

serve on the systemic risk council. 

Fifth and last, aiding and abetting. One of the purposes of the 

original securities laws was to establish higher standards of conduct. Sections 206 and 207 of the draft further this purpose by explicitly providing the SEC the authority to prosecute secondary actors who aid and abet violations of these acts. However, the interests of investors would be best served by amending these sections 

to remove the language ‘‘brought by the Commission.’’ The current 

language may be misinterpreted as an explicit or implicit exclusion 

of private rights of action. Certainly, this is what the defendants 

will argue. 

Deceptive and manipulative transactions that are intended to defraud investors really should not be classified as ordinary business 

decisions, and secondary actors such as accountants and lawyers 

should not be allowed to skirt responsibility for their wrongdoing. 

In conclusion, NASAA greatly appreciates the opportunity to 

present our views today. Going forward, we are absolutely committed to working with you as you go forward to enhance and improve our regulatory framework. Thank you. 

10 

[The prepared statement of Ms. Crawford can be found on page 

147 of the appendix.] 

The CHAIRMAN. Thank you, Commissioner. 

Next, Mr. Richard Ketchum, who is the chairman and CEO of 

the Financial Industry Regulatory Authority. 

STATEMENT OF RICHARD G. KETCHUM, CHAIRMAN AND CEO, 

THE FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA) 

Mr. KETCHUM. Chairman Frank, Ranking Member Bachus, 

Chairman Kanjorski, and members of the committee, on behalf of 

FINRA, I would like to thank you for the opportunity to testify. I 

commend you, Mr. Chairman, for having today’s hearing on the 

critically important topic of improving investor protection in our 

regulatory structure for financial services. 

Let me begin by saying I am deeply troubled by our system’s failures during the past 2 years and eager to see changes that could 

improve the level of investor protection. When so many investors 

have been harmed, it is vitally important that all regulators take 

a hard look at their programs, identify lessons, and make changes 

that can better prepare them for the future. 

At FINRA, that process is well under way. Already this year, we 

have enhanced our examination programs, procedures, and training 

in a variety of ways intended to help us better detect conduct that 

could be indicative of fraud. We established an Office of the Whistleblower to handle high-risk tips, and last week, we announced the 

creation of FINRA’s Office of Fraud Detection and Market Intelligence. This new office provides a heightened review of incoming 

allegations of serious frauds, a centralized point of contact, internally and externally, on fraud issues, and consolidates recognized 

expertise in expedited fraud detection and investigation. 

We will continue to develop plans to further strengthen our programs; and we also continue to believe that the broader financial 

reform that this committee is undertaking is vitally important, especially in terms of closing regulatory gaps that create exposure for 

investors. 

One of the most glaring examples of this type of regulatory gap 

is the disparity in oversight between broker-dealers and investment advisers. FINRA supports the Administration’s goal of harmonizing the regulation of broker-dealers and investment advisers. 

We believe that, in order to accomplish that goal, two steps are 

necessary. 

The first is establishing a consistent fiduciary standard for investment advisers and broker-dealers providing investment advice. 

The second is harmonizing the enforcement of that standard and 

the other rules relevant to each channel to better ensure that participants in that industry actually comply with those obligations. 

The Administration has proposed that the SEC write rules establishing consistent fiduciary standards of care for investment advisers and brokers providing investment advice. FINRA stands in 

agreement with numerous interested parties that the standard of 

care in both channels should be a fiduciary standard for the provision of advice. 

Harmonization of the standard of care is an important first step. 

However, given the number of recently revealed frauds perpetrated 

11 

by investment advisers bound by the fiduciary standard, it is clear 

that the existence of the fiduciary standard of care alone is not a 

guarantee against misconduct. Compliance with that standard 

must be regularly and vigorously examined and enforced to ensure 

the protection of investors. 

FINRA believes that authorizing the SEC to designate an independent regulatory organization to augment the agency’s efforts in 

examining investment advisers would create a structure that would 

better protect investors regardless of how their financial profession 

is registered. 

To put this in real terms, there are nearly 5,000 broker-dealer 

firms registered with the SEC; and between the SEC and FINRA, 

approximately 55 percent of those firms are examined on an annual basis. By contrast, there are 11,000 investment adviser firms 

registered with the SEC, and the agency expects only 9 percent to 

be examined in Fiscal Years 2009 and 2010. No one involved in 

regulating securities and protecting investors can be satisfied with 

a system where only 9 percent of regulated firms are examined 

each year. It is a dramatic lack of coverage, and must be remedied. 

Now, let me briefly turn to arbitration. We believe our forum provides efficient resolution of disputes in an impartial forum that is 

less costly and faster than traditional litigation. We focus our efforts on running a fair and efficient program, and we continually 

work to update and improve it. 

On the question of mandatory arbitration, I would note that 

FINRA rules do not require investors to arbitrate disputes with 

their brokerage firms, though they do require brokers to submit to 

arbitration if their investors choose. This is a matter of contract between firms and their customers. 

FINRA has long maintained that its determination about whether mandatory arbitration agreements should be allowable is a decision best made by Congress and the SEC. As such, we do not object 

to the proposal to authorize the SEC to restrict or prohibit mandatory arbitration agreements. 

Before I conclude, let me briefly touch on the issue of self-funding 

for the SEC. I believe that any mechanism that could provide more 

resources and predictability to the SEC in support of its critical 

mission should be explored. Especially now, I don’t think we are in 

an either/or environment for enhancing oversight of security markets. We stand ready to work with Congress and the SEC to find 

solutions and fill the gaps in our current regulatory system and 

create a regulatory environment that works properly for all investors. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Ketchum can be found on page 

175 of the appendix.] 

The CHAIRMAN. Next, Mr. Mercer Bullard, who is founder and 

president of Fund Democracy, Incorporated. 

STATEMENT OF MERCER E. BULLARD, PRESIDENT AND 

FOUNDER, FUND DEMOCRACY, INC. 

Mr. BULLARD. Chairman Frank, Ranking Member Bachus, and 

Chairman Kanjorski, thank you for the opportunity to appear before the committee today to discuss the protection of investors. It 

12 

is an honor and a privilege to appear to discuss these issues before 

the committee today. 

I would like to comment on certain provisions of the October 1st 

draft of the Investor Protection Act of 2009. 

I strongly support the Act’s position that brokers should be subject to a fiduciary duty with respect to retail personalized investment advice. Section 103 accomplishes this goal by requiring the 

SEC to adopt rules making brokers subject to such a duty. Personalized investment advice creates a situation in which it is likely 

that a retail client will rely heavily on a broker’s recommendation. 

The authority, therefore, is the proper standard in that context. 

Under current law, brokers are subject to a suitability standard. 

Section 103 raises this standard. The duty requires, for example, 

that brokers disclose conflicts of interest that are not required to 

be disclosed under the suitability standard or other FINRA rules. 

I am concerned, however, about the mechanism that Section 103 

uses to establish a fiduciary duty for brokers. It amends the Exchange Act to impose the same standard of conduct for brokers that 

applies under the Advisers Act and then amends the Advisers Act 

to provide that standard shall be a fiduciary duty to act in the best 

interest of the client. 

My concern is the interplay between the amendment to the Advisers Act and the fiduciary duty that currently applies to the advisers under the Act. The amendment could be read to create a new 

and, more importantly, different fiduciary duty from the current 

Advisers Act fiduciary duty. For example, the imposition of a statutory fiduciary duty as to retail personalized investment advice 

raises the question of whether and how the existing fiduciary duty 

owed to nonretail clients survives the amendment. 

If the amendment to the Exchange Act simply provided that, 

with respect to retail investment advice, brokers were subject to 

the same fiduciary duty that applies to investment advisers under 

the Advisers Act, then no amendment to the Advisers Act would be 

necessary. Brokers and investment advisers would be subject to the 

same fiduciary duty with respect to retail personalized investment 

advice. Advisers would still be subject to a fiduciary duty with respect to nonretail clients as well. 

Imposing a fiduciary duty on brokers and investment advisers 

will amount to very little, however, if regulators lack the capacity 

to enforce it. The SEC has long been substantially underfunded, 

and the declining frequency of investor adviser inspections has 

been one result. 

Section 302 of the Act takes an important step toward addressing 

the problem by creating an industry financed mechanism for the 

SEC’s advisory inspection program. But this will not be enough. 

States also play a critical role in the enforcement of investment adviser regulation. The cutoff amount for State regulation of investment advisers should be increased to return the number of advisers 

subject to SEC inspection to pre-INISMIA levels. 

Furthermore, the gap in inspections of advisers who are exempt 

from the Act should be plugged. Bernie Madoff was such an exempt 

broker for almost his entire career. The simplest mechanism would 

be to repeal the solely incidental exclusion for brokers. The SEC’s 

overbroad interpretation of that exclusion has left brokers who proVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
13 

vide a significant amount of investment advice unregulated under 

the Advisers Act. 

Alternatively, brokers’ unregulated investment advisory activities 

should be regulated by their regulator, FINRA. FINRA has argued 

it lacks the authority to regulate the advisory activities of its members who are not registered investment advisers. I believe that 

FINRA clearly has this authority. But whether FINRA will not or 

cannot assume responsibility for its own members’ unregulated advisory activities, this situation needs to be remedied. Brokers’ new 

fiduciary duty with respect to retail personalized investment advice 

will mean little if their primary regulator isn’t capable of enforcing 

it. 

I recommend that the committee resolve this issue by asking the 

SEC whether and to what extent FINRA lacks the authority to inspect its members’ unregulated advisory activities. If it lacks such 

authority, then Congress or the SEC should take whatever steps 

are necessary to fix this regulatory gap. Then, if FINRA shows that 

it is capable of regulating the activities of brokers who are not registered investment advisers, then we can have the SRO discussion 

about whether FINRA might be capable of regulating the advisory 

activities of brokers who are registered investment advisers. But as 

long as Bernie Madoff continues to represent the most telling example of FINRA’s oversight of brokers who are exempt from the 

Advisers Act, any discussion of expanding FINRA’s role would be 

premature. 

Thank you for your consideration of my views; and I would, of 

course, be happy to take questions. 

[The prepared statement of Mr. Bullard can be found on page 

120 of the appendix.] 

The CHAIRMAN. Thank you. 

Next, we have Mr. John Taft from RBC Wealth Management, 

who is testifying on behalf of the Securities Industry and Financial 

Markets Association. 

STATEMENT OF JOHN TAFT, HEAD OF U.S. WEALTH MANAGEMENT, RBC WEALTH MANAGEMENT, ON BEHALF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA) 

Mr. TAFT. Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee. I am pleased to testify this 

morning on behalf of the Securities Industry and Financial Markets Association on this important subject. 

SIFMA and its members support your efforts to reform our financial regulatory system to provide strong and consistent safeguards, 

to protect individual investors, while preserving their ability to 

choose the widest range of products, services, and advice to meet 

their individual investment needs. 

Building upon SIFMA’s testimony before this committee in July, 

we support a harmonized, uniform Federal fiduciary standard for 

broker-dealers and investment advisers when they are providing 

personalized investment advice about securities to individual investors. The average consumer does not know the difference between 

the 1934 Act or the 1940 Act, and they should not have to worry 

14 

about different levels of protection when they are getting the same 

service. 

We believe that now is the time for a strong Federal standard 

that should supersede the existing set of State common-law-based 

fiduciary standards which have developed inconsistently among the 

50 States and which therefore are inadequate to serve as a harmonized standard for individual investors. At the same time, we 

support the important role that States play in protecting the individual investors, and we recommend that any new legislation clearly permit the States to investigate or bring enforcement actions 

consistent with the Federal fiduciary standard. 

Mr. Chairman, we appreciate that the investor protection discussion draft embraces the term ‘‘personalized investment advice’’ by 

incorporating it into the definition of retail customer. We believe 

the term ‘‘personalized investment advice’’ is perfectly suited for 

clarifying the responsibilities that are the focus of this legislation. 

The term was coined in a U.S. Supreme Court case nearly 25 

years ago, where the courts sought to define the business of investment advisers. Since then, the term has been further clarified 

under various Federal securities regulations. Most recently, SEC 

Chairman Mary Schapiro invoked the term to define when a fiduciary duty should apply to both brokers and investment advisers. 

The SEC is well-positioned to ensure that a Federal fiduciary 

standard is clear, well-defined, and equally applied so that individual investors receive the same protection. 

It is important that the legislation appropriately define the circumstances under which a Federal fiduciary duty would apply and 

harmonize the duties under the 1934 Act with those of the 1940 

Act. The SEC should retain sufficient flexibility to craft brokerdealer regulations without being constrained by investment adviser 

rules. Such flexibility would protect investors by appropriately respecting and preserving investor choice, a necessary component of 

putting investors first. SIFMA would like to continue to work with 

the committee to ensure that the language provides the necessary 

flexibility from a technical perspective. 

With respect to the provisions related to predispute arbitration 

clauses and the securities arbitration forum, we would urge that 

the language of the Investor Protection Act: one, be strengthened 

to support the fairness and efficiency of the current securities arbitration system; and two, include provisions consistent with the suggestion in the Administration’s regulatory reform White Paper released in June that the SEC should study predispute arbitration 

clauses to determine whether they are beneficial to investors prior 

to making any changes to the current system. 

For nearly 4 decades, the SEC has upheld securities rules that 

require securities firms to arbitrate at the election of the investor. 

Securities firms have gained the same right in return by entering 

into predispute arbitration agreements with their new customers. 

These agreements ensure that both sides are treated fairly and 

that disputes are handled in a timely and cost-effective manner. In 

addition, previous studies have demonstrated that securities arbitration is faster and less expensive than litigation, and it particularly benefits small investors. 

15 

In closing, Mr. Chairman, I would like to make the following 

point: Some have suggested that SIFMA’s proposed fiduciary standard is somehow inferior to what has been described as the ‘‘authentic fiduciary standard.’’ SIFMA’s vision of a harmonized fiduciary 

standard is, however, stronger and more pro-investor than any 

other alternative we have heard advanced. A fiduciary puts investors’ interests first, acts with good professional judgment, avoids 

conflicts, if possible, or otherwise effectively manages those conflicts through clear disclosure and investor consent. These principles lie at the heart of what it means to be a fiduciary. This is 

the standard SIFMA endorses and that individual investors deserve. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Taft can be found on page 227 

of the appendix.] 

The CHAIRMAN. Next, Mr. David Tittsworth, who is the executive 

director of the Investment Adviser Association. 

STATEMENT OF DAVID G. TITTSWORTH, EXECUTIVE DIRECTOR AND EXECUTIVE VICE PRESIDENT, INVESTMENT ADVISER ASSOCIATION (IAA) 

Mr. TITTSWORTH. Thank you, Mr. Chairman, Ranking Member 

Bachus, and members of the committee. On behalf of the Investment Adviser Association, I really appreciate this opportunity to be 

here today. 

Our organization represents SEC-registered investment advisers. 

The advisory profession serves a wide range of clients, including individuals, trusts, and families, as well as institutions such as endowments, charities, foundations, State and local governments, 

pension funds, mutual funds, and hedge funds. There are about 

11,000 SEC-registered advisers. 

Contrary to public perception, most investment advisers are 

small businesses. About 7,500 employ 10 or fewer employees, and 

90 percent employ fewer than 50 employees. 

Our written statement addresses the Treasury Department’s proposed Investor Protection Act and related issues. Mr. Kanjorski circulated a discussion draft at the end of last week, and we greatly 

appreciate his efforts to address these important issues as well. 

In my brief time, I would like to focus on two topics that would 

directly affect all investment advisers: fiduciary duty; and SEC resources. 

First, I wish to reiterate our strong support for the Administration’s recommendation to require broker-dealers who provide investment advice to be subject to the same fiduciary standard as investment advisers. As fiduciaries, advisers must act in the best interests of all their clients and place their clients’ interests before 

their own. The Supreme Court has stated that the Advisers Act reflects congressional intent to eliminate or at least expose conflicts 

of interest related to investment advice. 

Our organization has worked closely with the State securities 

regulators, consumer groups, and financial planning organizations 

to ensure that the Advisers Act fiduciary duty remains a bedrock 

foundation of the advisory profession. Unfortunately, the Investor 

Protection Act, as drafted, would not achieve this laudable result. 

16 

Instead, it would open the door to watering down or weakening the 

current fiduciary standard by redefining fiduciary duty under the 

Advisers Act. 

In addition, we are concerned that the proposal could impose a 

fiduciary duty only with respect to retail clients, rather than to all 

clients. Different standards for different types of clients, whether 

individual or institutional, would not be in the best interest of all 

investors. We strongly believe it would be a mistake to alter or narrow the existing fiduciary standard under the Advisers Act. One of 

the greatest strengths of a fiduciary standard is its breadth. The 

standard has allowed the regulation of advisers to remain dynamic 

and relevant in changing business and market conditions. 

Second, I want to underscore our strong support for the critical 

missions of the SEC to protect investors, to maintain fair and orderly markets, and to facilitate capital formation. The SEC has the 

expertise and experience to regulate the diverse advisory profession, but it clearly needs adequate and appropriate resources to do 

its job. Accordingly, we believe the SEC should be fully funded and 

that Congress should examine alternatives to allow it to achieve 

long-term and more stable funding, including self-funding mechanisms. 

I note that Mr. Kanjorski’s discussion draft includes provisions 

that would authorize the SEC to collect user fees from investment 

advisers for inspection activities. Frankly, we would prefer a selffunding mechanism. But user fees may be an appropriate option in 

the absence of self-funding. 

In addition, we believe the SEC or Congress should increase the 

$25 million threshold that separates SEC and State-registered advisers. 

Finally, we oppose a self-regulatory organization for investment 

advisers. Non-governmental regulators pose serious investor protection questions, including inherent conflicts of interest, questions 

about transparency, accountability, and oversight, and added costs. 

A single governmental regulator for advisers—the SEC, operating 

without the confusion of overlapping regulation and additional regulators—is directly accountable to Congress and to the public. We 

particularly oppose the idea of FINRA as the SRO for investment 

advisers, given its governance structure, cost, track record, and its 

stated preference for the broker-dealer regulatory model. 

We look forward to working with you to ensure appropriate and 

effective regulation and oversight of investment advisers, and I 

would be pleased to answer any questions. 

[The prepared statement of Mr. Tittsworth can be found on page 

241 of the appendix.] 

The CHAIRMAN. Finally, Mr. Bruce Maisel, who is the vice president and managing counsel, General Counsel’s Office, of the 

Thrivent Financial for Lutherans, on behalf of the American Council of Life Insurers. And that doesn’t come out of your time, that 

title. 

17 

STATEMENT OF BRUCE W. MAISEL, VICE PRESIDENT & MANAGING COUNSEL, THRIVENT FINANCIAL FOR LUTHERANS, 

ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS 

(ACLI) 

Mr. MAISEL. Thank you, Chairman Frank, Ranking Member 

Bachus, and members of the committee. 

Thrivent is a fraternal benefit society, a membership group for 

Lutherans with a mission of helping to provide financial security 

to our members and serving communities. I greatly appreciate the 

opportunity to appear here before you to discuss strengthening investor protections. 

Life insurance company product distribution involves determining customer needs and matching them with appropriate fixed 

insurance and annuity products. Similarly, many life insurance 

agents of affiliate broker-dealers provide essential retail investor 

needs analysis and the sale of variable life and variable annuity 

products. 

Consistent with this needs-based approach, many of these 

broker-dealers offer a variety of other types of securities to meet 

the retirement, college savings, and other investment needs of retail investors. Many of these broker-dealers are also registered as 

investment advisers and offer investment advisory services to those 

investors. 

In short, life insurers products, functions, and regulations fit 

within the scope of various initiatives that address broker-dealer 

and investment advisers standards of conduct. 

As I will discuss further, while we support the establishment of 

fiduciary duty for broker-dealers and investment advisers and harmonization of their regulation, we do have some strong concerns 

with the proposed Section 913 of the Investor Protection Act and 

the recently released discussion draft. 

ACLI is focused on seeking to ensure that the establishment of 

a harmonized standard of conduct will enhance retail investor protection while at the same time permit ACLI member companies to 

continue to meet investor needs across the broad economic spectrum. We are also focused upon preserving the variety of ways in 

which retail investors receive personalized investment advice about 

securities. 

Many retail investors work with broker-dealers and investment 

advisers who provide personal investment advice and offer only 

those proprietary and nonproprietary securities available for distribution by the particular broker-dealer or adviser. In other cases, 

broker-dealers and advisers provide advice about proprietary securities exclusively. 

ACLI does not seek to advance one distribution channel or method as opposed to another. Instead, we believe that the overriding 

goal of the establishment of a harmonized standard must be tailored to reflect and preserve the various relationships that exist between a broker-dealer or investment adviser and the retail investor. By doing so, investor choice will be preserved. 

Regulators have urged that, to be effective, the imposition of a 

fiduciary duty must recognize the particular role in which a financial professional is acting. We agree. For example, SEC Commissioner Elisse Walter has suggested that, in developing a uniform 

18 

standard, regulators should not dwell on the label to be placed on 

the standard. She also noted that it is important that any standard 

be accompanied by business practice rules that provide practical 

guidelines regarding the standard’s parameters and that what a 

particular fiduciary duty requires would depend on the functional 

role being performed by the financial professional. We agree with 

those points as well. 

As I noted, we believe certain provisions to the Investor Protection Act and the discussion drafts are necessary to achieve a clear, 

workable standard under which broker-dealers and advisers can 

continue to meet the ever-increasing retail investor needs. 

First, any harmonized standard should apply only to personalized investment advice, meaning advice that is based on the retail 

investor’s personal financial information. 

Second, the standard should be imposed only with respect to 

dealing with retail investors. 

Third, the standard should require that broker-dealers and advisers that provide personalized investment advice about securities 

to retail investors act in the best interest of the retail investors. 

Finally, the hallmark of the standard should be defined that 

broker-dealers and advisers make full, balanced, fair, and timely 

disclosure, including of material conflicts of interest and related information so that retail investors can make informed investment 

decisions. Advisers have historically made and currently do make 

such disclosures. Many broker-dealers have voluntarily adopted 

similar disclosure practices. 

While we support the establishment of the best interest standard, we strongly oppose the tying of acting in the best interest with 

the notion of acting without regard to the financial or other interests of the broker or investment adviser providing the advice. As 

detailed in my written statement, that concept is at odds with the 

fiduciary duty to which advisers are currently subject and could 

have the unintended effect of chilling the provision of investment 

advice by brokers and investment advisers which would run 

counter to serving the investing public’s needs. 

We are also concerned that the requirement, if broadly construed, could even require that no compensation be paid or steps 

having to be taken to ensure that absolutely no disparity in comparison exists between similar or even different financial products. 

We believe with the above-noted modifications a harmonized 

standard of conduct and related rulemaking can result in brokers 

and advisers enhancing their ability to meet the ever-increasing retail needs across the broad spectrum of U.S. retail investors while 

providing those investors with enhanced protections. 

Once again, I appreciate being given the opportunity to appear 

before you today. The ACLI applauds the efforts of the committee, 

and we are committed to working toward strengthening investor 

protections. 

[The prepared statement of Mr. Maisel can be found on page 194 

of the appendix.] 

The CHAIRMAN. Thank you. 

I will begin. 

The gentleman from Pennsylvania will be presiding for most of 

the day, but he is meeting with some constituents now. 

19 

I did want to refer again to the question of the scheduling of the 

hearing. We announced today’s hearing on September 15th, at a 

time when we were expecting that there would have been votes last 

night. A week or 6 days later, on September 21st, the office of the 

leadership announced there would be no votes last night. So the 

question was, should we have cancelled the hearing that had previously been scheduled because there were no votes? Given the 

number of hearings that I think we are obligated to have and other 

business, we thought that would be a very bad idea. So, again, we 

scheduled this hearing at a time when we thought there would be 

votes last night, and then we accommodated. The fact is that they 

cancelled the votes. 

I would say, by the way, in terms of having hearings on days 

when there are no votes, the gentleman from Texas, Mr. Paul, had 

been trying for years to get a hearing on his bill to audit the Federal Reserve during the period when the Republicans controlled the 

Congress. Not only couldn’t he get a hearing, he couldn’t get the 

chairmanship of that subcommittee, despite his seniority entitling 

him to it. 

And so we did give a hearing for that. I thought it was worthwhile. And I worked with the gentleman from Texas, and by mutual agreement—and he thought it was a good time—we had it on 

a Friday when there were no votes. The gentleman from Texas 

thought the subject was important enough so that he and some 

other Members on both sides did show up on that date. 

Now, let me reassure Mr. Bullard and Mr. Tittsworth, I have a 

phrase that I want to put on the bill keyboard: This bill does not 

do what this bill does not do. Nothing in this bill revokes any existing standard. So the question of, does it apply to nonretail? Yes. 

And you reinforce the view that I have: redundancy is preferable 

to ambiguity. So while the bill doesn’t do it, we will say that the 

bill doesn’t do it. 

Now, there is a question that Mr. Maisel raised, and I talked to 

some people about it yesterday in my own district office. We want 

to make sure who is covered and who isn’t covered. So I think it 

is not retail and nonretail but what kind of activities are covered, 

and we will make that distinction. 

Now, let me go to Ms. Crawford. 

Ms. Crawford, you are the Securities Commissioner for the State 

of Texas. You were appointed by the Governor? 

Ms. CRAWFORD. No, sir, I am not. 

The CHAIRMAN. Who appoints you? 

Ms. CRAWFORD. I am appointed by a board that is, in turn, appointed by the Governor. I served for over 15 years. 

The CHAIRMAN. The Governor appoints a board. How long have 

you been in that position? 

Ms. CRAWFORD. Since 1993, under different Administrations, 

both Republican and Democrat. 

The CHAIRMAN. And the first Governor under whom you served 

was? 

Ms. CRAWFORD. Ann Richards. 

The CHAIRMAN. And, since 1993, you were continued by every 

subsequent Governor, Governor George Bush and Governor Perry. 

So you have a kind of bipartisan representation I think that is very 

20 

important to have, because I do think we do have some bipartisanship here. 

On the role of the States—not now, no one has raised it at this 

point. It did came up in some of the witness statements. But in 

previous Congresses, there were efforts to substantially diminish 

the role of State securities administrators. Mr. Spitzer got under 

some people’s skin; and the securities administrator in the State of 

Massachusetts, Secretary of the Commonwealth, Bill Galvin, does 

a great job. What is your view on this? Do you think that the role 

of States as it now—as it exists, are you an obstacle to the harmonious enforcement of the national securities market? 

Ms. CRAWFORD. With all due respect, Mr. Chairman and members, we are not an obstacle. In fact, we have been filling the gap 

for a number of years now. There has been less regulation on the 

Federal level for a variety of reasons. You may have read about the 

auction rate securities cases where we were able to free up $60 billion and other cases of national— 

The CHAIRMAN. Right. And I would say Secretary Galvin of Massachusetts has done that as well. I think that is very important. 

Now, look, we have the Federal supremacy clause. If anyone can 

show a conflict, then the Federal Government wins. But I agree 

with you that you have been collectively, as States, responsible for 

a significant improvement in the enforcement. 

But now as to arbitration, and one of the witnesses said, well, 

it is good for the small investor. Is it your experience that small 

investors are so dumb that they would refuse to deal voluntarily 

with something that would save them time and money? 

Ms. CRAWFORD. Mr. Chairman, arbitration is a problem that is 

recognized even by the— 

The CHAIRMAN. I understand that. Our bill says it should be mutual. Nothing in this bill prevents the mutual agreement by the investor to arbitrate dispute by dispute. It does say that this supposed mutuality of an imposed clause in a contract, when you have 

no choice, is not really mutuality. 

But if in fact you were to have a situation where you could have 

that agreement, that you would have a choice, if in fact there was 

a form of arbitration that was better for the investor, do you think 

they would refuse voluntarily to accept it? 

Ms. CRAWFORD. Of course not. I think that investors want 

choices. They don’t want to be captive to an arbitration board. 

The CHAIRMAN. All right, let me take the last question. We are 

told while they have a choice, they can sign a contract that requires it in advance or not. If they decide they want to invest and 

they don’t want arbitration, what options are open to them? 

Ms. CRAWFORD. They have no options. They cannot go to court, 

even small claims court, nor can they go to an arbitration forum 

that is not industry-run. So they are essentially out of luck. 

The CHAIRMAN. Thank you, Commissioner. 

The gentleman from Alabama. 

Mr. BACHUS. I thank the chairman. 

I want to acknowledge Joe Borg, who is the past president of the 

State Securities Commissioners. He also, like Texas, has done a 

tremendous job in Alabama on protecting consumers. I think there 

is bipartisan agreement, at least between the chairman and I, that 

21 

State securities commissioners do a very good job of protecting consumers, and often when there has been a failure on the Federal 

level, there has not been at the State level. 

I also believe that a lot of the questions will probably be on what 

standard. Let me start with a very elementary question that I am 

struggling with, because when I read the testimony and people 

visit my office from various associations, I can’t even get them to 

say which is a stronger standard, fiduciary or suitability. 

Just starting with you, Commissioner Crawford, tell me what 

you think the difference in the standards is? 

Ms. CRAWFORD. Mr. Bachus, there is no question but that the fiduciary standard is the more stringent standard. It is simply a 

standard to put the clients’ best interests first. Whereas suitability 

is a standard that focuses on whether or not the investment at 

issue is suitable for the investor. 

Mr. BACHUS. All right. 

Mr. KETCHUM. From our standpoint at FINRA with experience 

over the last 10 to 15 years, a standard that clearly provides a requirement to put the investors’ best interest first is the right standard. There is great value for some specific rulemaking that provides guidance as to how you handle advertising, communication 

with customers and the rest, but there should be no question that 

the requirement should be to put the customer first, and we believe 

that a fiduciary standard is the right way to do that. 

Mr. BACHUS. And you think the fiduciary is a higher standard? 

Mr. KETCHUM. I believe the fiduciary is a clearer and higher 

standard. It is not enough in this environment to just determine 

a product is okay. The product needs to be in the best interest of 

the customer. That standard shouldn’t make decisions from the 

standpoint of what type of business model should be okay. The 

standard should be business model neutral. It should encourage 

disclosure of conflicts. But the right question for anyone involved 

in providing advice to customers is, is this advice in the best interest of the customer. 

Mr. BACHUS. All right. 

Mr. BULLARD. I would essentially agree with Mr. Ketchum that 

the fiduciary duty for some purposes is clearly a higher example. 

An example is precisely the disclosure of conflicts of interest I 

think is of greatest interest to investor advocates. For example, 

when a broker is paid differential amounts of compensation for selling mutual funds, the fiduciary duty would require that be disclosed. The suitability standard, while it goes a long way towards 

protecting investors, would not protect the investor. 

Mr. TAFT. No question, the fiduciary standard represents a raising of the bar in terms of the standard under which brokerage activities would be conducted, and we are proposing fiduciary standard with the intention of raising the bar. If I might elaborate on 

that for a minute. 

Firms like mine, most brokerage firms are duly registered under 

the 1940 Act and as broker-dealers. We operate every day as investment fiduciaries under the investment advisory fiduciary 

standard. But unlike the businesses of registered investment advisers, those activities regulated by the 1940 Act only constitute a 

22 

small part of what we do for retail investors and only constitute a 

small part of what our clients ask us to do for them. 

We are not proposing to water down or narrow the fiduciary 

standard. Quite the opposite. What we are proposing to do is extend its reach from the small set of activities it applies to, investment advisory activities, to all the activities and services we provide to individual investors. And doing that will require work if we 

want to preserve the ability of customers to retain the breadth and 

range of services they receive today. 

Mr. BACHUS. Thank you. 

Mr. TITTSWORTH. Fiduciary standard is well established under 

the Advisers Act and is a higher standard than suitability. 

Mr. MAISEL. Fiduciary standard is a higher standard, but I think 

it brings up an issue of it becomes an argument of the labels. Investment advisers as fiduciaries have to make suitable recommendations just like registered reps, and there are obviously a 

slew of rules, including SRO rules for broker-dealers on the suitability side. And behind the label of fiduciary and acting in good 

faith and several others, there is not a lot of ‘‘there’’ there. So I 

think starting from the best interest point on both sides and following would be the way to go. 

The CHAIRMAN. The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

My first question is to my fellow Kansan, Mr. Tittsworth. I appreciate the point you made on page 2 of your written testimony 

that while the SEC’s regulatory inspection and enforcement efforts 

should be fully funded, Congress should ‘‘examine alternatives to 

allow the agency to achieve longer term and more stable funding, 

including self-funding mechanisms and user fees.’’ 

Do you have specific suggestions on how Congress should guard 

against regulatory capture, sir? 

Mr. TITTSWORTH. Thank you, Congressman Moore. We do have 

several suggestions. The goal should be giving the SEC the resources it needs to do its job. Our first preference would be selffunding, which has received a fair amount of attention lately, tying 

the SEC in to a dedicated revenue stream. 

Secondly, as Commissioner Crawford and Mr. Bullard have indicated, we strongly believe that the $25 million line that was established by Congress in 1996 and that has never been increased 

should be increased. I believe Commissioner Crawford suggested a 

level of $100 million. That would shift 4,200 advisers to State regulation from SEC regulation and basically put us back where we 

were when NSMIA was enacted in 1996. 

Finally, Congressman, Mr. Kanjorski has put a provision in his 

draft bill, section 302, on user fees for investment advisers. If those 

are properly structured and if it is clearly in lieu of a self-regulatory organization, we would be happy to work with you on that 

funding source as well. 

Mr. MOORE OF KANSAS. Thank you very much. 

There seems to be a lot to learn from the Madoff scandal and 

other Ponzi schemes that have been exposed in the financial crisis. 

For example, the Inspector General for the SEC recently issued a 

sweeping report and the draft investor protection bill includes lanVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
23 

guage authorizing an independent, comprehensive study of how to 

improve securities regulation. 

Mr. Taft, does the draft bill we are considering today answer all 

of the concerns raised by the Madoff and other investor fraud 

cases, in your opinion? 

Mr. TAFT. Congressman, I would like to speak in support of the 

comments that Mr. Ketchum made earlier. The imposition of or 

creation of a fiduciary standard for brokers and investment advisers, a harmonized standard, is a first step towards preventing 

Madoff-like events from happening in the future. I think though 

you have to marry that first step with an acceptable and appropriate enforcement regime, and I think Mr. Ketchum spoke very 

articulately to that point, and that is a necessary second step if you 

want to prevent future Madoffs. 

Mr. MOORE OF KANSAS. Mr. Tittsworth or other witnesses, do 

you have any comments in response to this question? 

Mr. TITTSWORTH. Well, I assume what Mr. Taft is referring to is 

the creation of an SRO or, as Mr. Ketchum, my good friend, has 

argued, extending FINRA’s reach over investment advisers. We are 

strongly opposed to that suggestion, Congressman. 

I certainly agree that enforcement is absolutely key to any appropriate regulatory structure, but we believe that the SEC has the 

expertise, the experience to do the job. What it needs is to have appropriate resources, and in my previous response, I hope I gave you 

some of our ideas on that subject. 

Mr. MOORE OF KANSAS. Do any other witnesses have comments? 

Mr. KETCHUM. Congressman, if I could just briefly say, I do believe that there is a choice here between one way or another ensuring that there are enough boots on the ground and providing the 

SEC resources is absolutely critical if the determination is not to 

have an additional independent regulator with responsibility on the 

investment adviser side. 

I suggest moving back to the NSMIA standard that perhaps 

moves the SEC from 9 percent to 15 to 20 percent is not even close 

to enough. So there needs to either be a realistic expectation of a 

huge increase from the standpoint of SEC resources or considering 

other alternatives. 

Mr. MOORE OF KANSAS. Ms. Crawford, do you have a comment? 

We are just about out of time. 

Ms. CRAWFORD. With all due respect to my friend Mr. Ketchum, 

I would say that the dividing line, if you raise that dividing line 

from $25 million to $100 million, you immediately address the bulk 

of the problem, because the SEC is left with the giant money managers, those more complex firms that need to be looked at by the 

Federal Government with their expertise, while the States take on 

those smaller shops, and that way you have governmental accountability, you have local accountability, and it would not cost the Federal Government more money. 

Mr. MOORE OF KANSAS. Thank you very much. 

The CHAIRMAN. The gentleman from California, Mr. Royce. 

Mr. ROYCE. Thank you, Mr. Chairman. 

I remember talking to a British regulator and asking him, how 

do you think the SEC missed this? He said, how did you miss it? 

How did we miss some of the things we missed? He said, with the 

24 

financial services authority, the first thing we need to do is fire 

half the lawyers and hire somebody who knows something rudimentary about the market in Britain. 

That brings me to the question, because as we look at the regulatory reform proposal issued by the Treasury Department, I think 

it is important that we fully understand the events of the past 

year, and I think one of the things that looking back is the most 

troubling is the SEC’s handling of the Ponzi scheme of Bernie 

Madoff, the Ponzi scheme of all Ponzi schemes. And before we look 

at increasing the regulatory responsibilities of the SEC, we should 

make sure some of the systemic problems are addressed. 

That takes me to the theme of Harry Markopolos’ testimony here 

that I think riveted everyone when he said that it was his belief 

that the SEC was over-lawyered. He noted, and then subsequently 

the SEC officials affirmed it, he noted there was a fundamental 

lack of understanding of the more intricate aspects of our financial 

markets within the SEC which prevented the SEC year after year 

from uncovering the Madoff incident. 

I would like each of you to comment on the idea of the SEC being 

over-lawyered and what else can the SEC do to address this problem, in your opinion. Maybe we can start with Mr. Taft. 

I do think Mr. Markopolos is on to something inasmuch as the 

British seem to feel that part of their problem was the same lack 

of understanding of how the market works by the people who are 

supposed to regulate it. 

Mr. Taft? 

Mr. TAFT. Congressman, I have to say that I really have no informed opinion on that subject, and, more importantly, I am here 

speaking on behalf of the SIFMA, and it would be far beyond my 

ken if I spoke to that. 

Mr. ROYCE. Well, that is all right. We will go down the line and 

see if any of the other witnesses would like to comment on it. 

Ms. CRAWFORD. Congressman, I have an opinion. I think that the 

point was very well taken. The SEC has, no question about it, brilliant lawyers. They are very good at writing rules, they are very 

good at interpreting statutes, they are good at bringing complex 

cases, appeals, that sort of thing. 

However, they are not what I would call nimble and scrappy. 

They don’t have people on staff who really have the will to burrow 

into the facts and circumstances and analyze the numbers. They 

need more MBAs, they need more accountants. 

Mr. ROYCE. Well, I am told by someone who has expertise in this 

area, and Harry Markopolos would certainly be one, that it doesn’t 

take that much burrowing in to find a classic Ponzi scheme, especially of this magnitude. The question is, did they have anybody? 

Well, as a matter of fact, we now know that the SEC did have 

someone who understood the market. He was in the Boston office. 

He had been a former portfolio manager and trader, and he was 

constantly trying to alert the New York office, he was trying to 

alert the home office, as to the nature of that particular scam, and 

he was constantly being ignored, because in that corporate culture, 

anybody with that background wasn’t an attorney and wasn’t to be 

listened to. At least that was Mr. Markopolos’ summation of the 

problem. 

25 

Ms. CRAWFORD. There is a question of accountability. One of the 

differences between State and Federal regulation is when you have 

people literally walking in off the street, defrauded investors that 

you have to sit across the table from and talk with one-on-one and 

try to address their problem, it changes your sensibility, it changes 

your culture. 

I think oftentimes the SEC, based as it is in Washington, doesn’t 

have those types of encounters on a day-to-day basis. If you actually looked at the lawyers there— 

Mr. ROYCE. Ms. Crawford, let me just stop you there. If we had 

somebody in the Boston office who understood it, why wouldn’t you 

just change the equation so that you have people who understood 

the problem. Rather than arguing well, if down in Texas somebody 

walks into the office, it might be a lawyer, it might not, at least 

we would have more empathy, why not acknowledge, and maybe 

having somebody who understands the nature of the problem 

would be something of an assist here. 

I think that is the bottom line. And changing that corporate culture is going to be necessary, I think, in order to get the kind of 

expertise necessary the next time to spot a Ponzi scheme. I don’t 

think it is empathy. I think it is a question of having somebody on 

board who understands the basic rudimentary nature of a Ponzi 

scheme. 

Ms. CRAWFORD. Well, in addition to empathy, I absolutely agree 

with you. You need those MBAs, you need those accountants, you 

need people with solid business experience employed at the SEC. 

Mr. BULLARD. I would say, having worked at the SEC, Ms. 

Crawford is correct. I wouldn’t necessarily call it over-lawyered, I 

would call it maybe under-quantified, and the staff needs to hire 

more experts in those quantitative areas, and it is my understanding that is Chairman Schapiro’s intent. 

Mr. KETCHUM. Congressman, if I could also say, having spent a 

large number of years at the SEC and then working closely with 

the SEC in time, I would just leaven that. I do believe that the 

SEC needs a broader diversity of capabilities. They do have a lot 

of MBAs, they do have a lot of accountants, they have a lot of people who know reverse conversions and conversions and understand 

the arbitrage. They failed in this particular case because of a stovepipe mentality and problem that needs to get fixed. 

I think that Chairman Schapiro, and I would also note somebody 

who hasn’t been mentioned so far, Robert Khuzami, is exactly the 

junkyard dog with the right type of experience to be able to cut 

through that. So I think you can feel that the SEC has already 

taken significant steps to move in the right direction. 

Mr. KANJORSKI. [presiding] The gentleman’s time has expired. 

There is a choice now; the issue came up that I am particularly 

interested in. I was going to go to Mr. Green, but I am going to 

hold off for a second, Mr. Green, and take my 5 minutes, if I may. 

In putting the Investors Protection Act together, we were particularly struck by some of the material that came out in the latter 

part of September in regard to the IG’s report on the Madoff and 

Stanford frauds, and it seemed to me that any fair impartial reading of the IG report indicated that we were now dealing with a totally dysfunctional agency. We can all be sensitive as to whether 

26 

when we use that word, folks will be embarrassed, but I do not use 

the word for the purpose of embarrassing either the agency or its 

leadership, present or past. The fact of the matter is it does not 

really matter what the Congress does in passing new laws and encouraging new regulations at the securities level if the cop is incapable or not inclined to carry out those new laws. And that is 

what we have, we have a blockage of implementation, and it is so 

very clear. 

So it became apparent to me that, unfortunately, we did not have 

all of the diagnosis in place to make recommendations or create authorities that are necessary to straighten that agency out, but it 

was with the understanding and the perception that we have a regulator now that is sensitive to what is necessary and desirous of 

removing a dysfunctional agency into a functional agency. 

That being the case, she will need assistance and help, and it is 

my intention that our subcommittee and committee give that assistance and help as necessary. But in order to adequately accomplish that, a very thorough study is necessary, unless we are going 

to go down this path of acting like blind men, not knowing quite 

what we are doing, because that is what we are. We are not experts in securities or securities laws or the experiences of the SEC, 

but we do have the legal authority and ability to give experts better tools in which to accomplish a functional agency, and that we 

intend to do. 

So we are asking basically for a total and complete study of not 

only the SEC, but its related agencies, so that we can get an entire 

picture of what the securities requirements of the United States 

are vis-a-vis 2010 and then from there do the necessary adjustments and implementation of new laws to equip them with the capacity to perform at a much higher rate. 

I have to be honest to say that I was shocked because I heard 

a little of the discussion here in response to Mr. Royce about the 

need for lawyers, junkyard lawyers, MBAs, etc. I don’t know what 

we need over there, but we don’t need blind men leading the blind. 

A very simple question in the Madoff case would have resolved 

the whole problem when they were doing some of the examinations 

that they were doing. They just asked the one question, where are 

the securities, and they totally failed to ask what I think is the 

most obvious question that should have been hornbook law for any 

lawyer or investigator or Master’s of Business Administration. 

They just didn’t know what to ask. Having not asked the proper 

question, they got not only inaccurate, but incredibly wrong answers, and they relied upon them and cost victims an awful lot of 

money, and I think brought somewhat of a disgrace to the agency. 

That is in the past. We cannot change that. But we sure can 

change the future. And it is the clear intent of the subcommittee, 

while I am chairing it with its jurisdiction, and I believe there is 

no question that under Mr. Frank, the full committee, we are going 

to do everything necessary to give the tools to the leadership of the 

Securities and Exchange Commission to accomplish our end of good 

administration with a strong cop on the beat. That is going to be 

done. 

Now, what I wonder about, is why we do not hear more as the 

committee and the Congress about inadequacies such as existed for 

27 

years in the SEC? Is there something we should do? We have the 

whistleblower implementation in the Act. But how about internal 

whistleblowers? What is wrong with people working in government 

who are observing what is happening. What is wrong with people 

who are clients of the agency who see what is happening? 

I do not get the calls. Every now and then, if I have a long involved conversation with a regulated individual, after several 

drinks or some other sort of relaxation, they will break down and 

start talking the truth. But when they are in their formal mode, 

they just do not respond the same, saying you have a problem over 

there, stovepiping, we have all heard of those things, here is what 

happened to me and here is how bad it is. Now, I have to be honest, recently, some have come forth that way and it has been very, 

very helpful. 

The reason we selected the witnesses here today, we know you 

have the expertise, the insight and the capacity to help us along 

this mode. May I urge you to grab the telephone, even in these 

processes, even in examining this draft legislation, if you see some 

ways we can strengthen it and make it fairer. We are not trying 

to just come down with a hard club. We are trying to do what is 

rational and reasonable, but at the same time not to dodge the responsibility of the Congress to oversight these areas of the government. 

So please feel free, I see my time has expired, but please feel free 

to call us to talk to us. I know you all know our staff very well. 

Get to know them even better if you will. We will appreciate it. 

Thank you. 

I now recognize my friend, the gentleman from New Jersey, Mr. 

Garrett, a frequent visitor on CNBC. That just proves I was up at 

6:30 this morning watching Mr. Garrett. 

Mr. Garrett, you are recognized for 5 minutes. 

Mr. GARRETT. I thank the chairman. Just to clarify my opening 

comments, I do appreciate the work that you have done on all of 

these areas we are talking about today. I guess my only wish is 

that they do just merit a subcommittee look, in my opinion, and 

probably the chairman might concur with me on that approach to 

doing these things so we can really delve into all the issues we look 

at. I do appreciate the hearing, the work you have done, and the 

information that we are learning today. I thank you. 

The ranking member went through the panel before with regard 

to the issue of the difference between the two standards. All right, 

let me just throw out to the panel a couple of questions. 

One is, there is talk about harmonization. Would someone just 

like to answer this question? When we talk about harmonization, 

does that always mean, maybe Mr. Maisel, does that necessarily 

mandate, require, that we get exactly the same standards? 

Mr. MAISEL. I would suggest that for the same functions, regardless, for example, of how the customer pays for the service or the 

choice or the way they are served, that there be the same regulation, whether you are under the Advisers Act or the broker-dealer 

rules, and that is not the case today. 

Mr. GARRETT. But how about this? Most of the panel here is talking about raising the standard to a higher standard, fiduciary 

standard. Could you, I will just throw this out, to say allow for difVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
28 

ferent standards, fiduciary standard or the current standard for 

broker-dealers, but on this side of the broker-dealers simply change 

it in a way as far as additional disclosure requirements and ‘‘transparency,’’ and would that then get to some of the points that some 

of the other members on the panel addressed as far as what me 

as the personal client would be able to look at and say, well, now 

I know what I am dealing with here, but because the broker-dealers’ responsibilities are slightly different, they are selling some of 

their products, they are getting commissions, and that sort of 

thing, could that address the problem? 

I will start there. 

Mr. TAFT. Congressman, if your question is would there be other 

ways to raise the bar with respect to the products and services we 

provide to retail investors, other ways than harmonizing the fiduciary standard, the answer is yes, you could do that differently. 

Mr. GARRETT. But still with a good result? 

Mr. TAFT. Well, it depends what you do, but you could certainly 

engineer a good outcome. 

The other thing you can do, and it was picked up actually in Mr. 

Maisel’s comments, is that, and I think this is the intention of a 

harmonized fiduciary standard, is have the same umbrella standard applying to all activities, but then tailor the duties and responsibilities when it comes to fulfilling that standard in a way that 

matches with the specific service being provided, okay? 

So, for example, you have heard unsolicited orders to sell or buy 

stocks should not be necessarily subject to the same requirements 

as the continuous discretionary management of a portfolio. 

Mr. GARRETT. Mr. Maisel? 

Mr. MAISEL. I would say that I agree with Mr. Taft. I think there 

are several ways to get there. At the end of the day, the basic consumer protections should be in place for similar services and functions that are provided, and the same obligations of the firm should 

be in place as well. 

Mr. TITTSWORTH. Mr. Garrett, I would just reiterate a couple of 

points. Number one, I totally agree, similar functions, activities, 

should be regulated the same way. I think everybody would agree 

that is fundamental fairness. 

I think the Administration’s proposal to say brokers who are providing investment advice should have the same fiduciary standard 

under the Advisers Act as investment advisers, that makes sense. 

If they are doing what investment advisers are doing, let’s treat 

them the same way. 

But I would also agree with Mr. Taft, not all broker-dealer activities are giving advice, and we are not suggesting that the fiduciary 

standard should apply to execution of securities transactions, underwriting or other important activities that broker-dealers are engaged in. 

Mr. GARRETT. My time is going by quickly. 

Mr. Tittsworth, Mr. Royce was raising the issue as far as the 

problems and the chairman is also raising the problems that we 

have had at the SEC in the past. I know FINRA was out there. 

They would say, hey, we can handle this all. Some would argue on 

the other side of that the SEC hasn’t done such a great job in what 

they have done and as far as the personnel necessary. 

29 

How do we actually get that done with an entity that so many 

people have pointed to the legitimate mistakes in the past to handle that huge broad authority if you have them sweep in all of this 

larger number? 

Mr. TITTSWORTH. I guess I may not be able to give you all the 

answers you want, but I would suggest that the SEC missions are 

absolutely right. So whether you put them with the SEC or establish some new regulator or whatever, I think you must have: that 

protection of investors; maintaining fair and orderly markets; and 

facilitating capital formation. Those are the right missions. And I 

think it is partly a question of giving it the resources to do its job 

as fully as it can. 

Ms. CRAWFORD. I would respectfully disagree. Resources are always important. You have to have them. But more important than 

that, you have to have a will to regulate. 

Just as the gentleman previously indicated, you can make all the 

rules and laws in the world, but if you don’t have people who are 

willing to enforce them, then you have a problem that you haven’t 

solved. And what we have seen at the SEC for the past few years 

is a lack of will to regulate. There are some things that can be done 

about that, but the SEC won’t like it. 

Mr. GARRETT. Thank you. 

Mr. KANJORSKI. The gentlelady from California is recognized for 

5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I am interested in the testimony that was filed with us from Ms. 

Crawford. 

Ms. Crawford, your testimony mentioned aiding and abetting liability. When the Stoneridge case was before the Supreme Court 

in 2007, Chairman Frank and Chairman Dodd filed amicus briefs 

supporting the plaintiff’s position that third parties could be held 

liable for their participation in fraudulent financial disclosures to 

the SEC. The Supreme Court ruled adversely to the shareholders, 

removing any private right of action against so-called secondary actors. 

As you mentioned, the proposal before us clarifies aiding and 

abetting liability for the SEC, but does not create any private right 

of action for investors. Can you provide us with some additional information about secondary actors? You mentioned they are lawyers 

and accountants. How large a role do they play in corporate fraud 

when such fraud occurs? Why is it important that we allow investors to have private right of action? And what was the Stoneridge 

case’s impact on investors? How much money or wealth is lost each 

year, now that investors are prevented from filing their own lawsuits against secondary actors? 

Ms. CRAWFORD. You have asked a number of questions and I will 

take them in order. 

The first one is the role that accountants and others, lawyers, 

play in connection with the entire process. Their role is unbelievably large and unbelievably important. The transparency that is required to make our markets operate effectively really boils down to 

two things: transparency and the verbiage that is in the disclosure 

documents; as well as transparency and the numbers that are put 

30 

before the investors. Accountants and lawyers are critical to that 

process. 

So to the extent there is wrongdoing on the part of an accountant 

or a lawyer who is engaged in that process, it is very unfortunate 

that they are not held liable for that wrongdoing. 

Why do we need aiding and abetting liability and why isn’t it 

enough just to give this to the SEC? Because the SEC can’t bring 

all of these cases. The SEC can’t be everywhere at once. 

You in this room today are demanding a lot of the Securities and 

Exchange Commission, as you should. But the Securities and Exchange Commission cannot be the private lawyer for every defrauded investor in the United States. The only way that an investor can effectively enforce his or her claims against a secondary 

actor would be remove that language in the draft so that it is not 

restricted just to the SEC’s enforcement. 

With regard to the decision in the Stoneridge case, we too at 

NASAA filed a brief and we were very dismayed at the outcome of 

the case, at the opinion of the Supreme Court, and it is extremely 

difficult to put a dollar figure on the amount that investors might 

have been able to recover had the case been decided differently. 

But I can tell you that it was a lot. We can try to provide numbers 

for you as best we can. 

Ms. WATERS. Would it be safe to suggest that when many of 

these fraudulent schemes are being enacted, that it would be almost impossible to do them without some of the supporting actors 

such as lawyers and accountants? How do you present something? 

How do you record something? How do you report something? How 

do you document it? And those people have to know what is going 

on. Is that what you are suggesting? 

Ms. CRAWFORD. Absolutely. It is impossible to conceive of CEOs 

and upper level management actually sitting down and putting 

these disclosure documents together. They of necessity must rely 

upon their accountants and lawyers to do that for them. Of course, 

they need to oversee the process, but the nitty-gritty details are left 

to the professionals. Those professionals need to be held accountable for any wrongdoing that they engage in. 

Ms. WATERS. So you consider a private right of action extremely 

important? 

Ms. CRAWFORD. Yes, ma’am. 

Ms. WATERS. Thank you very much. I yield back. 

Mr. KANJORSKI. The gentleman from California, Mr. McCarthy. 

Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. 

In listening to the chairman’s comments and also the questioning 

from Mr. Royce and Mr. Garrett, I would like to follow up a little 

on the SEC. 

I know in this bill it provides more money, but also just provides 

another study, and I am a little concerned by that. I am one who 

believes that structure dictates behavior. Mr. Ketchum, in part of 

the questioning you brought up stovepiping, the idea that you have 

people who set policy in one place and those inspectors in a whole 

other place. 

I guess my question, and I would like to start with Mr. Ketchum 

and go down the line, is does this really get the job done in the 

SEC? But specifically, what are some fundamental changes without 

31 

waiting for a study that we can change to change the structure to 

actually perform better? 

Mr. Ketchum? 

Mr. KETCHUM. Well, it is a great question, Congressman. I think 

points have been made with respect to diversity and skill sets. I 

think the point that you emphasized in your opening statement 

with respect to the bill, I wouldn’t be pretentious enough to say I 

know exactly how to design the SEC. But I do know that the 

present environment in which the examination function doesn’t 

have a direct accountability and in which the level of communication between that function and the two policy divisions from the 

standpoint of Trading and Markets and Investment Management is 

not good and should change. 

There should be greater accountability between the three divisions. Perhaps there should be a single person with responsibility 

for all three. But, one way or another, there needs to be the assurance that there is effective communication between the persons 

interacting with those industry sectors on a daily basis and the 

exam program. 

Mr. MCCARTHY OF CALIFORNIA. Should we wait until the study 

is done to make that move, or do you see any negative? I know I 

have H.R. 2622 that takes the office of inspection and examination 

and moves it back to the original function, location and division of 

investment management, trading and markets. 

Should we wait to have a study done, or could we not make that 

move now? Don’t you think it would be more important to have 

that done? 

Mr. KETCHUM. Well, Congressman, I have a great deal of faith 

in Chairman Schapiro. I think, as mentioned by Chairman Kanjorski before, she brings a very different focus and commitment to 

the SEC. I think she is looking very closely at organization now. 

I think you should definitely demand that there should be a conversation between Chairman Schapiro and this committee and subcommittee. 

I believe that a study may be useful, but I would give Chairman 

Schapiro a chance to work through, make her personnel decisions 

and make her organization decisions, and evaluate it after that has 

occurred. 

Mr. MCCARTHY OF CALIFORNIA. I would like to go down the row, 

if there are any ideas specifically as to what the SEC can do for 

a structural change, be it small or not, to make sure that we make 

a fundamental change there, not a study. 

Ms. CRAWFORD. Congressman, I would just mention that one of 

the overarching problems at the Commission is regulatory capture. 

There is so much interplay with the top people on Wall Street, and 

many, many of the employees of the SEC go there to get the necessary experience to then get jobs on Wall Street. And I think that 

it has a chilling effect sometimes at the agency in terms of the 

staff’s willingness to vigorously pursue wrongdoers. 

To the extent that you could address that, perhaps by limiting— 

or saying that an attorney who works for the SEC cannot go to 

work for a Wall Street firm for 1 year after departing the agency, 

or something like that, so that you don’t have so much of a revolvVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
32 

ing door, that might go a long way toward addressing this regulatory capture problem. 

Mr. MCCARTHY OF CALIFORNIA. Thank you. Mr. Bullard? 

Mr. BULLARD. I would reinforce Mr. Ketchum’s point about leaving it to Chairman Schapiro. Just to give you an example of why, 

having lived under the problems of OC being separate from the Division of Asset Management, where I was, if you move that function into investment management, which is responsible for regulating investment advisers, and you also move the broker function 

to the Trading and Markets Division, you have separated what are 

functionally similar, as Mr. Taft pointed out, because many of those 

people are dual registrants. 

I think that there has to be a two-step process, and that is a 

major reorganization that is reflecting the actual functional and 

regulatory lines that the law draws, and those are generally kinds 

of retail sales issues. And I can tell you in investment management, the hardest thing to get done was something that we had to 

get sign-off on trading markets. Of course, it was always trading 

markets’ fault. They might see the issue differently. 

The other recommendation I would make is that not only structure, but also money drives behavior, and I was greatly disappointed to see that the increased compensation being paid to 

SEC staff as of a few years ago went to salaries rather than bonuses. If you really want to change the behavior of the staff, then 

provide for an enforced mechanism of rewarding quality, rather 

than simply giving automatic salaries and increases to staff who 

may not be as productive as others. 

Mr. MCCARTHY OF CALIFORNIA. Mr. Taft? 

Mr. TAFT. I have no comment, Congressman. 

Mr. TITTSWORTH. Congressman, I agree with my good friends Mr. 

Ketchum and Mr. Bullard. I would leave it to Chairman Schapiro. 

I think in her testimony before this committee on July 14th, she 

bullet-pointed seven or eight different things that she is doing that 

could enhance the SEC’s ability to prevent future Madoffs from occurring. 

Mr. MAISEL. The only comment I would have is I believe the harmonization work that has been discussed earlier could certainly 

contribute to moving away from a false demarcation about one activity versus another and I think would be a factor in some of these 

improvements. 

Mr. MCCARTHY OF CALIFORNIA. Thank you, Mr. Chairman. I 

yield back. 

Mr. KANJORSKI. Thank you, Mr. McCarthy. 

We will now hear from the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman, and I thank the witnesses for appearing. I especially would like to thank Ms. 

Crawford, a fellow Texan. Thank you for being here today. I am 

honored to know you have been appointed and reappointed as 

many times as you have. 

Ms. Crawford, I think that you are eminently correct. I really do 

believe that it is willpower that we are talking about. Mr. 

Ketchum, you spoke of a junkyard dog, a highly technical term. I 

understand it. But the unfortunate circumstance is that we have 

a lot of front yard dogs. When you have a front yard dog, you need 

33 

a junkyard dog. Then you would need a system. You need something that is going to cause a front yard dog to behave like a junkyard dog. 

There is no question that the empirical evidence was before the 

SEC. Mr. Markopolos provided not only the evidence, he also provided the questions. He provided everything that a whistleblower 

could have provided. And the unfortunate circumstance is there 

was no one there who actually picked up on it and moved with it. 

I think, Ms. Crawford, what you said about allowing the private 

right of action to exist would have made a difference if Mr. 

Markopolos had the right to sue. If he could have sued, I think we 

would not have had the same ending that we are currently confronted with. 

Ms. Crawford, would you give me a brief response with reference 

to the right to sue as it would have related to Mr. Markopolos? 

Ms. CRAWFORD. Well, it would have been extremely fraught with 

difficulty, and your assessment is correct. At the end of the day, he 

would not have been able to maintain a lawsuit. 

What we are talking about right now is the aiding and abetting 

of these frauds by others who were involved, these secondary actors. And what we believe would be very helpful would be to not 

just limit these types of actions to the SEC, but to allow private 

individuals to bring these suits. 

Mr. GREEN. Give me an example of a private individual. Would 

Mr. Markopolos have been a private individual? 

Ms. CRAWFORD. He may well have been. 

Mr. GREEN. If he had the right to sue, what impact would that 

have had? 

Ms. CRAWFORD. Well, it would have had a major impact, for a 

number of reasons. For one thing, it would have been a very public 

action that would have put pressure on the regulators to perhaps 

take another different look at the activities of Bernie Madoff, and 

of course if he recovered, we would not have had as many wasting 

of assets, although there would have been huge losses, no question 

about that. 

Mr. GREEN. Now, if we couple that with a stronger, more expanded whistleblower requirement, how would you see the whistleblower, expanding the power of someone who is within who is blowing the whistle, who is giving us intelligence, how would that be 

much more effective, if you could have your way with this? 

Ms. CRAWFORD. Well, the problem isn’t that people weren’t coming to the Securities and Exchange Commission. They receive I 

think about 750,000 complaints a year. The problem is that they 

were ignoring them or at least not making good determinations 

with regard to those complaints that really needed to be followed 

up on. 

So, the whistleblower provisions are very good and helpful, but 

the problem is not with people who are reticent to complain. The 

problem is more that they are not getting the response of the agency presently. 

Now, I will say with regard to this question of the ability to file 

lawsuits, it is my understanding that while this has not yet been 

introduced in the House, there is a Senate provision, Senate 1551, 

called the Liability for Aiding and Abetting Act, that was recently 

34 

introduced. State securities regulators support that Act, and it has 

many of the types of things you are concerned about, Congressman 

Green. So I would commend it for your consideration. 

Mr. GREEN. I thank you. I thank Chairwoman Waters for broaching the issue initially, because there is no question in my mind 

that the lack of willpower, coupled with the fact that there really 

weren’t any penalties for failure to act, it is not that persons were 

necessarily engaged in aiding and abetting as much as it was that 

there was no penalty for those who decided that well, this really 

can’t be the case. Assuming they were acting with the best of intentions, there were just no penalties. So if we don’t have penalties, 

we obviously have to have some way to force the agency to look 

into these issues. 

Thank you, Mr. Chairman. I know that my time is up. I yield 

back. 

Mr. KANJORSKI. Thank you. 

We will now hear from the gentlelady from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. I will move down here. 

Mr. Maisel, are there any outstanding issues, and we have had 

this discussion, in the latest draft bill that would place consumers 

in a worse position or might cause them more harm than they have 

today? 

Mr. MAISEL. Yes. I believe in particular the language about without regard, acting in the best interests, we support on both investment adviser and broker-dealers. But tying it to without regard to 

the interest of the firm or the representative, is contrary to the Advisers Act, and I think one of the things that does work very well 

on the Advisers Act side and I think would be replicated somewhat 

as a result of this harmonization would be full and timely disclosure of information, including potential conflicts of interest, material conflicts of interest. 

So I think that I worry about the potential and we worry about 

a chilling. People would be afraid to provide investment advice if 

the point was so rigid or could be construed so rigidly that no other 

regard could be taken into account the other than the customers. 

There are always going to be different factors, and I think the key 

is to get information in the place of consumers at the right time 

so they can make informed investment decisions. 

Again, that would fall in the long-standing Adviser Act process, 

which I think is a very good and full disclosure regime. 

Mrs. BIGGERT. Thank you. We have been talking about the willpower and everything. Nobody has really mentioned the technology, and I think we had a hearing in the Oversight Subcommittee to talk about technology. I also serve on the Science 

Committee, and we now have the fastest computers in the world, 

and it just seems like maybe more investigations could have been 

done in a more timely fashion, instead of the 9 percent a year or 

whatever it is. Is that a factor that should be addressed? 

Mr. Ketchum? 

Mr. KETCHUM. Congresswoman, I think you make a great point. 

I know Chairman Schapiro has spoken quite strongly about the 

need to upgrade technology at the SEC. It is a focus at FINRA. We 

need to be in an environment where we effectively can manage the 

records of a broker-dealer and do as much preparation as possible 

35 

away from site, and also ensure that all regulators are effectively 

communicating together. 

I know this is a point that Ms. Crawford is concerned with as 

well. We can’t have situations where complaints are coming in to 

one of us and the rest of us are not aware of it. We can’t have situations where we are identifying problems with respect to a particular firm and others are not aware of it. We need to find ways 

to ensure our technology systems share better and our technology 

systems are better able to mine information with respect to the industry. 

So I think your point is a great one. 

Mrs. BIGGERT. I have heard about the big stacks of paper that 

are around everywhere. We try in our office to be a paperless office, 

but it is not possible. As you see on all these desks, all the paper. 

But the other thing is the need to have technology that talks to 

each other. That seems to be the hardest thing to deal with. 

Mr. KETCHUM. I think it is a great point. It is really critical for 

us to be able to talk and effectively work through information that 

exists from a record standpoint from the brokers and investment 

advisers, and similarly to be able to have technology that is more 

transparent between regulators. Your point is really well taken. 

Mrs. BIGGERT. Is there any concern then with the transparency, 

that there might be people who would get into any proprietary information? 

Mr. KETCHUM. You always have to be concerned from an information security standpoint. This should be sharing of information 

between regulators who both have responsibility to protect that information from a confidential standpoint, if it is public customer information, and have the responsibility to protect all information 

with respect to investigations of other regulators. Absolutely. 

Mrs. BIGGERT. Thank you. Just one other question. Is there a 

need for the industry and the SEC to really increase financial literacy and education to consumers, and do you have a quick way 

to do that? I know we have worked on it here. But it still seems 

like there is such a need. 

Ms. CRAWFORD. Congresswoman, we work on that all the time. 

In fact I am very pleased to say, and I say this every time I have 

the opportunity, financial literacy and investor education programs 

begin with State securities regulators. Now it has been embraced 

by everyone from the President of the United States out, and that 

is a very good thing. 

The question for us today is to make sure that what we are doing 

is working, and we would love to talk with you about that going 

forward. 

Mrs. BIGGERT. Thank you very much. I yield back. 

Mr. KANJORSKI. Thank you very much. 

Now, we will hear from Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman, and thank you for your 

work on this legislation. 

Ms. Crawford, thank you for being here. I want to chat with you 

just for a minute about State regulations. 

What size or the amount of assets under management by an investment adviser is currently under the responsibility of the State 

securities regulator? 

36 

Ms. CRAWFORD. Right now, it is $25 million assets under management or less. And what we are proposing to do, Congressman, 

and we hope that you will give this serious consideration, is raising 

that to $100 million. We have the infrastructure in place, we have 

the experience, and we are certainly willing to take that on. 

Mr. CLEAVER. I am very much interested in that. In fact, I am 

going to chat with the chairman and the sponsor of the legislation, 

about perhaps some kind of an amendment. But I want to make 

sure that $100 million is in harmony with the inflationary rise over 

the time that was set and today. Was that a figure that you just 

came up with, or was it based on inflation? 

Ms. CRAWFORD. Actually, Congressman, it wasn’t so much based 

upon inflation as it was counting up the number of firms that fell 

within that group, the size of that universe. What we are seeking 

to achieve is to leave the SEC to address the big, big money managers, the big investment advisers, while we will take the bulk of 

the smaller ones. I know it is hard to believe, it is hard for me to 

believe sometimes, but $100 million assets under management is 

actually pretty small. 

Mr. CLEAVER. Yes, very small. I agree with you, and thank you. 

Mr. Tittsworth, to hang out a shingle that one is a financial planner requires what? 

Mr. TITTSWORTH. Nothing, as far as I know. 

Mr. CLEAVER. Yes. Therein, said Shakespeare, lies the rub. David 

Letterman could just say I am a planner and go out and get clients 

and handle their money, and nothing is required. 

Mr. TITTSWORTH. There are no Federal competency standards for 

investment advisers, if that is what you are getting at. 

Mr. CLEAVER. That is what I am getting at. 

Mr. TITTSWORTH. I would point out that certainly with the vast 

majority of people, you still have the question of who is going to 

give their money to David Letterman or to me if I hang out my 

shingle, and the vast majority of people that I know in our industry, in our profession, are highly educated. There are a number of 

designations, including chartered financial analysts. 

Mr. CLEAVER. I understand that. But you would agree, and I 

want Ms. Crawford to respond to this, you would agree that there 

are some bad people in the world? 

Mr. TITTSWORTH. Yes, sir, I would agree with that. 

Mr. CLEAVER. All right. So you are talking about the people who, 

like you, are trying to function inside some kind of moral code or 

ethical code, but you will also agree with me that there are people 

who with great intentionality would go out and do just the opposite 

in order to make money? 

Mr. TITTSWORTH. I agree with you, Congressman. And not to 

change the subject necessarily, but I would point out that Bernard 

Madoff certainly had a Series 7 stockbroker license; he had taken 

an examination. So that in and of itself does not necessarily prevent the wrongdoers from doing what they want to do. 

Mr. CLEAVER. Yes, I know. I agree. Except that when we know 

that nothing is required to be a financial planner—there is a guy 

in Kansas City, Missouri, the district that I represent, and I 

couldn’t believe it. I am driving by a little strip shopping mall and 

I see his sign out doing financial planning, real estate development. 

37 

He doesn’t even have his GED, but he probably has a bachelor’s in 

‘‘crooktivity’’ or something. But this guy is cleaning up, and it just 

troubles me. 

Ms. Crawford? I am not even sure he is being prosecuted. He is 

out of business now because so many people reported him when the 

real estate market crashed. 

Ms. CRAWFORD. I just want to clarify that the term ‘‘financial 

planner’’ doesn’t really mean anything, just as you indicated, but 

if that person is giving investment advice and is receiving compensation for doing so, that person does have to be registered. A 

few years ago, the State securities regulators came up with an 

entry level competency exam for those folks. So if they are investment advisers, they fall within the regulatory regime. 

But you are so correct, Congressman. If they are just out there 

calling themselves a financial planner, sometimes it is difficult to 

get to them, depending on precisely what it is they are doing. 

Mr. CLEAVER. Thank you. Mr. Maisel? 

Mr. MAISEL. My comments don’t relate to the bad actors, but I 

also do want to say that I also raise the point that if financial planning somehow is separated, financial planning is one of various investment advisory services today, and I think it could be counterproductive to the harmonization discussion if somehow financial 

planning or financial planning client gets some kind of uber protections. 

Again, I think it goes back to the point it shouldn’t matter regardless of the type of broker-dealer service or investment advisory 

service, hopefully will be there a harmonized standard with the 

best interests and the rules of the road that we talked about, but 

not separating out one part of the industry. 

Mr. CLEAVER. Yes. Thank you, Mr. Chairman. 

Mr. KANJORSKI. Thank you. The gentleman from Colorado, Mr. 

Perlmutter. 

Mr. PERLMUTTER. Thank you, Mr. Chairman. 

I guess I just have more general questions. Mr. McCarthy from 

California has some general changes to the structure within the 

SEC that he thinks will assist in enforcement and review and 

things like that. And I think that is great. I think it also starts at 

the top. If you have an Administration that says let the market 

take care of it, and buyer beware and the regulatory agencies don’t 

really have a rule, they just get in the way, well, then you have, 

in my opinion, a lot of the fraud that was committed over the last 

8 years by Stanford and by Madoff. 

Soon we have people who really do believe that regulation boosts 

certainty and trust in the marketplace, which I think we have with 

President Obama. My question to you is this, all the people who 

lost a bunch of money, either to Madoff or to Stanford or to some 

other of the Ponzi schemes, what recourse do they have now, or is 

there any? 

So I know SIPC is part of the conversation here. And I am not 

looking for an education on this, but are we making it any better 

for the people that we are investing in the feeder funds to have 

some protection here? 

I will start with you, ma’am. Does this bill help those folks in 

any way? 

38 

Ms. CRAWFORD. I am not familiar with any provisions in the bill 

that would address your question, Congressman. However, I will 

point out that in some jurisdictions, States are looking at the feeder funds, trying to determine whether or not they contributed to 

this problem and recoveries may be possible there. 

But I wouldn’t want to mislead you into assuming that there is 

a magic bullet to the problem of the defrauded investors, because 

I personally think that there is not going to be a lot of money there 

and wouldn’t want to lead you to think otherwise. 

Mr. PERLMUTTER. Mr. Ketchum? 

Mr. KETCHUM. I would agree with Ms. Crawford. To your specific 

question, no. I don’t believe there is anything in this bill that looks 

backward and addresses that issue. I would say that the SIPC provisions that are built in here are important steps to ensure the 

flexibility of how SIPC covers and its ability to cover investors 

going forward and it is a good thing. 

Mr. PERLMUTTER. Do you think we should have something in this 

bill that protects secondary and tertiary investors, if I invest in this 

guy over here in Boulder, Colorado, who then invests in something 

here that then invests in Madoff, should they have any protection 

or how are they protected? Those are the guys who are getting clobbered in this thing. 

I appreciate, we have to have better up-front watchdog kind of 

enforcement. But how do I, how do I help those guys at the back 

end of this thing? They are the little guys who were just wiped out? 

Mr. KETCHUM. Well, I think where you can, as Ms. Crawford indicated, where you find complicity and serious failures by entities 

like feeder funds, they should be held accountable and they should 

be held actable monetarily. The key thing for all of us is to find 

these things more quickly before customers are exposed as they 

were in those tragic instances. 

Mr. PERLMUTTER. Thank you. Mr. Bullard, do you have any 

thoughts? 

Mr. BULLARD. There are clearly a wide range of private claims 

that can be brought against Madoff, both Madoff feeder funds. And 

I think, to a large extent, they are fairly adequate. The concern I 

have had with CPIC, is that I think they are taking a position on 

what constitutes a loss, which is both unreasonable and not consistent with fundamental financial theory. But that doesn’t seem to 

raise anyone’s eye, and it is clearly addressed by the bill. 

I would say, though, that as far as this bill goes, Mr. Taft has 

suggested that it preempt State causes of action. That would significantly reduce the ability of investors to bring claims against investment advisors. I don’t know whether he sees that as an implied 

preemption in the bill, in which case the committee certainly 

should make it clear in the legislative history that it does not preempt State law or if it is wishful thinking. But that would give a 

substantial hit to State claims. 

Mr. PERLMUTTER. Okay. Let me ask Mr. Taft, what do you think? 

Mr. TAFT. Well, as I said in my testimony, we believe there is 

tremendous merit to having a harmonized Federal fiduciary standard that applies to everyone providing investment, personalized investment advice to individuals, so that no matter which door an individual investor walks into, they can be assured that they are 

39 

going to receive the same protections they would receive if they 

walked in a different door. 

As to a Federal standard, the consistency, the clarity that it 

brings, we are not suggesting that exist to the detriment of the 

ability of State regulators to enforce that law. So I want to make 

it clear that we think State regulators play an important role, and 

they would have the ability to pursue wrongdoers who violate fiduciary standard. 

Mr. PERLMUTTER. Thank you. Thank you, Mr. Chairman. 

Mr. BULLARD. To clarify, my point was about private claims, not 

State regulators claims. I didn’t hear a response to that, but that 

is what I was getting at. 

Mr. KANJORSKI. Thank you, Mr. Perlmutter. Now we will hear 

from the gentleman from Illinois, Mr. Manzullo. 

Mr. MANZULLO. I have been going in and out and I am sorry I 

have missed most of the testimony. I had an opportunity to read 

it. 

I have some people in northern Illinois who got caught up in 

some of these Ponzi scams, and we are always interested in knowing what, if anything, can be done to protect sophisticated investors 

from getting caught in something like that, and what, if anything, 

the Investor Protection Act of 2009 could do to help people who are 

sophisticated investors. Does anybody want to take a stab at that 

one? 

Ms. CRAWFORD. Well, I will say this, and the statement has been 

made by Chairman Frank that the accredited investor standard is 

not working or, I am paraphrasing, but he said words to that effect. 

And when you look at the universe of people who were where defrauded by Bernie Madoff as well as Robert Stanford, they were socalled accredited investors, which means that they have a very 

large net worth and/or a very large income and are presumed to 

be, because of that, sophisticated. 

At some point, it may make good sense for the United States 

Congress to look at that concept. Should someone be presumed to 

be sophisticated simply by virtue of his or her wealth or income? 

That standard did not service very well recently, and there really 

is no reason to think that it will service very well going forward. 

Mr. MANZULLO. Does anybody else want to take a stab at that? 

I know it is a little bit off the context, but it really is tied into it. 

Mr. BULLARD. I will do it. I think there may be reluctance, to be 

really frank, about the question of sophisticated investors investing 

with someone like Madoff. But in my position, I can perhaps afford 

to be more frank. 

And my view is that in light of the Madoff scandal, a truly sophisticated investor would not have invested with Madoff. There 

were fundamental steps that any truly sophisticated investor 

should have made that would have led them not invest at least a 

substantial amount of their assets with Madoff. I think Madoff is 

ultimately a question of how we regulate those who don’t take the 

steps, to some extent, to protect themselves. Exactly the same 

thing could be said of Stanford with respect to CDs being issued 

from a very small island in the middle of the Atlantic. 

So I think that is really the answer, and as my testimony suggests, I think the focus should be on retail investors, personalized 

40 

advice and there has to be a point at which you draw the line and 

sophisticated investors would have to rely on the private claims 

that they have. 

Mr. MANZULLO. The reason that I asked— 

Mr. KETCHUM. I am sorry, I just agree with Professor Bullard. 

Two things to note. First, fraud standards remain the same no 

matter what the sophistication of the investor. Secondly, you are 

absolutely right. I think it deserves a careful analysis from a suitability standpoint at a minimum and perhaps from a fiduciary 

standpoint, with respect to what obligations are with regard to a 

range of institutional investors that don’t have the level of sophistication that many other institutional investors do. 

And time and time again, there are instances in which those persons who are categorized by standards that have been built for 

other reasons by the SEC are brought into schemes where they suffer serious harm. So I think your point is correct. I think it deserves some careful look and study and perhaps a valuable part of 

the study that is a part of this bill. 

Mr. MANZULLO. The fact that the SEC had actually looked at Mr. 

Madoff, given him a clean bill of health on a couple of occasions, 

wouldn’t that lend credence to a sophisticated investor that the 

Madoff investment was solid? 

Mr. BULLARD. It might. I would say it should not, given that 

would be nearly a floor. But just to give you a concrete example 

of steps that any sophisticated investor should take, one of the 

rules that I suggest for any investor is never send the check to the 

person who is making the decision about the check, and what that 

means is you always have to make sure that there is a separate 

third party who has custody, who is a different person from the one 

who is making decisions about the account. 

Mr. MANZULLO. But there were people who had contacted independent brokers, and investment advisers, who said the best place 

to invest your money is with Mr. Madoff. 

And so I guess at what point, does the government get involved, 

when even the people who are supposed to be really sophisticated 

also may have relied upon some very poor information and gotten 

stung? Maybe I should just leave that as a rhetorical question and 

let it go at that and thank you. 

Ms. CRAWFORD. Congressman, you might want to direct that 

question to the SEC. 

Mr. MANZULLO. Well, they didn’t even know about it. Their own 

internal investigation showed that when the whistleblower had 

contacted the lower echelon at the SEC, that it never made it all 

the way to the top. I guess my thought is, why didn’t that man who 

testified here contact a Member of Congress or somebody in the 

Banking Committee, because we could have kicked it upstairs right 

away and worked on it. Thank you. 

Mr. KANJORSKI. Thank you very much, Mr. Manzullo. Now we 

are faced with a problem. The problem is we could continue with 

this panel or take a break for lunch and come back and catch panel 

2 and panel 3, and I see all the disappointed faces of this panel 

to get excused now and I would not want to disappoint them. But 

since we are down to three members here, four members, it probably is a good chance to take a break. So what I want to do is exVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
41 

press the thanks of the committee and the subcommittee for this 

panel’s participation. We appreciate it. I was particularly interested with the flow of some of the testimony and the comments. We 

will not refer to the gentlelady from Texas at all, so we cause her 

no embarrassment. 

But all of you really were rather forthcoming, gave some very 

good insight in assisting us and coming up with conclusions, and, 

of course, you were willing to give critiques and criticism to the existing legislation, which you are always welcome to do. 

Again, you are not discharged from your responsibilities to communicate some of your hesitations with the legislation or how we 

can improve it, but we do want to give you our tremendous thanks 

for having participated. 

And at this point, we will discharge the panel. Thank you. 

We are going to recess the hearing until 1:00, when we will take 

panel number 2 and then shortly thereafter, panel number 3. So 

no one try and escape from the committee room. Thank you, they 

are discharged. The committee stands in recess. 

[recess] 

Mr. KANJORSKI. The full committee will reconvene, and I will introduce our second panel, which will discuss enhancing oversight of 

private pools of capital. Thank you for appearing before the committee today and without objection, your written statements will be 

made a part of the record. You will each be recognized for a 5- 

minute summary of your testimony. 

First, we have Mr. Stuart Kaswell, general counsel of the Managed Funds Association. 

Mr. Kaswell. 

STATEMENT OF STUART KASWELL, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, MANAGED FUNDS ASSOCIATION (MFA) 

Mr. KASWELL. Thank you, Chairman Kanjorski, Ranking Member Bachus, and members of the committee. 

I am Stuart Kaswell, executive vice president and general counsel of the Managed Funds Association. As you know, Congressman 

Richard Baker was invited to testify on behalf of MFA today, but 

weather-related delays in Baton Rouge kept him grounded. He 

sends his deep apologies for not being able to appear and sends his 

thanks to the committee for its invitation. 

MFA is the voice of the global alternative investment industry 

and is the primary advocate for sound business practices and industry growth for professionals in hedge funds, funds of funds and 

managed futures funds, as well as industry service providers. 

Hedge funds provide liquidity and price discovery to markets, capital to allow companies to grow or to improve their businesses and 

sophisticated risk management to investors, such as pensions, to 

allow those pensions to meet their obligations to their beneficiaries. 

MFA appreciates the opportunity to provide its views on the registration and investor protection legislative proposals from this 

committee and the Obama Administration. 

MFA is committed to playing a constructive role as the regulatory reform discussion continues. As investors, hedge funds have 

a shared interest with other market participants and policymakers 

42 

in seeking to restore investor confidence in a stable and transparent financial system. These important objectives can, in part, be 

accomplished through a thoughtful approach towards the goal of 

establishing a smarter financial regulatory system, a system that 

enhances investor protection and market efficiencies through 

strong but fair oversight, regulation and enforcement, and the promotion of industry best practices like MFA’s sound practices. 

With regard to the registration issue, MFA and its members support the general approach of requiring investment advisers, including those to all private pools of capital, to register under the Investment Advisers Act, which provides a comprehensive regulatory 

framework for investment advisers. 

In considering the appropriate regulatory framework, we believe 

it is important to establish a narrowly tailored exemption from registration for the smallest investment advisers that have a de minimis amount of assets under management and coordinate with, and 

not duplicate, State regulation of investment advisers. 

MFA believes that the approach taken in the draft proposals, notably requiring registration under the Advisers Act, is consistent 

with an intelligent approach to a complex issue. We also welcome 

the fact that the committee and Administration drafts both seek to 

preserve a de minimis exemption from Federal registration for advisers to all but the smallest of funds and would provide for confidentiality with regard to reporting systematically relevant information about a firm to the appropriate regulator. 

While MFA supports the general thrust of the draft proposals, I 

would like to spend a few minutes discussing some areas of concern 

where we believe the draft proposals can be improved. 

We believe that the proposed bills by imposing unnecessary overlapping regulatory requirements for commodity trading advisors, 

who are already registered with, and well regulated by, the Commodity Futures Trading Commission, is inconsistent with the goal 

of improving the current system of regulation. 

As I noted, while we appreciate that the proposals provide for the 

confidential treatment of certain reports, we would encourage Congress to consider the Federal Reserve’s model of protecting bank information. 

We recognize and strongly support the fiduciary obligations that 

investment advisers owe their clients. We further recognize the 

SEC’s challenges following the Goldstein decision and the need for 

additional legislation to clarify the SEC’s authority. 

We believe there are different ways to address those concerns 

without expanding the definition of client so broadly that advisers 

would become subject to the irresolvable conflicts that would result 

if an adviser were required to manage a pooled investment in the 

interest of each individual investor. 

We support strong disclosure between counterparties, but we believe that there should be limitations on the information that an 

adviser is required to disclose to other market participants. For example, we believe that an investment adviser should not be required to reveal its proprietary trading strategies or other trade secrets. 

We believe that Congress should provide an appropriate transition period to implement the registration requirement. 

43 

MFA also supports efforts to enhance investor protection and 

strengthen the authority of the SEC to enforce the Federal securities laws. I have a few suggestions. I will try to cover them quickly. 

We support giving the SEC authority to prohibit individuals who 

engage in improper conduct while associated with a broker-dealer 

or investment adviser, from being associated with any other securities industry participant. 

Investment advisers are subject to an existing, robust fiduciary 

standard with respect to their clients. We support extending that 

standard to broker-dealers and believe it is unnecessary for Congress to establish a new standard. 

I see I am just about out of time. We have a few additional 

points that are included in our written statement. Thank you, Mr. 

Chairman. 

[The prepared statement of the Honorable Richard Baker, president, Managed Funds Association, can be found on page 104 of the 

appendix. ] 

Mr. KANJORSKI. Thank you, Mr. Kaswell. 

Next, we have Mr. Douglas Lowenstein, president of the Private 

Equity Council. Mr. Lowenstein? 

STATEMENT OF DOUGLAS LOWENSTEIN, PRESIDENT/CEO, THE 

PRIVATE EQUITY COUNCIL 

Mr. LOWENSTEIN. Thank you, Mr. Chairman, and members of the 

committee. I appreciate being back here to testify and discuss the 

Private Equity Council’s views on the proposed Private Fund Investment Advisers Registration Act of 2009. As I had previously 

testified before this committee, when applying the Obama Administration’s systemic risk factors to private equity, it is hard to see 

how any particular PE fund could be considered to present a systemic risk. 

Indeed, in testimony last week before this very committee, Federal Reserve Board Chairman Ben Bernanke said he would not 

think that any hedge fund or private equity fund would become a 

systemically critical firm individually. Though he did add that it 

remains important for the systemic risk regulator to monitor the 

industry as a whole, and we agree. Precisely for that reason, and 

notwithstanding the lack of a nexus between private equity and 

systemic risk, we are genuinely supportive of requiring registration 

of advisors to private pools of capital. 

With respect to the specifics of the draft bill circulated last week, 

I have a few comments that I want to share with you and we covered in some detail in our written testimony. Section 204(b)(7) of 

the draft would add to the Investment Advisers Act the requirement that registrants provide reports, records, and other documents to investors, prospective investors, counterparties, and creditors if the SEC determines such disclosure is necessary. 

We take no issue with requiring PE fund managers to disclose 

any and all information to the SEC regarding systemic risk, but 

this section’s added authorization for the SEC to require registrants to make broad disclosures to third parties is unnecessary, 

problematic and will do little to advance the underlying objectives 

of the regulatory system. It is unnecessary because the Securities 

44 

Acts of 1933 and 1934 already impose a series of requirements obligating PE funds to make extensive disclosures to their investors. 

Additionally, the contracts that PE funds negotiate with their investors typically require the funds to provide even more information than is required by the 1933 and 1934 Acts. 

In short, given the highly sophisticated nature of our investors 

and our dependence on them for funding our investments, they 

have both the knowledge and the leverage to obtain the information they need to ensure they are fully protected. While the proposed law protects information provided to the SEC from disclosure 

under the Freedom of Information Act, the section has the perverse 

effect of neutering these critical confidentiality provisions by allowing the agency to compel disclosures to counterparties, creditors, 

and others. 

These disclosures could result in exposure of proprietary information and trade secrets to those with whom we compete. For example, this provision could easily result in the disclosure of highly 

sensitive material, nonpublic information about our valuation of a 

current or prospective investment, information that creates the potential for the counterparty to trade on that information or pass it 

along to another client. There is no public or systemic risk interest 

served, as far as we can tell, by this additional disclosure section, 

and we hope that you will consider removing it from the draft. 

We are also concerned about section 204(b)(3) of the draft which 

creates what we believe is a rather sweeping optional informationgathering authority for the SEC above and beyond the already extensive disclosures that are required by the Investment Advisors 

Act itself. 

Given the fact that the prior section of the draft already authorizes the SEC in consultation with the Fed to collect such information as it deems necessary or appropriate in the public interests for 

the protection of investors or for the assessment of systemic risk, 

it would seem that should be sufficient to carry out the goals of the 

statute. 

Finally, section 6 creates a venture capital exemption. I sympathize with the intent to offer relief to certain funds that may not 

have the resources or the infrastructure to absorb the administrative costs of a company registration, and which are also too small 

to create systemic risk individually or collectively. However, I think 

it will prove very difficult to define a venture capital firm and to 

distinguish these from most other investment firms. So I would 

suggest a simpler and perhaps even fairer approach would be to 

raise the threshold above which registration is required from $30 

million to a level that Congress believes is appropriate. 

This would ensure the registration requirement captures the 

larger firms more likely to pose the systemic risk, regardless of 

whether they are classified as a venture capital fund or private equity fund or some other investment advisor. And it has the virtue 

of treating all small advisers in the same way. 

And, most importantly, it will help ensure the SEC can focus its 

scarce resources on overseeing those very firms, including those 

who are members of the Private Equity Council, that are most relevant to the public policy objectives that bring us here today. 

45 

Thank you for inviting me. I look forward to answering any questions you may have. 

[The prepared statement of Mr. Lowenstein can be found on page 

188 of the appendix.] 

Mr. KANJORSKI. Thank you, Mr. Lowenstein. 

Next, we have Mr. James S. Chanos, chairman of the Coalition 

of Private Investment Companies. Mr. Chanos? 

STATEMENT OF JAMES S. CHANOS, CHAIRMAN, THE 

COALITION OF PRIVATE INVESTMENT COMPANIES (CPIC) 

Mr. CHANOS. Thank you, Congressman Kanjorski, Congressman 

Bachus, and members of the committee. 

My name is Jim Chanos, and I am testifying today as chairman of the Coalition of Private Investment Companies. I also run a $6 

billion hedge fund. Thank you for the opportunity to testify. 

As I testified before at your Capital Markets Subcommittee earlier this year, CPIC supports legislation to provide increased Federal regulation of private investment funds. We support the draft 

legislation before the committee today with some additional enhancements that I will outline briefly. 

As this committee is aware, hedge funds and private pools of capital were not the source of the recent near meltdown in our financial system. The greatest threats to the world economy came from 

large, highly regulated, diversified investment and commercial 

banks, insurance companies, and the GSEs. Nonetheless, we recognize that you are working to expand and improve Federal oversight 

over the financial markets in which private funds play an important role. All significant market participants should participate in 

a regulatory framework that promotes transparency and accountability. 

The benefits and risk mitigating features of private funds for investors in our economy are well-known at this point. There, of 

course, are risks associated with private funds. These risks center 

on relationships among fund managers, investors and individual 

counterparties. In rare cases, like Long-Term Capital Management 

in 1998, a fund may grow to a size, amount of leverage, and 

interconnectiveness that presents systemic risks. 

CPIC has advocated that Congress develop a special stand-alone 

private investment company act tailored to the unique characteristics and risks of private funds. In our view, statutes like the Investment Company Act and the Investment Advisers Act were designed to protect retail investors and are not the right fit for private funds. 

That said, the Administration’s proposal and this committee’s 

draft have chosen to develop private fund regulation oversight 

through amendments to the Adviser’s Act. These proposals offer a 

way forward but only if they are sufficiently strengthened and tailored to private funds. To begin, both proposals require that private 

fund advisers register with the SEC under the Advisers Act and 

subject both the fund manager and the fund to SEC examination. 

The committee’s draft, however, exempts advisers to venture capital funds from registration. We question whether a category of private funds should be relieved of SEC registration, recordkeeping 

and inspection, solely by virtue of its self-proclaimed investment 

46 

strategy. Indeed, Ponzi schemes and frauds can be run with any 

asset class, and the lines between different categories of private 

funds have tended to blur over time. 

Leaving the operations of some funds outside the regulatory purview based upon a stated investment strategy is an invitation for 

the growth of bubbles and frauds. The draft proposals grant broad 

general authority of the SEC to write rules in several areas, including disclosure to investors, counterparties, and creditors. 

We recommend providing more specificity such as requiring disclosures for a fund’s valuation methodologies, the type of assets it 

holds, the existence of side arrangements and trade allocation policies. We also believe that Congress could help combat fraud and 

theft by statutorily requiring managers to keep all client assets 

with qualified custodians and requiring audits by public accounting 

firms overseen by the PCAOB. 

We commend the decision to explicitly direct the SEC to write 

rules relating to assessments of systemic risk. We support these 

provisions and also believe that any broader systemic risk regulation the committee develops should include private funds, depending upon their size, level of leverage, and interconnectedness. 

With respect to systemic risk oversight, private funds should not 

be subject to the same type of regulation as is necessary for a Bank 

of America, Citigroup or Goldman Sachs. But what is fundamentally important is that systemic risk entity has the overarching authority to obtain information from any market participant when 

necessary and without the predicate of an enforcement action. 

We would also urge the committee to consider whether it wants 

this new systemic risk regulator to apply the same disclosure contemplated in the Private Investment Act to the proprietary trading 

functions of all regulated financial institutions. 

Proprietary trading resembles many of the same features as 

hedge funds using high levels of risk and leverage. The metrics 

used to assess risk stemming from private fund activity can also 

be used to better understand the risks being taken by significant 

taxpayer-backed financial institutions. 

All of these provisions will benefit investors and private funds by 

enhancing regulators’ ability to combat abuses while reducing systemic risk. CPIC is committed to working with you to build a better 

regulatory framework that will best serve all investors’ interests. 

Thank you very much for this opportunity. 

[The prepared statement of Mr. Chanos can be found on page 126 

of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Chanos. 

Next, we have Mr. Terry McGuire, co-founder and general partner of Polaris Venture Partners, and chairman of the National Venture Capital Association. 

STATEMENT OF TERRY McGUIRE, CO-FOUNDER AND GENERAL 

PARTNER, POLARIS VENTURE PARTNERS; AND CHAIRMAN, 

NATIONAL VENTURE CAPITAL ASSOCIATION 

Mr. MCGUIRE. Chairman Kanjorski, Ranking Member Bachus 

and members of the committee. On behalf of the venture capital industry, I would like to thank you for the opportunity to be part of 

this important process. We understand the need to address the 

47 

causes of the recent financial crisis, as well as eliminate regulatory 

gaps, so that our country is never surprised by massive financial 

failures again. 

Last week, the Capital Markets Subcommittee, chaired by you, 

Chairman Kanjorski, released a discussion draft focusing on risk 

related to private pools. We would like to express our sincere appreciation for the work of the subcommittee under your leadership 

and the leadership of Chairman Frank in drafting legislation that 

recognizes that venture capital firms do not pose systemic risks. 

We also appreciate your understanding that registering under 

the Advisers Act would place an undue burden on our industry. 

The legislative draft recognizes the important difference between 

entrepreneurial risks, which we take all the time, and financial 

systemic risks, which we do not. 

Our investment model is simple. We invest in startup companies 

run by entrepreneurs using capital from ourselves and our investors. We invest cash to purchase equity and hold that equity, working side-by-side with the management for 5 to 10 years until the 

company is sold, goes public or fails. In the latter case, there is no 

multiplier impact of these losses. 

While we lose our capital, there are no derivative transactions or 

leverage that would lead to a ripple effect. The elements identified 

by the Treasury Department as contributing to systemic risks are 

not part of the venture capital model. 

We do not actively trade in the public markets. Our funds are 

not directly available to retail investors. While some of our investors are pension funds, under many State laws they are limited to 

the amount of money they can invest in venture capital. The number is often less than 5 percent in investable assets. 

We do not use long-term leverage or rely on short-term funding. 

We do not create third party or counterparty risks. Lastly, the venture capital industry is small, just a fraction of other pool investment funds. But, for more than 50 years, our collective wins have 

far outpaced our losses. 

Tremendous economic value has been created. Venture-backed 

companies say it counts for 12.1 million jobs and approximately 21 

percent of the U.S. GDP. Entire industries, including biotechnology, 

semiconductors, and now clean tech have been built upon venture 

capital. By exempting venture capital funds from registering under 

the Advisors Act, this committee has eliminated a significant burden on our industry. 

As you may know, the average venture capital firm employs less 

than 10 professionals, and the administrative staff is often a fraction of that. Registration could easily cost our firms hundreds of 

millions of dollars, which should be directed to growing new companies, rather than unnecessary compliance. 

Finally, venture capital registration would not provide the government with meaningful insight into systemic risks and would divert government resources. With that said, we do recognize the ongoing need for ongoing transparency. 

Today, venture capital firms provide information to the SEC that 

is publicly available when we seek to raise a new fund. This filing 

process, which involves the completing of a form which is known 

as form D, could easily be enhanced to include information that 

48 

would provide greater comfort regarding systemic risks. An enhanced form D, let’s call it form D–2, for venture firms could answer questions annually on the use of leverage, trading positions 

and counterparty obligations, allowing regulators to continue to exempt firms that pose no systemic risks. 

The D–2 solution could be a viable option because it does not require a lengthy regulatory process to test the definition of venture 

capital. It would cause firms to annually confirm that they are safe 

from systemic risks by responding to questions that reveal the nature of their investing activity. This would enable the SEC to 

quickly identify firms that do not meet the standard. 

This process would also accomplish the Administration’s goals of 

providing transparency and eliminating regulatory gaps. It would 

do so without unnecessarily burdening the venture industry or the 

SEC. We look forward to discussing these recommendations further. 

We applaud the committee’s intent to protect entrepreneurship 

and innovation. We stand ready to work with you to gain transparency as you require, without hurting our industry and the startup companies we support. 

I thank you for your consideration today, and I am happy to answer any questions. 

[The prepared statement of Mr. McGuire can be found on page 

211 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. McGuire. 

And thank you all, gentlemen, for your testimony. Notice I said 

‘‘gentlemen.’’ There should be some young ladies sitting at that 

table too, so one of these days, we have to think about equality 

here. 

No, all things being said, I take it for granted that nobody really 

has concluded that the bill as presented is too harsh for acceptance, 

but you would like to sit in a role of being an assistant and helping 

us to protect even a finer bill; is that correct? 

Mr. KASWELL. That is correct. We applaud your efforts. We think 

there are opportunities for further enhancement, but we agree with 

the general thrust, that is right. 

Mr. KANJORSKI. That is very good. The Congress doesn’t hear 

that very often, so I thank you on behalf of the entire Congress. 

I have been trying to propel an idea to the industry that is we 

regulate or sit in judgment of and create regulatory implementation for, and that is that too often we miss the advice of the experts 

and do not recognize very clearly that we all, Members of Congress 

and members of this committee, are generalists. 

If I can extend to you—we all actually have telephones. If you 

call the gentleman from Alabama, he will get on that line and talk 

to you. Then he, in turn, will relate to us some of the objections 

you may have stated or, actually, make your argument a little 

more understandable. 

Mr. BACHUS. Or not. 

Mr. KANJORSKI. Or not. No, I have known Mr. Bachus for a long 

time, and he is going to be a very major player in trying to put this 

together. What this is, is an open invitation to you and your colleagues and your association members, etc., to please participate. 

49 

If we have done something that can be improved and corrected 

upon, do not hesitate to do that. That is what we are here for. We 

are not here to play ‘‘gotcha.’’ We are not here to cost you a lot of 

money. Mr. McGuire, you mentioned it costing hundreds of millions 

of dollars to comply. That is the last thing we want to do. 

We do really want you to take those hundreds of millions of dollars out there and invest in companies, those that are north of 

Philadelphia by 100 miles and east of Pittsburgh by 200 miles. If 

you get my measure, you can tell exactly where I am looking at 

that investment to occur. 

We spent actually a lot of time trying to put this together so we 

could accomplish something. I take for granted that we have been 

partially at least successful. We want to work as this process goes 

forward, and we think it can go forward in a relatively reasonable 

period of time to get this done. 

So without taking my full time, I am going to recognize the ranking member from Alabama to give his comments. 

Mr. BACHUS. I thank the chairman. 

Venture capital, hedge funds, private equity, all of those, I guess, 

private pools of capital or whatever you call them, I think have 

served the country well, and they have been a valuable cog in our 

economy, and it is an economy that is 3 times larger than the next 

biggest economy, which is the Japanese economy. 

I think it was this diversity and different approaches to adding 

wealth creating jobs is a strength of the American economy. And 

we don’t, in America, take the one-size-fits-all. 

And as the chairman said, as we move forward on protecting investors, we do want your advice and input, because we don’t want 

to put some restriction on what you do that is unnecessary and also 

limits your ability to aid the economy. 

Our economy—I go to high school students and I ask them what 

the largest economy in the world is. Most of them today say China. 

Yet our economy is bigger than the Japanese, the German, the 

British, the French, the Chinese, and the Japanese economy put together. 

We got there through choice and innovation and different approaches, and letting the market come up with, really, solutions. 

And our capitalistic market, it turned into a bad word, that and 

profits today, but I think they have generated tremendous wealth 

for the American people. Despite what we witnessed last year, I 

think we got ahead of ourselves on some of them. 

The securitization, the different derivatives, all those things were 

actually, I think, good products that were just abused. But there 

is nothing fundamentally unsound or fundamentally wrong with 

the product itself, but you can abuse anything. 

So I am just going to—I guess I will ask this, is registration with 

the SEC properly done, would that be a problem with any of the 

industry or you? 

Mr. MCGUIRE. If I could make a comment, the truth of the matter is that the venture capital industry has been around for 50 

years. We certainly submit SEC forms, form D, as I mentioned. We 

are prepared to do additional disclosure. 

I do think, though, that the burden of the Advisers Act would be 

substantial and would be difficult for some of our members. Some 

50 

of our members are very small places in districts such as yours. As 

I mentioned, the average has nine professionals. There are some, 

though, with two and three professionals. 

By the way, they are doing incredibly important work in companies that are coming from technologies generated from your local 

universities. And I think having an additional burden, the SEC 

burden, would not be helpful. In fact, over 50 years we have proven 

that, in fact, we are good citizens. 

Our model is pretty simple. It is old-fashioned. We invest in companies. We expect to have our equity in those companies for up to 

a decade, and we work hand-in-hand with those companies. So I 

think we have proven to be good citizens. We have proven that our 

model works. As you point out, it has made an enormous contribution to the competitive positioning of the United States. 

So I think it would be unfortunate if there was undue regulation. 

I don’t think it would provide any particular insight into systemic 

risks. Things haven’t changed in our business. 

It is true that technology is unrelenting, and it is always changing. But the way we practice venture investing has really been 

tried and true for over 50 years. We would hate to lose some of 

these venture capital investors because of these undue burdens. 

Mr. BACHUS. I think you make a good argument. I think the burden ought to be on us to prove that there is a reason for—even registration. 

Mr. Lowenstein? 

Mr. LOWENSTEIN. Yes, I think that for anybody, even the largest 

private equity fund, to suggest that registration isn’t in some ways 

burdensome is not reasonable. It clearly is burdensome. That is distinguished—in fact, for even the largest funds, that might requiring hiring 7 to 10 compliance people at a cost of several million dollars. But that is a reasonable cost to impose on the members we 

represent in the private equity world. 

I do think it is important and appropriate though to, as you go 

further down into the smaller firms—and there are about 2,000 private equity firms, and most of us all know the big names in private 

equity—but there are small private equity firms all around this 

country. And imposing, in the same way that the VC funds have, 

would be a burden, I think would apply to virtually any small fund 

regardless of what it does. And that is why we suggest in our testimony, the touchstone for whether registration is there, isn’t what 

you say you are, it is a—an assessment of your size and what you 

do and whether you create systemic risk. 

That is a reasonable standard. That is what this statute is all 

about. And so tying the registration to a reasonable targeting of 

registrants who actually are relevant to the underlying policy 

goals, I think, makes no sense. Just in the final point, as we say 

in our testimony, the characteristics of PE and the reality of what’s 

happened would suggest that private equity wasn’t relevant at all 

to the crisis. 

I could make a case that we shouldn’t have to register. I think 

it is entirely reasonable to require us to register and then to calibrate that registration so that it is most tied to what we do and 

what is necessary for the SEC to carry out its oversight responsibilities. 

51 

Mr. BACHUS. And I don’t think venture capital, in any way, contributed to the events of last year, did it? 

Mr. CHANOS. If I could take a stab also, I would just point out 

as a practitioner, as someone who runs a fund day-to-day, much of 

what we are talking about here in the form of so-called burdensome 

compliance issues to register, if you are accepting pension fund 

money in large pools of capital, which almost all the reasonably 

large members of our different groups do, you are already doing 

most of that which is necessary for compliance under registration. 

So it would not be necessarily additive to what you should already be doing in your internal workings of your fund if you take 

pension fund money, ERISA money. That is something that is often 

lost in these discussions. 

Number two, we can talk about various different types of self-described funds and whether or not they were the source of systemic 

risk. And the hedge fund industry, I think was a model of actually 

warning people about systemic risk back in 2006 and 2007. 

But we also understand that markets look forward. And who is 

to say which group of funds is not going to be issued prospectively 

as opposed to retrospectively. And I know that we can all hold ourselves out to be paragons, I think, in the investing world—but for 

the purpose of the public good, I think that our group, CPIC, says 

don’t make many exemptions. Make it comprehensive, set minimum standards for capital or risk standards as Mr. Lowenstein 

said. But when a lot of people opt-out through self-description, you 

also open up the door to the less than 1 percent of the actors out 

there that may take advantage of that. 

Mr. BACHUS. Mr. McGuire? 

Mr. MCGUIRE. Yes. Let me comment on that. Let me be very specific. In my opening statement, I made the comment that there are 

essential criteria which have been defined by Treasury which define what are systemic risks. They include the use of leverage, they 

including public trading positions, they include counterparty transactions. 

Our model doesn’t use any of those. Therefore, I am making an 

argument which is that any models that don’t use those criteria 

which have been defined by Treasury are adequate for exception. 

Now I am not here to tell you which of these other organizations 

should be regulated. They, earlier on, said that they are happy to 

register. That is fine. 

We have never taken a position that registration works for our 

industry because, in fact, as defined by these risks, none of these 

apply to us. So why should we now start registering just because 

the others are registering? 

Mr. KASWELL. We also feel that there should not be regulatory 

gaps, that registration should apply to advisers to all private pools 

of capital with the exemption for only the de minimis based on the 

size of assets under management, not the nature of the operation. 

We are afraid it will create regulatory gaps, which we know has 

been one of the touchstones of the Administration’s concerns here, 

and also we are concerned about the opportunities for regulatory 

arbitrage. 

One of the things we are worried about in the bill, and I mentioned this in my statement, is that it creates the possibility of 

52 

overlapping regulation, if you are principally engaged on the future 

side and registered with the CFTC, the bill would take away an exemption that exempts you from the Advisers Act. We think that 

just creates duplication and is not warranted. Thank you. 

Mr. BACHUS. Thank you. 

Mr. KANJORSKI. The gentleman’s time has expired. We will now 

hear from the gentleman from Missouri, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman, thank you, Mr. Chanos. 

Thank you for being here. Thank you all for being here. 

In your testimony on pages 11 and 12, you say, ‘‘In my view, one 

of the most important recommendations of the report, of the asset 

manager’s committee, is that managers should disclose more details going beyond the Generally Accepted Accounting Principles regarding how their funds derive income and losses from financial accounting standards.’’ 

Now I agree with the need to disclose more details, but can you 

be a little more specific on the change, what kind of change will 

take place with the overall risk to the financial system? 

Mr. CHANOS. I helped write that section for the President’s 

Working Group and the manager’s report, so I am familiar with it. 

What we suggested, and what my organization, CPIC, is embracing, is a level of disclosure beyond what we have right now under 

GAAP for the so-called level 1, level 2 and level 3 assets. And these 

are the various classifications of financial assets under the accounting standards. Very briefly, level 1 are things that have a very liquid national market, 100 shares of IBM, for example. 

Level 2 assets are those assets which are priced off something 

else, which uses the term observable inputs. So, typically, a bond 

that might trade at a spread to Treasuries would be, in some historical pattern, would be a level 2 asset. 

Level 3 assets are those which are the oxymoronic phrase 

unobservable inputs, and those are really subject mostly to management judgment and best guesses, quite frankly. 

And what we advocated—and I think is good policy for every financial institution, not just hedge funds, by the way, would be not 

only a disclosure of the various levels of assets at a point of time 

on the balance sheet, but also how much of your profits and losses, 

both realized and unrealized, in your financial statements, have 

come from the three classifications. That goes well beyond the current accounting standards, but that would have helped us in 2006 

and 2007 in seeing just how much of the profitability of various different actors on the stage were dependent on hard-to-value assets 

or assets in which management had large discretion over the valuation. 

So, the President’s Working Group committee, the managers, 

really, we did argue over that, exactly the point you highlighted. 

But we felt it was in the best interests of not only the hedge fund 

industry but the markets as a whole and regulation to shine more 

light in this area. 

I really applauded the President’s Working Group committee to 

take that step and go beyond what we are doing now. 

Mr. CLEAVER. I do as well. I am requesting a subjective response, 

probably, but whenever we begin to discuss in this committee requiring more detail, we run into very, very rigid resistance. 

53 

You can predict it, it is coming, and it is going to, if we are told, 

if we do, that the Statue of Liberty will fall and the Washington 

Nationals would win the series, or all kinds of just unbelievable 

things will happen. Give me a response to what we have heard in 

here over and over again. 

Mr. CHANOS. Well, I think that I would make the distinction between giving the information that your investors need to make 

good decisions about, for example, my fund, and that the industry 

feels that we could go a little bit further to telling our investors 

where we are making our money, how we are making our money, 

and also to tell regulators and enforcement individuals what they 

need to do to do their market policing and their market regulation. 

We do draw the line in telling the broad public, because you then 

do cross over into the proprietary trading information. And if I 

have to disclose my whole portfolio to the public every 90 days, I 

really don’t have a business because, that is what I charge people 

for. 

But to regulators, to enforcement, and to our own investors, who 

have put their money in the fund, we think we should be as broad 

as possible and as detailed as possible. And I think that is just 

sound business and sound regulation. It doesn’t necessarily compromise my ability or our members ability or members of these organizations’ ability to make money as long as they know they have 

some safeguards over that information, that it stays in the proper 

regulatory framework. 

Mr. CLEAVER. I agree. I think that is what the American public 

wants too. Mr. Kaswell? 

Mr. KASWELL. Yes, I just wanted to note that these principles 

are—as part of the President’s Working Group recommendations— 

reflected in the MFA sound practices that we recommend as something for our members to consider. So I think we are not necessarily saying it should be a regulatory requirement—I am not 

sure we are going that far—but as far as what we think are sound 

practices for the hedge fund industry, we are very much on board. 

Mr. CLEAVER. But you are not saying that they should be included in any regulatory form? 

Mr. KASWELL. Right, not at this stage. But we are saying this is 

something our firm should seriously consider doing, and we have 

it as an industry sound practice that we commend to our members. 

Mr. CLEAVER. Thank you. My time has about run out. 

Mr. KANJORSKI. Thank you very much, Mr. Cleaver. 

Now, the gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. I thank you, Mr. Chairman, and I thank the panel. 

Well, Mr. McGuire, you convinced me, although I was easy to be 

convinced, public coming in on this, as to why, as you described it, 

you would not be what this type of legislation is adept at trying 

to get at, which is systemically risk the institutions and, of course, 

you said a 50-year track record that we have before us. 

But I think those points that you make also seem to apply to 

your colleagues on your right, to an extent, well, going to the issue 

of—the one seminal issue which I always bring up is how do we 

get here in the first place. Mr. McGuire, you would argue that it 

was not venture capital firms. I would think others would argue 

54 

that it was not the hedge fund industry as well. And if anyone disagrees with that—no. 

So, part of the problem, then—and I found some of the testimony 

quite interesting—part of the problem is, can you do sometimes 

more good, more harm than good, and can you sometimes be adding disclosure that may actually open it up if it is not crafted in 

just the right way as far as, Mr. Chanos, your comments, as far 

as disclosing your practices and your portfolio, what have you? 

So, that is one element that is a problem. And the other element, 

of the problem I guess, is that if you disclose information that becomes what someone indicated is duplicative, it is already out there 

anyway. 

And I guess the third problem, as far as disclosure is, if you do 

disclose, and maybe it is not duplicative—and that would be one 

of my questions to you is what information would you be receiving 

potentially that is not duplicative—that is just overwhelming to the 

system. I am sitting here thinking on the personal level as far as 

all of the information that we require in Congress as far as the disclosure on credit cards and what have you—and no one ever reads 

that—all of us who are involved in mutual funds and what have 

you—and we get the reports every 6 months and no one ever reads 

that. 

I am wondering we can—these aren’t individuals here, but the 

Fed and the other regulators who look at this can, we would be giving them something they already have or information that is already overwhelming towards them. So if you would address those 

two points, duplicative information, new information, and whether 

there is an overwhelming factor. That is three points. 

Mr. LOWENSTEIN. Let me take a quick crack at that and also link 

it back to the prior discussion. 

I think if you actually take a look at the draft legislation, it provides the SEC with a pretty broad mandate beyond even what’s in 

the existing Advisers Act to collect information, as is necessary, appropriate, in the public interest for the protection of investors or 

for the assessment of systemic risk as the committee determines in 

consultation with the Board of Governors of the Federal Reserve. 

That is a pretty sweeping grant of authority to the agency and 

could, in fact, compel considerably more disclosure than we have 

today. 

I think the point that we have made all along, in answer to your 

question, is that what is helpful here is for the agency to be directed to calibrate the disclosure it requires based on the nature of 

what level of systemic risk you might present. 

So it is less about a one-size-fits-all regulation and more about 

a more focused effort to look at what are the differences between 

different private pools of capital; and are there differences, therefore, in the kinds of information we need to carry out the responsibilities under this Act, which I think are important and reasonable. 

Mr. GARRETT. And part of those requirements is fixed criteria 

that they are looking at for someone who has capital, someone who 

is leveraging. But in this industry, you are really not looking, actually, at an industry that is overly leveraged, certainly not in comVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
55 

parison to where the problems come, certainly not in comparison 

to what we do in the government with GSEs. 

So, really, what are we looking at here, as far as a class of industry, a class of business that is potentially a problem area? Or, as 

one of you said in your statement, do we want to make sure that 

the SEC’s resources are focused on those areas where they should 

be focused on. Is this an area we want them to be focused on? Or 

are there other, better places for them to focus on? 

Mr. LOWENSTEIN. If I could comment, again, our practice is very 

simple— 

Mr. GARRETT. Yes, well, yours shouldn’t be. But I am wondering 

if they shouldn’t be focused on at all. I am right there. I am also 

right there maybe to further than where the panel is, saying that 

maybe we should be focusing on some other area. 

I am down to my last 30 seconds. 

Mr. KASWELL. In some areas, we think there are opportunities 

for more disclosure. For example, amending ADV Part II, the information that goes to investors, we support providing information to 

investors on prime brokers, accountants, and custodians. We think 

that would be useful. 

We are supportive of providing reasonable information to the regulator. We get concerned about public disclosure. We don’t want to 

have to disclose our trading strategies. We are concerned about 

providing too much information in the way of trade secrets to 

counterparties. 

We only deal with sophisticated investors. It is a very different 

market than the retail marketplace, and we want to keep it that 

way. We also favor raising the level of investment permitted so 

that we don’t inadvertently become a retail product. 

Mr. GARRETT. Can I go a little further? 

On another note, for 30 seconds, Mr. Lowenstein, I thought you 

made some sort of comment with regard to the auditing requirements—I think it was you, I made in my notes—with regard to 

making sure that the firms are audited by a PCAOB. Oh, I am 

sorry, Mr. Chanos. Okay. 

Mr. CHANOS. We said that, too. 

Mr. GARRETT. There you are. Everybody but Mr. Lowenstein. 

Okay. 

Mr. KASWELL. Funds should be audited by a PCAOB-regulated 

auditor. 

Mr. GARRETT. Now, here is the problem, potentially, with that. 

Let me see what your response is. 

That is okay for the big guys who are probably already in that 

mix already. But if we are going to either carve out exemptions by 

class or if we are going to carve out exemptions by size, doesn’t— 

or, class and not size, doesn’t that cause a problem, then, for those 

industries that are just now going to look for higher-priced audits 

being done? And, really, the benefit of that is just marginal? 

Mr. KASWELL. Well, we favor a de minimis exemption for the 

truly small. But after that, when you are taking the investments 

from pension plans and so on, we think that a PCAOB audit is the 

appropriate thing to do. 

56 

Mr. GARRETT. What are the requirements right now if you are already doing a pension fund—handling a pension fund? What are 

the requirements, as far as any audits? 

Mr. KASWELL. I don’t believe it is required. 

Mr. CHANOS. It is not required. But you will get very little pension fund money unless you do it. It is a practicality. 

Mr. GARRETT. It is standard practice, is what I thought, already. 

So maybe, once again, we might be adding something on that is actually—for those industries that are already doing it, we are not 

really adding it on, but we are just creating all that murky middle 

ground as to where that exemption lies. Is this for a class of business or size of business as you folks would have to do? And all we 

are doing is just adding more uncertainty. But the best practices 

out there—or the real practices out there, it is already being done. 

Am I right, understanding— 

Mr. KASWELL. I think that is true. We think that, in this environment, you should have a PCAOB audit. We think that is a 

threshold issue at this juncture. 

Mr. GARRETT. Okay. 

Mr. KANJORSKI. Thank you very much, Mr. Garrett. 

The overwhelming attendance on your side of the aisle there is— 

Mr. GARRETT. They are all in the back room having coffee, waiting for— 

Mr. KANJORSKI. Just going to run out here suddenly. 

Mr. GARRETT. Suddenly, yes. 

Mr. KANJORSKI. All right. Mr. Cleaver, do you have any further 

questions? 

Mr. CLEAVER. No, Mr. Chairman. 

Mr. KANJORSKI. Okay. Well, then we are going to give this panel 

a break. 

Thank you very much for coming by and giving us your observations. We thank you very much and appreciate it. 

And may I extend to you what I said before? If, as this process 

moves on over the next several weeks and couple of months and 

you have some more insights, please feel free to share those insights with the staff or myself or Mr. Garrett. 

Thank you very much for appearing. 

The committee will reconvene. I now introduce the third panel, 

which will discuss creating a Federal Insurance Office. 

Thank you for appearing before the committee today. And, without objection, your written statements will be made a part of the 

record. You will each be recognized for a 5-minute summary of your 

testimony. 

First, we have Ms. Janice Abraham, president and chief executive officer of United Educators Insurance, on behalf of the Property Casualty Insurers Association of America. 

Ms. Abraham? 

STATEMENT OF JANICE M. ABRAHAM, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, UNITED EDUCATORS INSURANCE, ON 

BEHALF OF THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI) 

Ms. ABRAHAM. Thank you, Chairman Kanjorski, and Ranking 

Member Bachus. I am Janice Abraham, president and CEO of 

57 

United Educators, a reciprocal risk retention group. We are owned 

and governed by 1,200 educational institutions that we insure, including colleges and universities, public and independent schools, 

educational associations, foundations, and cultural institutions. 

I am testifying today on behalf of Property Casualty Insurers Association of America, PCI, the leading P and C insurance trade association in the United States, representing more than 1,000 members. 

The home, auto, and business insurance industry is healthy and 

competitive, and the current system of regulating the industry is 

working relatively well. In the past 5 years, our insurance companies have weathered Hurricanes Katrina, Rita, and Ike, in addition 

to handling our regular claims, without having to ask for a government bailout. We are not broke, we didn’t cause the current financial crisis, and we don’t need a duplicative system of Federal oversight that may ultimately increase costs to consumers. 

PCI supports responsible regulatory reforms that reflect principles of good insurance regulation. We understand the need for a 

Federal insurance office with three primary roles: first, to support 

harmonization of State insurance regulations; second, to have a 

seat at the table during international negotiations regarding insurance issues; and third, to develop an expertise within the Federal 

Government to advise both Congress and the Administration on insurance issues. 

While PCI has not taken a position on the Federal Insurance Office, our members have a number of questions and concerns about 

the ONI and FIO discussion drafts. PCI appreciates some of the 

changes made in the FIO draft. However, the proposed Federal Insurance Office still goes far beyond the limited scope of the original 

bipartisan congressional bill by you, sir, and Representative 

Biggert and several other committee members. Instead, it creates 

an office with extremely broad scope and powers that could lead to 

very costly duplication of State insurance oversight. 

I will underscore four critical concerns that are more fully detailed in my written testimony. 

First, there are virtually no limits in the bill on the types or volume of information the FIO may demand. While gathering information might sound like an innocuous activity, it can impose extraordinarily high costs and burdens on insurers, especially small insurers who must comply with data requests. 

State regulators have some accountability in the information that 

they gather since they do so in pursuit of a regulatory function 

with the responsibility of insuring the solvency and stability of the 

marketplace. The FIO has no such balancing accountability or mission. Instead, the proposed language directs the FIO to require 

mandatory information reporting to ‘‘monitor all aspects of the insurance industry.’’ This is an incredibly broad directive, duplicating 

what the States already effectively implement. 

PCI appreciates your leadership, Representative Kanjorski, in 

dropping the explicit grant of subpoena authority from the ONI 

proposal. This is a significant improvement. However, to avoid inefficient duplication of reporting requirements, the FIO should look 

to State insurance regulators or other public sources to obtain information it needs for its analysis. If the information needed is not 

58 

available through these public sources, we suggest the data requests be voluntary, not mandatory. 

Second, the FIO may exclude small insurers from its mandatory 

reporting requirements, but the exclusion is discretionary and undefined. 

Third, the FIO proposal dropped critical due process protections 

that are standard administrative procedures and included in your 

congressional bipartisan bill, although we do appreciate that it reflects an improvement on the ONI proposal. 

Fourth, and perhaps the most important concern, the scope of 

FIO goes far beyond the bipartisan congressional bill, with the potential to lead to mission creep and greater duplicative and costly 

oversight. Specifically, the new proposal would have the officer 

monitor all aspects of the industry and to have any additional related authority that Treasury wants to give it. We recommend refocusing the Federal Insurance Office on its unique role in international trade issues, liaison, and advisory to the Federal Government, as specified in the bipartisan congressional bill, as well as 

coordination to harmonize State insurance regulations. 

In conclusion, PCI appreciates the committee’s hard work and 

diligent consideration of this issue, especially the joint leadership 

of Representatives Kanjorski and Biggert on the original, widely 

supported, bipartisan proposal. PCI has strong concerns about the 

current legislative FIO draft but appreciates the improvements on 

the ONI proposal and looks forward to working with the committee 

on addressing the remaining concerns consistent with the past 

committee leadership. 

Thank you very much, sir, for your consideration. 

[The prepared statement of Ms. Abraham can be found on page 

89 of the appendix.] 

Mr. KANJORSKI. Thank you, Ms. Abraham. 

Next, we will have Mr. David B. Atkinson, executive vice president and vice chairman of RGA Reinsurance Company, on behalf 

of the Reinsurance Association of America. 

STATEMENT OF DAVID B. ATKINSON, EXECUTIVE VICE PRESIDENT REINSURANCE GROUP OF AMERICA (RGA), ON BEHALF OF THE REINSURANCE ASSOCIATION OF AMERICA 

(RAA) 

Mr. ATKINSON. Thank you, Mr. Chairman. As you said, my name 

is David Atkinson. I am testifying today on behalf of not only my 

company, Reinsurance Group of America, Integrated (RGA), but 

also the Reinsurance Association of America, or RAA, a trade association representing life, property, and casualty companies that 

specialize in reinsurance. 

Simply put, reinsurance is insurance for insurance companies. By 

spreading risk among many companies around the world, reinsurance plays a critical role in maintaining the financial health of the 

insurance marketplace and ensuring the availability of insurance 

for U.S. citizens and businesses. My company, RGA, is the largest 

U.S.-based life reinsurer, the second-largest life reinsurer in North 

America, and the third-largest in the world. 

I am pleased to appear before you today to provide the RAA’s 

perspective on Congressman Kanjorski’s legislation to create a FedVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
59 

eral Insurance Office. We applaud the committee’s interest in and 

we strongly support this legislation, and are especially grateful for 

Congressman Kanjorski, his leadership on this important issue. 

We also applaud the Administration’s acknowledgement that 

international aspects of the reinsurance business require Federal 

involvement to address the needs of the U.S. market as well as to 

assist and support U.S. companies doing business abroad. Encouraging the participation of global reinsurers in the U.S. market is 

essential, because reinsurance provides the much-needed risk-sharing capacity for life, property, and casualty risks in the United 

States. Without reinsurance, insurance prices would increase and 

the availability of insurance would decrease. 

The current State-based system is primarily focused on regulating market conduct, contract terms and rates, and protecting 

consumers. None of these objectives apply to reinsurance, which is 

purely a business-to-business transaction. Instead, reinsurance regulation focuses mainly on financial solvency so that reinsurers can 

meet their obligations to their insurance company customers. 

The RAA supports a reinsurance regulatory system that would 

create a single national regulator with a single set of rules focused 

on efficient and effective solvency regulation. We also support a 

process for the national regulator to evaluate and recognize nonU.S. regulatory regimes to boost international reinsurance transactions. 

We believe a Federal Insurance Office is necessary to assist Congress and the Federal Government in making better decisions regarding international insurance policy and in enforcing international reinsurance agreements uniformly across the United 

States. Public policy issues are frequently raised at the Federal 

level which could have a significant impact on the reinsurance 

business, yet there is no Federal agency tasked with understanding 

the insurance industry. The Federal Insurance Office would fill this 

void. 

The RAA believes it is critical that the Federal Insurance Office 

coordinate Federal efforts and establish Federal policy regarding 

global standards for international insurance matters. Currently, 

the U.S. voice is marginalized because of the fragmented nature of 

the current State system and the lack of a single national regulator 

with authority to speak on behalf of the United States. As a consequence, global insurance standards are evolving with minimal 

U.S. input. Furthermore, uniform application of these global standards in the United States is unlikely, since identical regulations 

would have to be adopted in each individual State. We suggest that 

the legislation be amended to make it clear that the Federal Insurance Office has the authority to represent the United States in all 

relevant international organizations on insurance issues. 

The RAA also strongly supports the authority of the Federal Insurance Office to preempt State insurance measures that are inconsistent with international insurance agreements and that disadvantage non-U.S. reinsurers. It is critical that the Federal Insurance 

Office be empowered to ensure these international agreements are 

uniformly upheld throughout the States and that companies are 

not subject to dual and perhaps conflicting regulation. This is a significant step forward in creating a more efficient and effective reguVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
60 

latory system in the United States and enhancing U.S. dealings 

with foreign governments and regulatory bodies. 

Now, in our drive to open the U.S. market to non-U.S. reinsurers, it will be important to not put U.S. reinsurers, such as my 

company, at a disadvantage in their home market. Preserving a 

U.S. presence in the U.S. reinsurance market should be a guiding 

principle of the Federal Insurance Office legislation. 

Finally, the Federal Insurance Office must ensure a level playing 

field in the United States for both U.S. and non-U.S. reinsurers 

alike. 

Thank you for the opportunity to testify. The RAA looks forward 

to working with members of the committee on this very important 

issue. 

[The prepared statement of Mr. Atkinson can be found on page 

97 of the appendix.] 

Mr. KANJORSKI. Thank you, Mr. Atkinson. 

Next, we have Mr. Dennis Herchel, assistant vice president and 

counsel of Massachusetts Mutual Life Insurance Company, on behalf of the American Council of Life Insurers. 

Mr. Herchel? 

STATEMENT OF DENNIS S. HERCHEL, ASSISTANT VICE PRESIDENT & COUNSEL, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, ON BEHALF OF THE AMERICAN COUNCIL 

OF LIFE INSURERS (ACLI) 

Mr. HERCHEL. Thank you. 

Mr. Chairman, Ranking Member Bachus, and members of the 

committee, on behalf of the American Council of Life Insurers, I 

would like to thank you for the opportunity to appear here today 

to discuss the industry’s position on the newly proposed Federal Insurance Office. 

We support creating this office in the Department of the Treasury. As we testified last year on the Office of Insurance Information proposal, we believe this office would be enormously beneficial 

to Congress as it considers issues that are vitally important to our 

business and would facilitate the handling of international insurance matters and would provide a means for— 

Mr. BACHUS. Mr. Herchel, could you pull the microphone up a little closer? Just grab it and pull it up. And I guess it is on. You 

have to turn them on. 

Mr. HERCHEL. It was on. I am sorry. 

The events of the last 12 months have only heightened the need 

for this office. The financial crisis illustrated the problems associated with the lack of insurance industry expertise at the Federal 

level. 

As you know, for some time now, the ACLI has advocated for the 

creation of a Federal regulatory presence. In light of the recent crisis and the legislative proposals and response, and short of Congress enacting an optional Federal insurance charter, we believe it 

is imperative that Congress establish this office. 

As proposed, the office would be the Federal Government’s repository of insurance industry information and expertise and also act 

as the U.S. international representative on insurance issues. It 

would not have any supervisory or regulatory authority. 

61 

In addition, we believe the office should be elevated in status so 

it can participate actively and effectively with Federal financial industry regulators, including the systemic risk regulator, under any 

new systemic risk regulatory structure. This will ensure that actions affecting insurers are taken only after a systemic risk regulator has had direct consultation and coordination with the office. 

The Administration’s systemic risk regulation proposal places the 

Federal Reserve Board in the position of ultimate systemic risk 

regulator. The Board would be given broad authority to determine 

which companies pose systemic risk, designate them as Tier 1 financial holding companies, and exercise sweeping regulatory powers over those companies and their subsidiaries. This includes authority to require increased capitalization and changes in management activities. 

This power is tempered only slightly, as the Board is required to 

consult and coordinate with the Federal functional regulator of a 

Tier 1 company or its subsidiary before instituting any action or 

proceeding against it. Since there is no Federal functional insurance regulator, there would be no equivalent consultation or coordination when it comes to Board decisions affecting Tier 1 companies 

that are insurers or insurance subsidiaries. 

Since the Board is a banking regulator and has virtually no insurance regulatory expertise, we believe this is an inappropriate result. The Board is required to coordinate with other banking regulators even though it has strong expertise in that area. The fact 

that it would not be required to act similarly when it comes to insurers is a contradiction of sound regulatory policy. 

Insurance is a highly regulated industry. Insurers that do business in more than one State are supervised by a functional regulator in each one. Insurers are subject to a strict financial solvency 

regime. Establishing a systemic risk regulatory system that ignores 

this is an imprudent approach for the Federal Government to take 

and will result in unintended negative consequences. 

We believe one solution is to give the office a role equivalent to 

that of Federal functional regulators when it comes to dealing with 

the Board on all aspects of systemic regulation. The Board should 

be required to coordinate and consult with the office whenever 

Board supervisory or enforcement action is directed at an insurer. 

The office should be required to act as an intermediary between the 

Board and the insurer’s domestic State regulator regarding any 

proposed Board action. And the office should be given a seat on the 

proposed Financial Services Oversight Council. These and other 

changes in the office’s status will vastly improve any regulatory regime ultimately enacted by Congress. 

We also support amending the proposal in a number of ways to 

effectuate the role originally envisioned by the office. 

First, it should be made clear that the office’s preemption authority will never be used in a way that results in a solvency regulation 

gap, nor should preemption result in any material, unfair discrimination against any U.S. insurer. While we do not believe use of preemption should be withheld if it can’t be used to realize the benefits provided under mutual recognition agreements, it should not be 

used to disadvantage domestic U.S. companies. We support a clear 

62 

administrative due process to any preemption action to ensure prevention of these undesirable outcomes. 

Second, it is important that a report of the funds appropriated 

to the office be used to secure and retain personnel with insurance 

industry experience and expertise. In order for the office to be successful, it will be necessary to staff it with personnel who are well 

versed in the workings of the industry. 

Third, clarification that the office has no general supervisory or 

regulatory authority over insurance companies is important. As 

drafted, the proposal contains ambiguous language that could 

cause confusion on this issue, so a clear statement of this intent 

should be included in the final bill. 

There are some additional recommended changes outlined for 

you in my written testimony, so I won’t take the committee’s time 

listing them again here. 

Mr. Chairman and members of the committee, we believe the 

need to establish this office is self-evident and, with the addition 

of these changes we have outlined, fully support enactment of the 

proposed substitute to H.R. 2609. Thank you for giving us the opportunity to present our views, and we look forward to working 

with you as this legislation moves forward. 

[The prepared statement of Mr. Herchel can be found on page 

161 of the appendix.] 

Mr. KANJORSKI. Thank you, Mr. Herchel. 

We will now hear from Mr. Spencer Houldin, president of Ericson 

Insurance Advisors, on behalf of the Independent Insurance Agents 

and Brokers of America. 

Mr. Houldin? 

STATEMENT OF SPENCER M. HOULDIN, PRESIDENT, ERICSON 

INSURANCE ADVISORS, ON BEHALF OF THE INDEPENDENT 

INSURANCE AGENTS & BROKERS OF AMERICA (IIABA) 

Mr. HOULDIN. Thank you, Mr. Chairman. 

Good afternoon. My name is Spencer Houldin. I am pleased to be 

here today on behalf of the Independent Insurance Agents and Brokers of America. Thank you for the opportunity to provide our association’s perspective on proposals to create a Federal Office of Insurance. 

IIABA has long supported State regulation of insurance. And, especially during this difficult economic time, State insurance regulators have effectively ensured that insurers are solvent, that 

claims are paid, and that consumers are protected. State insurance 

regulation has a long and stable track record of accomplishment, 

especially in the areas of solvency regulation and consumer protection, but its benefits and merits have never been more apparent. 

While State regulation is certainly in need of improvement, the 

economic crisis has highlighted serious deficiencies associated with 

creating an optional Federal insurance regulatory system. When financial services entities are permitted to select a regulator of their 

choice, they will select the path of least resistance and what best 

serves their business interests. That choice may not be what is in 

the best interest of the consumer. 

Although we strongly support State insurance regulation and 

would oppose any effort to undermine that system, we recognize 

63 

the benefits that can achieved by establishing a nonregulatory, informational office at the Federal level. It is imperative, however, 

that any statute authorizing the establishment of an insurance information office be designed carefully and with the proper safeguards and not set the stage for Federal insurance regulation. 

We support the Insurance Information Act as introduced in May 

but have significant concerns with several of the revisions unveiled 

in a recent discussion draft. The OII legislation introduced just several months ago was a carefully constructed and thoroughly vetted, 

bipartisan proposal with broad support in what is often a highly 

splintered insurance market. We strongly hope any legislation 

adopted by this committee will closely resemble the original bill. 

There are several critical elements of the original version of OII 

that are, at a minimum, essential to any legislation that creates a 

Federal insurance information office. Specifically, any proposal 

should make clear that the office does not possess supervisory or 

regulatory authority over the business of insurance. We also believe the information gathering provisions of any proposal should 

ensure that the office does not collect information available elsewhere, and include important protections governing how certain 

data maybe obtained and utilized. 

In addition, the discussion draft would have the unintended effect of enabling this office to require Main Street insurance agents 

to produce data and information upon demand. We, therefore, urge 

the committee to revise the definition of ‘‘insurer’’ so that it applies, 

as it should and is likely intended, only to insurers and reinsurers 

and not small businesses. 

At the very least, we believe that this office should be required 

to establish an exemption to the submission requirements for all 

covered entities meeting the minimum size threshold, instead of 

only permitting the office to do so. Explicitly requiring such an exemption would ensure that small agencies and insurers are not unduly burdened by informational demands. 

Any legislation should also include clear and meaningful administrative provisions for handling preemption, and we urge the committee to establish safeguards that would apply in those instances 

when the office is considering whether a State law should be preempted. We believe that these changes would ensure that the scope 

and power of this office are limited in focus and would eliminate 

any concern of regulatory mission creep. 

Our main concern and focus is ensuring that the office does not 

operate as a de facto Federal insurance regulator or serve as a precursor to Federal insurance regulation. It has repeatedly been stated that such an office is not meant as a step towards Federal regulation. Our conditional support for this concept is tied directly to 

these commitments. Therefore, any overt or subtlest efforts to 

make the insurance office look more like a regulatory body or set 

it up to become a forerunner to Federal regulation would force us 

to vigorously oppose any such proposal. 

State insurance regulation has a strong track record of regulating insurers and protecting consumers, and it has been particularly successful over the last year. Using targeted legislation to establish a nonregulatory insurance information office with limited 

and defined responsibilities would strengthen State regulation 

64 

while also filling the void of insurance expertise that currently exists at the Federal level and remedy many of the problems faced 

by the insurance industry participants in the global economy. 

Thank you. 

[The prepared statement of Mr. Houldin can be found on page 

168 of the appendix.] 

Mr. KANJORSKI. Thank you very much, Mr. Houldin. 

We will now hear from Ms. Therese Vaughan, chief executive officer of the National Association of Insurance Commissioners. 

Ms. Vaughan? 

STATEMENT OF THERESE M. VAUGHAN, CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) 

Ms. VAUGHAN. Thank you, Chairman Kanjorski, Ranking Member Bachus, and members of the committee. Thank you for inviting 

me to testify today. 

My name is Terri Vaughan, and I am the CEO of the National 

Association of Insurance Commissioners. Prior to joining the NAIC, 

I was a professor of insurance and actuarial science at Drake University. I also served as the Iowa Insurance Commissioner from 

1994 to 2004 and as the NAIC president in 2002. I am pleased to 

be here today to offer the NAIC’s perspective on establishing a Federal Insurance Office. 

To address a Federal Insurance Office, we must first offer this 

context: State regulation of insurance has a proven track record of 

stability and effectiveness even in the face of great financial strain, 

having shepherded the U.S. industry through the recessions of the 

1890’s, the bankers panic of 1907, the Great Depression, and the 

dramatic credit crisis of the past year. 

In light of this track record, particularly when compared to other 

aspects of the financial services industry, we strongly urge that any 

efforts to improve insurance regulation build on the proven legacy 

of State oversight and tread carefully when considering any 

amount of Federal preemption. 

Having said that, certain fundamental improvements to Statebased regulation may require targeted Federal assistance, and we 

are not adverse to this when appropriate. We worked closely with 

Congressman Kanjorski, Congresswoman Biggert, and others on 

H.R. 2609, which would create an Office of Insurance Information. 

That proposal was carefully crafted to protect effective State supervision while achieving two fundamental goals: first, increasing insurance knowledge and access to insurance sector information at 

the Federal level; and, second, enhancing international cooperation 

on insurance regulatory issues. 

The proposed Federal Insurance Office Act generally preserves 

those two goals but has discarded a number of the key provisions 

from the original OII proposal that are critical to preserving the 

strong State regulatory system and, therefore, critical to our support. 

In particular, we urge that any Federal Insurance Office not be 

empowered with day-to-day supervisory authority over insurance. 

Additionally, we have recently offered members of this committee 

a number of substantive suggestions which restore the protections 

65 

embedded in the original OII legislation. Our written statement 

goes into greater detail, but today I will focus on a few key points. 

While insurance regulatory information and expertise has always 

been available directly from the States and collectively through the 

NAIC to those in Washington, a formal Federal interface is appropriate. However, this interface should provide a two-way, reciprocal 

flow of information, enabling insurance regulators to have equal 

standing with our Federal counterparts and access to information 

on federally regulated parents and partners of State-regulated insurers. 

To avoid unnecessary expense and resources, any Federal Insurance Office should serve as a conduit for, and not a replacement 

of, the extensive information collected by the States, both individually and nationally through the NAIC. The recent financial crisis 

and our experience with AIG illustrates the need for financial regulators, whether State or Federal, to have in place a clear system 

for sharing information about complex institutions. 

A key goal of legislation to create a Federal Insurance Office 

should be to enhance international cooperation on insurance regulatory issues without displacing the existing critical role of the 

States as the functional regulators in these discussions. Any binding discussion at the international level should respect and reinforce the States’ authority to regulate insurer solvency and protect 

insurance consumers and, therefore, should be limited to agreements of regulatory equivalence or mutual recognition. These types 

of agreements serve to level the playing field for U.S. and non-U.S. 

insurers without preempting States’ ability to prescribe the rules of 

the game for solvency and consumer protection. 

Such equivalence seeks to harmonize treatment of insurers operating globally, but it does not require jurisdictions to give up sovereignty over their standards over minor differences. As such, any 

preemption of a State law stemming from an international agreement should be limited to reconciling material or substantive differences in treatment. 

Strong capital and solvency protections have been embedded in 

State regulation of insurance and are a critical reason that insurers have weathered the financial downturn relatively better than 

other types of financial institutions. Our solvency system is national in scope. All 50 States are now accredited by the NAIC utilizing the same risk-based capital and baseline solvency standards. 

As such, State solvency regulation should be excluded from any 

possible preemption by a Federal Insurance Office. 

Mr. Chairman, we support the goal of creating a National Insurance Office to serve as a resource for the Federal Government and 

a conduit for the States. But we will continue to strongly oppose 

any efforts to use such an office as a precursor to establishing a 

Federal insurance regulator, and we continue to have significant 

concerns with the current proposal before this committee. 

We have offered substantive changes in good faith to improve the 

proposal, and we look forward to continuing to work with you on 

this effort and on the many other critical issues before this committee. 

Thank you for the opportunity to testify, and I would be happy 

to answer your questions. 

66 

[The prepared statement of Ms. Vaughan can be found on page 

273 of the appendix.] 

Mr. KANJORSKI. Thank you, Ms. Vaughan. 

And finally, we will hear from Mr. J. Stephen Zielezienski, senior 

vice president and general counsel of the American Insurance Association. 

Mr. Zielezienski? 

STATEMENT OF J. STEPHEN ZIELEZIENSKI, SENIOR VICE 

PRESIDENT & GENERAL COUNSEL, AMERICAN INSURANCE 

ASSOCIATION (AIA) 

Mr. ZIELEZIENSKI. Thank you, Chairman Kanjorski, Ranking 

Member Bachus, and members of the committee. I appreciate the 

opportunity to be here today to discuss the establishment of a Federal Insurance Office, as contemplated in Chairman Kanjorski’s 

discussion draft. 

While the discussion draft does not create the national regulatory 

option AIA has long advocated, we support the Federal Insurance 

Office because it accomplishes two major goals that I would like to 

explore today: increasing Federal insurance expertise; and empowering the United States in international negotiations on prudential 

insurance matters. 

First, the important role of insurance in our economy compels 

the need for Federal insurance expertise. Insurance contributes 2.4 

percent to the annual GDP and directly or indirectly employs 1.5 

million hard-working Americans. And the unique focus of property 

casualty insurers on reducing societal risk has saved many lives, 

prevented countless injuries, and avoided billions of dollars in economic losses. 

We believe that the Federal insurance office should be led by an 

assistant secretary appointed by the President and confirmed by 

the Senate. By having this position filled by a presidential appointee, the head of the office will be recognized here and abroad 

as an important senior government official with insurance sector 

responsibilities. 

In its role as Federal insurance expert, the discussion draft also 

envisions that the office will identify regulatory gaps that might 

contribute to systemic risk and recommend whether any insurer 

should be subject to additional regulatory scrutiny. We agree that 

these are key functions. 

The office should start from the premise that the property casualty sector has weathered the current crisis and remains strong 

overall today primarily because these are generally low-leveraged 

businesses, with lower asset-to-capital ratios than other financial 

institutions, more conservative investment portfolios, and more 

predictable cash outflows that are tied to insurance claims rather 

than on-demand access to assets. 

Given this dynamic, the office should facilitate understanding of 

the insurance regulatory model and ensure that the industry and 

its customers are not adversely affected by the application of inappropriate bank-centric regulatory standards. 

I don’t mean to imply that our insurance regulatory system is 

perfect. In fact, Treasury has called it ‘‘highly fragmented, inconsistent, and inefficient.’’ Despite the best of regulatory intentions, 

67 

States are inherently limited in their ability to resolve issues that 

go beyond their borders. But until Congress decides to establish a 

national regulatory alternative, a result the AIA would welcome, 

the expertise promised through the Federal Insurance Office is essential to prevent unintended consequences. 

We would also urge the office to focus its monitoring activities on 

unregulated or lightly-regulated products or activities that could 

present broader systemic risk. This approach would allow the office 

to analyze the industry through the prism of risk aggregation and 

counterparty exposure generated by nontraditional products or activities rather than simply by company size. 

We also strongly urge this committee to provide a seat for the 

Federal Insurance Office on any systemic risk council that is established so that the council gains a Federal stakeholder offering a national perspective on insurance issues. 

Second, the discussion draft grants the Federal Insurance Office 

authority to set national policy on prudential aspects of international insurance matters and to represent the United States before the IAIS. The office’s international authority complements separate power given to the Treasury Secretary to negotiate international insurance agreements. 

These are critical functions, given that the U.S. Constitution 

grants the Federal Government exclusive power to conduct foreign 

affairs. Both the discussion draft and the Treasury White Paper 

document ongoing frustrations with the inability of the United 

States to negotiate authoritatively with foreign counterparts on 

pressing insurance issues. 

The most oft-cited example of the need for robust U.S. involvement is the EU Solvency II initiative. Solvency II is moving forward, while the current U.S. insurance regulatory system remains 

fragmented among 57 separate jurisdictions. The ability of U.S. insurers to remain globally competitive may well rest on Federal engagement on this prudential issue in every relevant forum as it 

evolves and to have our financial regulatory system deemed equivalent on a national level. 

Indeed, we believe that the discussion draft compels the conclusion that the office can preempt State insurance measures that are 

inconsistent with international agreements concluded on behalf of 

the United States to the extent those agreements involve financial 

supervision. 

Let me close by thanking the committee again for circulating 

Chairman Kanjorski’s discussion draft and for engaging in an open 

dialogue on the substantial merits of a strong Federal Insurance 

Office. Establishing such an office, properly empowered, represents 

a key step in ensuring that the critical role of insurance is recognized at the national level and that the Federal Government retains the ability to preserve a viable private insurance market and 

maintain U.S. competitiveness in a changing global economy. 

Thank you. 

[The prepared statement of Mr. Zielezienski can be found on 

page 280 of the appendix.] 

Mr. KANJORSKI. Thank you, Mr. Zielezienski. 

68 

I thank the panel for their testimony. We have a few questions. 

I will take mine initially to begin with, and then we will get the 

other members in. 

If I had to summarize what I have just heard in the opening 

statements, 50 percent of you love it and 50 percent of you hate 

it. I could concede that maybe that means we should do it. 

I think it is fair to say it has stiffened considerably from its original introduction. It has also changed its name from ‘‘National’’ to 

‘‘Federal.’’ It is not intended to do anything that is regulatory in 

nature; I think that should be made clear to everyone. It is, however, something that has been requested for various reasons from 

the Administration and others that we make the changes. 

But I want you all to know that they manufacture that thing 

called a telephone that allows you to every now and then ring us 

up, either myself or the staff or even the other side of the aisle, 

if you will, to give us some good critiques of what is in there, how 

it could be changed in a better light. 

On the other hand, do not just call to make a compelling argument to tone it down or dumb it down because that won’t be very 

successful. I think it is already dumb enough, so what we really 

want to do is try to smarten it up. And that is where we will ask 

members of the panel to participate with us. 

I, quite frankly, thought that it was going to be so great today 

that we would just have a roar from the panel, no statements necessary, and we would go on to unanimous passage. I expected my 

colleague on the right here to just announce his bipartisan support 

of the legislation, that it would be all over and we would lock 

hands and sing. But I think I am now looking at the gentlelady 

from Illinois, and she is not too happy. Now I am in trouble. So 

we will go down and take the legitimate criticisms that are there 

and see what has happened. 

Actually, if I had to ask a question now, those who think they 

can favor the legislation as is, could you show your hands? 

Thank you, Mr. Cleaver. 

And those who are absolutely abject opponents of the legislation 

as it presently is? 

Okay. And we have two neutrals. Is that it? Maybe yes and 

maybe no? 

Ms. ABRAHAM. I am not sure where you counted, whether—in 

your 50 percent. 

We think there are good reasons to have a Federal Insurance Office. I articulated those: a seat at the table on international issues; 

and harmonization of State regulations. We think there needs to be 

expertise. We are concerned about the breadth, the scope, and the 

potential for mission creep. And those are concerns. And we think 

there can be areas where your stated goals can be articulated. I am 

concerned about small insurance companies, small to mid-sized 

companies. 

So we understand why this is needed. We think the intent is 

strong. But there are very specific issues and concerns that we 

have that we think can be addressed. And I articulated those in my 

testimony, my written testimony. So I am not agnostic, not a flag 

bearer, but very willing to work with you on making improvements 

to this, sir. 

69 

Mr. KANJORSKI. We do appreciate that. And, believe me, we do 

want to work on that, and we will. 

Ms. ABRAHAM. Thank you. 

Mr. KANJORSKI. But you have to admit that we are successful— 

did somebody say—oh, yes, your testimony said that 50 of the 

States have now joined in. That is amazing. We are getting some 

people to stand up and be counted, are we not? So we are slightly 

successful there. Maybe we can get some other activity and finding 

out what can happen both in State regulation as it impacts on potential Federal regulation. That would be very healthy. 

But we are not trying to sneak an end run here. We are really— 

and I think everybody agrees with at least this whole idea that a 

Federal Government devoid of adequate information on the insurance industry, as large as it is, is really a great risk to our system 

of systemic risk in the future if we do not have: one, an understanding; and two, a methodology to handle it. 

Right now, it almost was a complete disaster with AIG insofar 

as it was not the insurance part of the business that went awry, 

it was the financial products part of the business, but the insurance part almost got dragged in. Because, as you recall, there was 

a request to allow the utilization of about $30 billion in assets to 

support the counterparty positions of AIG in Europe, and the regulator in New York actually gave the authority for that to happen. 

Luckily, circumstances and events passed beyond the authority 

being exercised. But if it had been exercised, it probably would 

have precipitated the largest financial disaster for the insurance industry in the history of the country. And whether it could have 

been stopped is an open question when I discuss with people. 

And now, Professor, if you will give us a shot on that? 

Ms. VAUGHAN. Well, thank you, Chairman Kanjorski. 

I was not around at the time. I was safely ensconced in Des 

Moines, Iowa. But my understanding is that there were extensive 

discussions among the regulators. And, actually, I think the story 

around AIG is a very positive one, because the States got very organized. They had constant communication, regular conference 

calls. They had a game plan for what was going to happen so that 

there was going to be action taken by all States at the same time 

if it was necessary. They agreed on what that was going to be. 

And in terms of the request by New York to use the money, my 

understanding is that it still had to go through some approval processes in other States and that had not yet—they hadn’t agreed to 

that. 

So it is not entirely clear to me that would have happened. In 

fact, I like to use that as an example of the strength of our system, 

in that New York, I do not believe, could have unilaterally taken 

that money. I think they would have had others that would have 

had to look at it and decide whether that was a good idea or not. 

And that is a good thing. 

Mr. KANJORSKI. I would hope that in the future—and I know I 

am over my time—that we don’t have little entities in far-off countries like London carrying on adventures in the insurance industry 

that, in my estimation, were never intended to be engaged in by 

insurance companies. 

70 

But to the tune of, I think, your testimony is that the 

counterparty positions held by AIG Financial Products in London 

was $7.8 trillion. How that ever happened, to that size and magnitude. 

And the fact that we obviously now know that we have not had 

a sufficient system to have that disclosed within the system, 

whether we could call that systemic risk or for some other purposes, we just cannot afford to continue or to allow that to happen 

in the future. Luckily, it did not precipitate the type of disaster, 

perhaps, that could have occurred, but I do not know how we meet 

that challenge. 

Anyway, I have exhausted my time, and I guess I will move to 

my friend from New Jersey—incidentally, a recent television star 

in his own right. 

Mr. GARRETT. If you were up at 6:00 this morning. 

Mr. KANJORSKI. That is right. I was viewing it at 6:30 in the 

morning. That is the point. I have just been mentioning that so 

that everybody knows I was up at 6:30 in the morning watching 

Mr. Garrett on TV. 

Mr. GARRETT. Thank you. 

To the panel, Ms. Abraham, one of your opening comments just 

struck me when you read it. It said, ‘‘We are not broke, we didn’t 

cause the current financial crisis, and we don’t need a new Federal 

oversight that may ultimately increase the costs for consumers.’’ 

I don’t know if you were sitting in the rows before the other 

panel who was here. They could probably have said the same 

things, the hedge funds and the venture capital: They weren’t 

broke, they didn’t cause a problem, and they don’t need any oversight. But, gee, almost everybody, except for a man there, sitting 

at the panel said they were all willing to have the Federal Government step in and oversight them anyway. 

Ms. ABRAHAM. Well, I didn’t mean to say we didn’t need oversight. What I said is, we already have oversight. We have good 

oversight in the State system. And what we are concerned about 

is duplicative oversight or conflicting oversight, so that the Federal 

Government is asking for information that is already produced, already given to the State regulators. So that is what I meant by ‘‘we 

have oversight.’’ I think we have extensive oversight. 

Mr. GARRETT. Actually, I was going to jump to that in a minute, 

but you brought it up, so I will raise it out to other people, as far 

as the duplication of information. 

And, Ms. Vaughan, you can chime in here, or others. 

The information as far as that is already being collected by the 

States and then through the NAIC, is there other information that 

would be going to this new entity that is not going to the NAIC 

or not going to—yes, not going to the NAIC right now? And, if so, 

what? 

Ms. VAUGHAN. I would say that is a good question to ask the 

Treasury, is what other information they might envision in this. I 

have a hard time imagining that there would be issues that are 

needed in order to understand the risk posed by the insurance industry that the insurance regulators wouldn’t already be asking 

and gathering information about. 

71 

We periodically go to our companies and say, give us information 

on this. Because of the environment that we are in right now, there 

is a new thing that we highlighted that we want to gather information on. I would say we could certainly do the same thing in working for a Federal insurance office, if they want to work through us. 

What we would really like to get to is a partnership, where they 

come to us, we go to them, we have good communication. We think 

we can make something like that work. 

Mr. GARRETT. Thank you. 

I only have a couple of minutes. 

Another question that you brought up that raised a point—I will 

let you chime in on this. Maybe you can answer this question as 

well. She also said, we ultimately don’t want to increase costs for 

the consumers, so maybe this goes to the question of collecting information and more information. 

Has anybody on the panel—are there are groups or entities that 

have gone out there and looked to see, if we do do this, either in 

this version or the other version, whether or not this actually 

raises costs to the consumers? 

Ms. ABRAHAM. I think one of the concerns—just to jump in quickly—to Dr. Vaughan is, because the scope is so broad, we don’t know 

what we would be asked for. We already supply to 50-plus different 

regulators information. I have no doubt that if we would require 

additional information, we would have to hire additional staff in 

order to compile the information and send it in, in addition to what 

we already do. So it is the broad scope. It is the unlimited mandate 

that is of deep concern to us. 

Mr. GARRETT. Does anybody know of information on the studies 

as far as whether this raises costs or maybe lowers costs? I can see 

that argument being made. 

No? Okay. 

Just another general—Mr. Atkinson? 

Mr. ATKINSON. If I could just comment on that. 

If we get into international negotiations with foreign regulators, 

they may well come up with some items of information they require 

from U.S. companies to get comfortable with our situation. So that 

is one area we don’t know about, but it is a possibility. 

Mr. GARRETT. Mr. Herchel? 

Mr. HERCHEL. Thank you. 

One point that was made about oversight, I think of this office 

as not just being one of oversight but also one of gathering information and developing expertise at the Federal level. So not to say 

that there won’t be some oversight that will be taking place, but 

I think there is a dual purpose there. 

Mr. GARRETT. On that line as far as oversight, one question is 

the issue of solvency, which to me is the issue when it comes to 

insurance regulation. Everything else is secondary to that. 

Does anyone want to chime in on the thought that this language 

is tight enough or too broad as to giving the Fed the authority to 

get into the area of solvency? A, should we—and I can imagine 

your answers—and, B, whether the language is on point or goes in 

different directions? 

Ms. VAUGHAN. I would say the concern—one of the concerns we 

have about the language is the ability of the office to enter into 

72 

international insurance agreements is not constrained in the sense 

that it should be focused on the kinds of agreements that reflect 

our own solvency system. That is one of the things we want. We 

have a system that works. Let’s not go out and make agreements 

and let people come in under weaker solvency systems. 

Mr. GARRETT. For the folks who are proponents of this, generally 

speaking, on the other side—I will close on this—do you see that 

as an issue? Do you see the language could be tightened up to address those concerns? Or shouldn’t it be tightened up? 

Mr. HERCHEL. We have concerns about making sure that our solvency regime stays intact so that we can withstand the trials and 

tribulations as we go through. However, we think there probably 

has to be some type of flexibility there for this Federal insurance 

office to be able to sit at the table and try to understand different 

issues on an international solvency basis. 

But in our testimony, you will see that we have caveats in there 

about making sure that we don’t create any type of solvency gap. 

We don’t want to have any unfair discrimination amongst foreign 

insurers and domestic insurers and things of that nature. Maybe 

we are saying it in a little different way than the NAIC today, but 

we recognize that is an important issue. But we don’t want to necessarily completely take the whole discussion off the table for this 

Federal office. 

Mr. ZIELEZIENSKI. I think we read the language ‘‘prudential 

measures’’ to be coextensive with the term ‘‘financial regulation.’’ I 

think if you look at other titles of the Administration proposal, particularly title II, which deals with stricter capital standards on socalled Tier 1 financial holding companies, all of the measures that 

are identified as prudential standards are things that you would 

expect in a solvency regulatory regime. 

So if one of the purposes of this legislation is to help the United 

States engage effectively at the international level and be at the 

table when Solvency II discussions evolve to make sure that not 

only are we well-represented but that, when the equivalency determinations get made—and European spokespersons have said they 

are going to be made at a national level, not a State-by-State 

level—that they have the ability to carry that out. 

Mr. GARRETT. Okay. I thank the panel. 

Thanks, Mr. Chairman. 

Mr. KANJORSKI. Thank you, Mr. Garrett. 

Now we will hear from the gentleman from Missouri, Mr. 

Cleaver. I am sorry—Mr. Scott. I avoided an assault there. 

Mr. SCOTT. That is okay. When you get me confused with Mr. 

Cleaver, you have gotten me confused with a tremendous gentleman, a scholar, and a great American. Thank you. 

Allow me to pose a few questions here, because I just want to 

make sure we are clear here. 

Is this a Federal Office of National Insurance we are proposing? 

Is it a Federal Office of Insurance Information or is it a Federal 

Insurance Office? 

There are a variety of different terminologies that we have been 

throwing around with what this is. But, most definitely, I hope 

that we will come to the conclusion that this is not a precursor to 

a Federal charter for insurance. 

73 

What disturbs me about the plan also is the words in this as I 

read it that states there will be preemption power over State insurance matters in this. So I think we ought to really make sure we 

are moving down a road that we have fairly clearly mapped out 

and that we don’t have unintended consequences. 

Let me start with you, Mr. Houldin, if I may. You are with the 

Independent Insurance Agents & Brokers of America. You have 

consistently been a strong supporter of State regulation of insurance and an opponent of Federal regulation, optional or otherwise, 

is that correct? 

Mr. HOULDIN. That is correct. 

Mr. SCOTT. Do you see a danger here? We all know that everything is not perfect. Let me ask you, how would you propose modernizing or reforming the State system for the benefit of the consumer? 

Mr. HOULDIN. That is a great question, Congressman. Thank 

you. 

The State system has proven to be extremely efficient; and, using 

targeted Federal legislation, I think we can make that State system better. We look at the surplus bill that recently passed the 

House, the NARAD bill which you have recently introduced, which 

would make agent licensing more efficient. And the original OII bill 

from Chairman Kanjorski is a good piece of legislation. It brings 

data and information to the Federal Government, and it does solve 

some preemption problems. This current draft legislation goes a little bit further than that and starts to bring in regulation and supervision of the industry, so we have a problem with that. But 

using targeted Federal legislation to enhance the State system in 

our opinion is the best of both worlds. 

Mr. SCOTT. Let me ask you, are you familiar—I am sure you 

have read this—with the preemption language in this? 

Mr. HOULDIN. Yes. 

Mr. SCOTT. How do you interpret this? If this new Federal insurance office is granted broad preemption authority, and let’s say foreign insurers are able to operate under different rules, would this 

create a potential harmful environment for the consumer? 

Mr. HOULDIN. We certainly have concerns that the preemption in 

the new draft goes a little bit further and may put the foreign companies in different consideration than the domestic companies. The 

original draft or original OII only treated when there was a difference and put everybody on a level playing field. We are afraid 

this new language may have gone too far and made it unlevel. 

Mr. SCOTT. And with this new preemption authority, is there a 

real concern that all of the insurance companies domiciled, let’s 

say, in a certain State would be significantly disadvantaged by 

these international companies? 

Mr. HOULDIN. It certainly could happen when the international 

companies are going to be given different treatment and play by 

different rules. Certainly. 

Mr. SCOTT. Now, so that we know for sure, what is your major 

concern? What is your major concern with Federal regulation? 

Mr. HOULDIN. Well, with Federal regulation on this particular 

bill and where it goes, our major concern is that the bill goes beVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00079 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
74 

yond just information and preemption and it gives regulatory authority to Treasury. 

We also have a concern in that the definition of insurer in the 

bill is anybody who engages in the business of insurance. That 

would bring mainstream agents like myself, mom-and-pop shops, 

into the fold. So we think there should be some exemptions to exempt smaller businesses and insurers. 

Mr. SCOTT. I just want to note for the record in the White Paper 

that the President submitted, he says in the last sentence here, 

‘‘Given the importance of a healthy insurance industry to the wellfunctioning of our economy, it is important that we establish a Federal Office of National Insurance.’’ 

Do you worry that this kind of language would be a precursor to 

Federal control? Especially when it says within Treasury and that 

we develop a modern regulatory framework for insurance. 

Mr. HOULDIN. Certainly, that concerns us. It was nice to see that 

the Blueprint left out Federal regulation of insurance completely 

and just talked about this particular office. We do need to make 

sure we don’t have mission creep through this bill. That is exactly 

what the original OII was intended to do. 

Mr. SCOTT. Thank you very much, Mr. Houldin. 

I yield back the balance of my time. Thank you. 

Mr. KANJORSKI. Now, we will hear from the gentleman from Alabama, Mr. Bachus. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Normally, I would not ask you all to give me a yes-or-no answer, 

so I am going to give you another choice, and that is, you can answer ‘‘yes,’’ ‘‘no,’’ or ‘‘I don’t have an opinion.’’ How about that? 

My first question is, State regulation—this is just a statement. 

You tell me whether you agree or disagree with this statement, or 

you don’t have an opinion. 

State regulation of insurance functions is significantly better 

than Federal regulation of securities and banking over the past 5 

or 10 years. How many think it did a better job of regulating the 

State—okay. 

How many of you think it did a worse job? 

How many of you don’t have an opinion? 

Okay. To the three who said that you don’t have an opinion on 

whether State regulation of insurance was better than Federal regulation of, say, securities or financial services, what were the failures of State regulation of insurance? 

I will start with Mr. Atkinson. What do you see as the most significant failure? I can give you 100 failures of Federal regulation 

of banking and securities. 

Mr. ATKINSON. I wouldn’t say they are failures. They are probably inefficiencies and frustrations and so forth. It is not a very 

fast system. Things evolve very, very slowly. We are 30 years behind most developed countries in our regulations. 

Mr. BACHUS. The bottom line, how did that affect customers? 

Was it increased— 

Mr. ATKINSON. Increased price is probably the main thing. 

Mr. BACHUS. Was it increased over what the costs were, like the 

insurance in other countries? 

75 

Mr. ATKINSON. The products are not too comparable between 

countries. Each country has their own regulations which dictate 

what kind of products are available. 

Mr. BACHUS. I can’t think of any instance where someone didn’t 

have an insurance contract, they contracted for insurance, and it 

paid off. Were there any instances where that didn’t happen? 

Mr. ATKINSON. There have been insolvencies. We do have a State 

guarantee system that backs up— 

Mr. BACHUS. So there were no losses? 

Mr. ATKINSON. Insolvency regulation has worked well. It has 

been a success. 

Mr. BACHUS. They didn’t in banking and securities? 

Mr. ATKINSON. I am not that close to banking, but certainly, 

reading the papers, there have been huge problems in banking and 

securities. 

Mr. BACHUS. We talk about inefficiencies in insurance, driving 

up the cost to consumers. National regulation in banking, has that 

brought down the cost to consumers of different banking fees? Does 

anybody have an opinion? 

Okay. Do you think that national regulation of financial services 

products or securities, do you think that offered the type of protection it should have? Anybody? 

It was a pretty profound failure, wasn’t it? 

I am just trying to figure out how, after what we witnessed the 

last 10 years, we would want to say that national regulation would 

do a better job than State regulation. To me, clearly, the answer 

to that first question was that the States did a much better job of 

regulating insurance than the Federal Government did of regulating securities, investments, and banking. 

Let me say this—and I appreciate those who came down on both 

sides. Maybe you all would elaborate in a letter to me why you 

don’t have an opinion as to which worked best. 

Mr. ATKINSON. I am just not that familiar with Federal regulation of banking. 

Mr. BACHUS. But you read the papers. 

Mr. ATKINSON. But there is also State regulation of banking, and 

I don’t know where the failure lies, perhaps it is at both levels. 

Mr. BACHUS. We were talking about State regulation of insurance. 

Mr. ATKINSON. Right. So I don’t know that either has a license 

to be better than the other. 

Mr. BACHUS. Let me ask you this: International insurance agreements, that has quite an appeal to me, that we need an office that 

can negotiate those. But does the Federal Government have better 

expertise to know whether those agreements will protect insurance 

customers in those States? 

Ms. ABRAHAM. One of the issues that we are concerned about on 

this is to ensure that, if preemption does occur, that there is due 

process associated with it. So there can be a full hearing through 

the judicial process to understand what the preemption means, the 

impact on the States and the consumers, obviously. So we are concerned that preemption can occur. And as the draft proposal currently stands, there isn’t that due process. We think that is very 

76 

important. So we would encourage as this evolves, that is built into 

any final legislation that is put forward. 

Mr. BACHUS. I would think there is something worse than not 

having an international insurance agreement, and that would be 

having a bad one that impacted customers negatively. 

Mr. ATKINSON. The whole reason for this measure is to build expertise at the Federal level, and it may take years; and it may also 

take more than a few years to negotiate our first international insurance agreement, and probably prudently so. 

Mr. BACHUS. I am really asking questions. I am seeking to better 

educate myself. Thank you. 

Mr. KANJORSKI. Mr. Zielezienski wanted to respond. 

Mr. ZIELEZIENSKI. There are a couple of responses, one in the 

context of international insurance agreements. The U.S. Government is the only one that can do that, vested solely with the foreign affairs power by the Constitution. The fact of the matter is 

these international agreements are being concluded between other 

countries every day, and every day we don’t sit at the table is another day lost. 

Mr. BACHUS. A lot of those international agreements have turned 

out fairly badly for some of our companies. 

Mr. ZIELEZIENSKI. And, to date, there has been no ability or authority on behalf of the Federal Government to conclude an agreement on insurance matters. 

Mr. BACHUS. I am not sure that is all bad. I understand it is bad 

on occasion. I give you that. There are legitimate cases. With reinsurance, there have been some tremendous problems. I do think 

last year’s legislation went about where it should have, and I am 

afraid that this year’s legislation may be an overreach. 

Thank you. 

Mr. KANJORSKI. Thank you very much. 

Now, we have the gentleman from Missouri, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Let me thank all of the witnesses for being here, but particularly 

Mr. Atkinson. Thank you for being here. 

I will just restate something that the chairman stated earlier. 

You are from the Reinsurance Group of America, RGA. The business journals, which actually was started in Kansas City by Mike 

Russell and ‘‘Doc’’ Worley, Bill Worley, but now they are all over 

the country and one is in St. Louis, the St. Louis Business Journal 

said that people get you confused with the RCGA as well, which 

is a civic, economic development oriented organization; and if you 

come near the Potomac, the RGA is the Republican Governors Association. I am not mad or anything. I am just saying that is what 

people think, particularly on this side. So it may be of some value 

for you to help us clear up some things, particularly about reinsurance. 

How would your member organizations differ from some major 

company like AIG? 

Mr. ATKINSON. Well, first of all, we are specialists in life reinsurance, so we pay money when people die. We only pay life insurance 

companies, and all of our negotiations and dealings are with life insurance companies. We also are a buyer of reinsurance ourselves. 

We deal with other life insurance companies behind us. The net efVerDate Nov 24 2008 12:08 Apr 29, 2010 Jkt 055810 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 K:\DOCS\55810.TXT TERRIE
77 

fect of all this is, when someone famous with a lot of insurance 

dies, no single company is put in jeopardy. The claim is spread 

around, with sometimes as many as 40 or 50 companies paying a 

share of a large claim. 

On top of that, we work with a lot of companies on new products, 

new ideas in the industry, and help to further the process, speed 

up the process of innovation and lower the price of insurance over 

time because of that. 

Mr. CLEAVER. So AIG, which is ‘‘too-big-to-fail,’’ would not be in 

any way or should not be confused with your group. You are not 

‘‘too-big-to-fail?’’ 

Mr. ATKINSON. We do insure AIG. But one thing to note about 

our business, too, we charge premiums each year, and we pay 

claims each year, and those largely offset. So there is not a lot of 

money tied up somewhere that could evaporate. 

Mr. CLEAVER. You said that right now, the multi-State system of 

insurance regulation is cumbersome. 

Mr. ATKINSON. Yes, it is. 

Mr. CLEAVER. And extremely inefficient. 

Mr. ATKINSON. Look at things like new product introductions. 

You have to file your product in every State. Every State has different things they want changed on your application and your policy wording. It is a nightmare. It takes up to a year sometimes to 

get 1 product approved in all 50 States. 

Mr. CLEAVER. So you would be opposed to a 50-State system? 

Mr. ATKINSON. That is just the way it is today. I think U.S. companies are used to dealing with that. It is a frustration. It is an 

inefficiency, but it is livable. 

Mr. CLEAVER. What would you do to correct it? To make it more 

livable? 

Mr. ATKINSON. I don’t know that you can do anything. When you 

have insurance regulated at the State level, you are going to have 

at least 50 different voices with different ideas, and sometimes they 

can come together and adopt a uniform regulation. Even there, 

there are usually some tweaks in each State. 

Mr. CLEAVER. I got a BlackBerry message a few minutes ago 

from someone who said to me, you guys should not do anything to 

help AIG, assuming that is what is going on here. That is why I 

wanted to get some clarity. 

I have no other questions, Mr. Chairman. Thank you. 

Mr. KANJORSKI. Thank you very much, Mr. Cleaver. 

Next we will hear from the gentleman from California, Mr. 

Royce. 

Mr. ROYCE. Thank you. Thank you, Mr. Chairman. 

Well, one of the biggest failures I think was AIG in our recent 

history, and the securities lending division was overseen by the 

various State insurance regulators. Now, that portion of AIG has 

cost the taxpayers dearly, and no one here I don’t think is arguing 

that there aren’t problems with State regulations or Federal regulations. We understand there are problems with both, and it is getting to a solution of this I think we are focused on. 

One of the particular problems with AIG in terms of their insurance contracts over the Government-Sponsored Enterprises, Fannie 

Mae and Freddie Mac, was the government intervention directly in 

78 

the market, in the sense that we prevented regulators from regulating Fannie and Freddie for safety and soundness. 

I carried legislation on the behalf of the Federal Reserve to try 

to do something about this, but it was defeated over an argument 

that it would be injurious to affordable housing if we didn’t have 

those zero down payment loans, if we didn’t have those 50 percent 

requirements for Fannie and Freddie to hold that much subprime 

in their portfolios, and it was AIG that made the bet or insured 

this. So when Fannie and Freddie went down, when that $1 trillion 

was lost, AIG lost that money as well. But a lot of that money, 

again, was the securities lending division over seen by the various 

State insurance regulators, so they miss THAAD too. 

As I mentioned in my opening statement, the European Union 

continues to move closer to passing the Solvency II directive which 

will create one market for insurance throughout all of Europe. Another aspect of Solvency II is meant to increase the global cooperation effort by bringing equivalent regulators from around the world 

into closer consultation with each other. 

Unfortunately, we have not held up our end of the bargain. The 

various State insurance regulators simply do not have the authority to negotiate with foreign regulatory bodies on behalf of the U.S. 

market. As a result, the regulators in the EEU will not recognize 

U.S.-based firms under the oversight of the various State regulators. 

So I would ask Mr. Atkinson, are you concerned that our regulatory model will punish U.S.-based institutions trying to operate 

overseas, and what are steps likely to be taken by EEU regulators 

against U.S. firms should they follow through on our violation of 

that agreement? 

Mr. ATKINSON. I wouldn’t use the word ‘‘punish,’’ but we have 

been disadvantaged by our situation for some years now in many 

of the leading countries that we operate in. We have had to set up 

subsidiaries and capitalize those subsidiaries, rather than deal directly from our U.S. base. So that has created a lot of extra costs. 

Mr. ROYCE. If I could interrupt, Mr. Atkinson, that was in a situation where we as a Nation have 50 separate regulators, but 

France didn’t have 50 regulators for every province, so they took 

some decisive action then. But now the EEU is all one market, because they have decided instead of having 50 regulators, they are 

going to have one world-class regulator. But they are looking at the 

United States and saying we have an agreement for equivalency on 

regulation, and you are going to be in violation of it unless you figure out a way to have a regulator that can effectively regulate and 

stop things like AIG from happening in the future. So your observation on that? 

Mr. ATKINSON. Well, the way around that is you set up another 

company in another jurisdiction and operate it in harmony with the 

local laws. Like I said, it is not a good way to do business, but it 

is a way to do business. 

Mr. ROYCE. As I noted in my opening statement, the current 

State-based regulatory system is highly fragmented, it is inconsistent, and it is inefficient. That is the judgment of the Treasury 

Department. It costs consumers and makes our regulatory model 

weaker. 

79 

What will a Federal insurance regulator do that the proposed 

Federal insurance office cannot? Could I ask if Mr. Herchel has any 

observation on that? 

Mr. HERCHEL. Yes, Congressman. I think there is a big difference 

between the legislation that is in front of this committee today and 

an optional Federal insurance charter would call for. What we are 

just talking about here today is about a Federal insurance office 

that is going to have information gathering potential and expertise 

so they can consult with the systemic regulator or other Members 

of Congress to make sure that there is a knowledge base about the 

insurance business and also on the side with reinsurance, as an example, with respect to international agreements. 

You are correct that these rules will not have any way of regulating the business of insurance in the United States. This office 

would not have any role in taking care of product development or 

product approvals, which is some of the issues that national insurance companies, insurance companies that do business across the 

country do; have nothing to do with market conduct requirements; 

have nothing to do with agency licensing issues, making sure that 

products are distributed appropriately throughout the States; and 

also the financial standards that are applicable to those companies, 

what reserves they have to have in place and how they invest their 

assets that they take in. 

Mr. ROYCE. Mr. Zielezienski, you wanted to comment on this? 

Mr. ZIELEZIENSKI. Yes. You have heard today, I think, from a variety of panelists that the Federal insurance office won’t be a regulatory body. Adopting an optional Federal charter would create that 

national regulator that we lack today. 

On the issue of the fragmentation and inconsistency and inefficiency that pervades the State system today, that would be eliminated in favor of a strong set of uniform national standards that 

would apply to those who were federally chartered. 

If the bill follows your legislation, that focus would be squarely 

on financial solvency and market conduct, where it ought to be. 

And I have no doubt that under such a system, even if it replicated 

the standards that are at the State level today on financial solvency, that would be judged to be equivalent. 

Mr. ROYCE. Thank you, Mr. Zielezienski. 

Now, we will hear from the gentlelady from Illinois, Ms. Bean. 

Ms. BEAN. Thank you, Mr. Chairman, and to all of the witnesses 

who are testifying before us today. 

First, I just want to point out in reference to my colleague from 

Alabama’s questions about State versus Federal oversight, my colleague from California did point out some of the failures at the 

State level relative to AIG. I would like to add to that McKenzie 

& Company found that State regulation creates an added cost of 

over $13 billion in inefficiency to the industry, which does get 

passed on to the consumers. 

Also relative to banking oversight that came up as part of his 

questions to the panel, two-thirds of the subprime loans that were 

originated came from nonbanking, State-regulated loan originators. 

So, that clearly had a lot to do with the overall financial crisis. 

But moving forward, I have a question for the NAIC. As you 

know, the National Insurance Office Act was included in the 

80 

Obama Administration’s June proposal for regulatory reform. The 

Treasury proposal further called for modernization of our insurance 

regulatory structure, stressing the need for ‘‘increased national uniformity through either a Federal charter or effective action by the 

States.’’ The Treasury also recognized the failures of the Statebased system, stating, ‘‘Our current insurance regulatory system is 

highly fragmented, inconsistent and inefficient.’’ 

My question to you is, since June, what actions have the State 

commissioners and the NAIC taken to create a uniform system of 

insurance regulation? 

Ms. VAUGHAN. Thank you very much, Congresswoman Bean. 

First of all, let me say that I have to respectfully disagree with 

Treasury’s statement that the structure is highly fragmented, inconsistent, and inefficient. In fact, we have a highly coordinated 

system, and we work very hard through the NAIC to be coordinated. And I think history demonstrates that we have been coordinated and have done a pretty good job, certainly in the environment we are in. 

We do recognize that there are things— 

Ms. BEAN. Specifically what have you done? 

Ms. VAUGHAN. Specifically what we have done, in September we 

adopted, we came up with a new proposal for modernizing our reinsurance regulatory structure. That is something that— 

Ms. BEAN. So a proposal. Anything else? 

Ms. VAUGHAN. Boy, I would have to go back and look at all of 

the various things. We work constantly, and I would be happy to 

answer your question in more detail in writing. 

Ms. BEAN. Okay. 

Ms. VAUGHAN. After I have a chance to— 

Ms. BEAN. And what authority does the NAIC or any State commissioners have to enforce, number one, the collection of information from non-insurance affiliates like an AIG, or to enforce any 

kind of commitments out of a proposal towards consistency in 

rules? 

Ms. VAUGHAN. What authority does the NAIC have, or does the 

State have? 

Ms. BEAN. Or does any individual State commissioner have to actually make sure that: number one, collection of information happens; or, number two, that there is commitment to consistent rules 

that States will follow through? 

Ms. VAUGHAN. Yes. We have laws in the States that call for companies to report information to the NAIC, so we collect that information and that is grounded in State law. 

Ms. BEAN. So some States? 

Ms. VAUGHAN. Normally, all States require that the companies 

file. That is one of our accreditation requirements, that companies 

file their financial information with the NAIC, and that is what 

creates our financial database. 

Second, the interpretation and enforcement of laws in the States 

are the responsibility of the State insurance regulators. 

So I am not sure that I understand the question exactly. 

Ms. BEAN. Okay, let me move on to some other questions with 

some other folks. 

81 

We just heard the NAIC say they have a proposal to create further coordination. I guess I would ask Mr. Herchel and Mr. Atkinson, do you believe or should anyone here have any confidence that 

after 140 years of efforts by the NAIC to create uniform rules and 

their failure to actually have that happen, that a new proposal was 

going to change that? 

Mr. HERCHEL. Congresswoman, I have been working in the insurance arena for decades now, and I have been working with the 

NAIC, and I have a lot of respect for the insurance regulatory community. They are very dedicated and work very hard. 

But what we found is that there are constraints on how far they 

can go. The NAIC is a great organization, puts together great proposals and model laws and model regulations. 

Ms. BEAN. To shorten up your answer so I can get to other questions, you don’t have a lot of confidence that anything is going to 

be any different than it has for 140 years? 

Mr. HERCHEL. I hope we move on, but it is going to be a tough 

road for them. 

Ms. BEAN. Mr. Atkinson? 

Mr. ATKINSON. I would add, it is hard. As diligent and dedicated 

as the NAIC and its members are, how do you get unanimous 

agreement from so many players? 

Ms. BEAN. From 50 different bodies. 

Mr. ATKINSON. But we are encouraged that they are trying hard. 

In fact, their latest proposal recognizes the need for a Federal role 

in international reinsurance matters. 

Ms. BEAN. I would like to ask Mr. Zielezienski as well? 

Mr. ZIELEZIENSKI. We have said this pretty often, it is not the 

fault of the State regulators, but the fact is you have to navigate 

50 different political environments. If the NAIC produced a perfect 

model law, you still have to go to the State legislatures and get it 

passed, and our experience has been there is always going to be 

those inconsistencies, and, again, it is not their fault. That is just 

the way it is. 

Ms. BEAN. Again, you don’t have confidence that this is going to 

change that. I appreciate that. 

I would like to ask Mr. Zielezienski another question, which is 

essentially that the Treasury proposal included six principles of reform for insurance reform. It included, and I will just summarize: 

effective systemic risk regulation; strong capital standards that 

specifically matched capital allocation with liabilities; meaningful 

and consistent consumer protections for insurance products and 

practices; increased national uniformity, which we just spoke 

about; to improve and broaden regulation of insurance companies 

and their affiliates; and international coordination. 

Specifically, you have already said that we don’t have confidence 

that what we are doing today addresses the national uniformity 

issue. Does it provide meaningful and consistent consumer protection for insurance products and practices nationally? 

Mr. ZIELEZIENSKI. I think ‘‘meaningful’’ is subject to interpretation. But consistent, I think the answer is no. One of the frustrations for companies is that you have to deal with requirements that 

may differ and different definitions of consumer protection. Some 

82 

may view different aspects of regulation as providing consumer 

protection, when actually they are inhibiting solvency regulation. 

Ms. BEAN. If I could ask another question, do you believe the National Insurance Office can potentially monitor systemic risk within 

the insurance industry without a seat on the Financial Services 

Oversight Council? 

Mr. ZIELEZIENSKI. No. 

Ms. BEAN. Given the significance of the insurance industry in our 

financial system, do you think this office would be better served by 

an individual that is appointed by the President and confirmed by 

the Senate to serve a set term in office, compared to serving more 

or less as a subordinate to the Treasury Secretary? 

Mr. ZIELEZIENSKI. Yes, I have testified to that, that I believe the 

person ought to be viewed as much as an equal, absent the regulatory responsibilities that the discussion draft doesn’t provide. 

Ms. BEAN. Thank you. I yield back. 

Mr. KANJORSKI. The gentlelady from Illinois, Mrs. Biggert. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

I do have some concerns with the discussion draft that was circulated late last Thursday. Obviously, it has been mentioned that 

it is almost identical to the Administration’s proposal, except the 

subpoena power has been removed. I am afraid that the new draft 

moves away from what I thought was really a great bipartisan bill 

that I worked on with you, Mr. Chairman. So, I just have a few 

questions and a few comments. 

The new discussion draft requires that insurers provide that the 

new Federal Insurance Office with any information that it requests, and our bill sets up an Office of Insurance Information that 

made providing information beyond what is already provided to the 

State regulator voluntary. So there is a mandate versus voluntary. 

Then I really worry about the mandatory requirement unfairly 

imposing significant costs and burdens, particularly on the smaller 

and medium-sized insurers. 

Also, the draft could allow agreements entered into the USTR, 

and this concerns me that the head of the Federal Insurance Office 

would be able to preempt State law. We have already had agreements under GATT and worked with the WTO, and insurance was 

included in some of these agreements and there has been a carveout of domestic laws to protect the consumer and the policyholder. 

The Treasury has an international office now that is already engaging in talks with trading partners, aimed at beefing-up the insurance part at the market, informed markets. Some have been informal, like the U.S.-China Joint Commission. Others are a little 

more formal. 

My question would be, I believe there are existing trading agreements, both bilateral and multilateral, that involve insurance. Am 

I correct in that? Does anyone say no to that? 

Well, then, would this new office require States to comply with 

these agreements and could States opt out? Anybody willing to 

take a shot at that? Mr. Atkinson? 

Mr. ATKINSON. Where we are today, the U.S. Government can 

negotiate, but they can’t follow through on any agreement because 

they have no power. There is no credibility for a U.S. negotiator 

where we are today. The EEU knows that no matter what the 

83 

United States says, the States control the outcome. So there is no 

way to implement it. 

Ms. ABRAHAM. One of the issues, I agree with your statement 

that there is potential for preemption. I did mention earlier the 

need for due process to hear that. One issue I was specifically concerned about, Representative Biggert, is the collateralization issue. 

We are quite concerned about that, because this allows particularly 

small to medium-size insurance companies to be able to be confident that when they have claims to pay, when they have a judgment, that the collateral be there, the payment will be there from 

the reinsurance companies that are not U.S. reinsurance companies. These are foreign or non-domestic reinsurance companies. 

We would be very concerned that there would be a preemption 

of the State collateral rules, and that particularly small-to-medium 

companies would be left disadvantaged, unable to collect on the collateral if that would go away. 

So it is a concern we have, and one we appreciate your attention 

to. 

Mrs. BIGGERT. Okay. Because it could erode consumer protections and decrease competition and really harm U.S. insurers or 

the reinsurers or raise the cost of insurance for consumers. Let me 

go on to one other thing I wanted to get to, and my time is running 

out. 

If you could just give me one or two or two or three issues that 

are different in this draft versus the Office of Insurance Information that you have concerns about. I will start down here. 

Mr. ZIELEZIENSKI. I will highlight one which I think we can all 

agree on, and that is to the extent there is an information collection function by the office, that it needs to ensure that data is gathered from existing sources. I think we can all agree that the best 

thing to do is create an efficient system of collecting that information, and protecting that information is also key as well. I think my 

concern is that should be a little bit tighter. 

Mrs. BIGGERT. Ms. Vaughan? 

Ms. VAUGHAN. Yes. First, the language that would limit the 

scope of international agreements to those that are substantially 

equivalent to regulation in the States, we think that is very important; second, the possible stay of preemption; And, third, the twoway information sharing, including sharing information through 

the NAIC. 

Mrs. BIGGERT. Mr. Houldin? 

Mr. HOULDIN. Two things. One, the definition of ‘‘insurer,’’ not to 

include everybody engaged in insurance, including Main Street 

agents. Secondly, just the overstep of their regulatory and supervisory authority that it gives the office. 

Mrs. BIGGERT. Thank you. 

Mr. HERCHEL. A couple of things that we want to make sure are 

part of this process is making sure that the Federal Insurance Office is a member of the council, and the other thing is to make sure 

that they are on parity with other Federal regulators with respect 

to consulting and coordinating with the systemic risk regulator. 

Mrs. BIGGERT. So that would be either the FOI or the OII? 

Mr. HERCHEL. The FOI. 

84 

Mr. ATKINSON. I think the current proposal also works pretty 

well for the reinsurance market. As part of that, I think we do 

want to be at the table talking about collateral requirements, talking about capital requirements, talking about reserving requirements, all of the factors that enter into solvency. But I would just 

like to emphasize, the ability to preempt State laws when needed 

is absolutely necessary because you cannot negotiate in good faith 

unless you can actually follow through. 

Mrs. BIGGERT. Ms. Abraham? 

Ms. ABRAHAM. Retrieving information from established sources, 

from the existing State regulators or other public sources; voluntary submission of information, not mandatory; and a very distinct carve out for small insurance companies are things that are 

very important to us. 

Mrs. BIGGERT. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Mr. KANJORSKI. Thank you very much. 

I see no other questions are pending or members present. So that 

being the fact, I am going to thank the panel for having been here 

and call to the panel’s attention that some members may have additional questions for this panel which they may wish to submit in 

writing. 

Without objection, the record will remain open for 30 days for 

members to submit written questions to today’s participants and to 

place their responses in the record. 

Before we adjourn, the following written statements will be made 

part of the record of this meeting: The National Association of Mutual Insurance Companies; the National Association of Insurance 

and Financial Advisers; the Financial Services Institute; and the 

National Association of Small Business Investment Companies. 

Without objection, it is so ordered. 

The panel is dismissed and this meeting is adjourned. 

[Whereupon, at 3:32 p.m., the hearing was adjourned.] 

(85) 

A P P E N D I X 

October 6, 2009 

86 


55810.001
87 


55810.002
88 


55810.003
89 


55810.004
90 


55810.005
91 


55810.006
92 


55810.007
93 


55810.008
94 


55810.009
95 


55810.010
96 


55810.011
97 


55810.012
98 


55810.013
99 


55810.014
100 


55810.015
101 


55810.016
102 


55810.017
103 


55810.018
104 


55810.019
105 


55810.020
106 


55810.021
107 


55810.022
108 


55810.023
109 


55810.024
110 


55810.025
111 


55810.026
112 


55810.027
113 


55810.028
114 


55810.029
115 


55810.030
116 


55810.031
117 


55810.032
118 


55810.033
119 


55810.034
120 


55810.035
121 


55810.036
122 


55810.037
123 


55810.038
124 


55810.039
125 


55810.040
126 


55810.041
127 


55810.042
128 


55810.043
129 


55810.044
130 


55810.045
131 


55810.046
132 


55810.047
133 


55810.048
134 


55810.049
135 


55810.050
136 


55810.051
137 


55810.052
138 


55810.053
139 


55810.054
140 


55810.055
141 


55810.056
142 


55810.057
143 


55810.058
144 


55810.059
145 


55810.060
146 


55810.061
147 


55810.062
148 


55810.063
149 


55810.064
150 


55810.065
151 


55810.066
152 


55810.067
153 


55810.068
154 


55810.069
155 


55810.070
156 


55810.071
157 


55810.072
158 


55810.073
159 


55810.074
160 


55810.075
161 


55810.076
162 


55810.077
163 


55810.078
164 


55810.079
165 


55810.080
166 


55810.081
167 


55810.082
168 


55810.083
169 


55810.084
170 


55810.085
171 


55810.086
172 


55810.087
173 


55810.088
174 


55810.089
175 


55810.090
176 


55810.091
177 


55810.092
178 


55810.093
179 


55810.094
180 


55810.095
181 


55810.096
182 


55810.097
183 


55810.098
184 


55810.099
185 


55810.100
186 


55810.101
187 


55810.102
188 


55810.103
189 


55810.104
190 


55810.105
191 


55810.106
192 


55810.107
193 


55810.108
194 


55810.109
195 


55810.110
196 


55810.111
197 


55810.112
198 


55810.113
199 


55810.114
200 


55810.115
201 


55810.116
202 


55810.117
203 


55810.118
204 


55810.119
205 


55810.120
206 


55810.121
207 


55810.122
208 


55810.123
209 


55810.124
210 


55810.125
211 


55810.126
212 


55810.127
213 


55810.128
214 


55810.129
215 


55810.130
216 


55810.131
217 


55810.132
218 


55810.133
219 


55810.134
220 


55810.135
221 


55810.136
222 


55810.137
223 


55810.138
224 


55810.139
225 


55810.140
226 


55810.141
227 


55810.142
228 


55810.143
229 


55810.144
230 


55810.145
231 


55810.146
232 


55810.147
233 


55810.148
234 


55810.149
235 


55810.150
236 


55810.151
237 


55810.152
238 


55810.153
239 


55810.154
240 


55810.155
241 


55810.156
242 


55810.157
243 


55810.158
244 


55810.159
245 


55810.160
246 


55810.161
247 


55810.162
248 


55810.163
249 


55810.164
250 


55810.165
251 


55810.166
252 


55810.167
253 


55810.168
254 


55810.169
255 


55810.170
256 


55810.171
257 


55810.172
258 


55810.173
259 


55810.174
260 


55810.175
261 


55810.176
262 


55810.177
263 


55810.178
264 


55810.179
265 


55810.180
266 


55810.181
267 


55810.182
268 


55810.183
269 


55810.184
270 


55810.185
271 


55810.186
272 


55810.187
273 


55810.188
274 


55810.189
275 


55810.190
276 


55810.191
277 


55810.192
278 


55810.193
279 


55810.194
280 


55810.195
281 


55810.196
282 


55810.197
283 


55810.198
284 


55810.199
285 


55810.200
286 


55810.201
287 


55810.202
288 


55810.203
289 


55810.204
290 


55810.205
291 


55810.206
292 


55810.207
293 


55810.208
294 


55810.209
295 


55810.210
296 


55810.211
297 


55810.212
298 


55810.213
299 


55810.214
300 


55810.215
301 


55810.216
302 


55810.217
303 


55810.218
304 


55810.219
305 


55810.220
306 


55810.221
307 


55810.222
308 


55810.223
309 


55810.224
310 


55810.225
311 


55810.226
312 


55810.227
313 


55810.228
314 


55810.229
315 


55810.230
316 


55810.231
317 


55810.232
318 


55810.233
319 


55810.234