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

67–368 PDF 2011

FINANCIAL MANAGEMENT, WORK FORCE, AND OPERATIONS AT THE SEC: WHO’S WATCHING

WALL STREET’S WATCHDOG

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES

AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

AND THE

SUBCOMMITTEE ON GOVERNMENT ORGANIZATION,

EFFICIENCY AND FINANCIAL MANAGEMENT

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

MARCH 10, 2011

Serial No. 112–11

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND BAILOUTS OF PUBLIC AND

PRIVATE PROGRAMS

PATRICK T. MCHENRY, North Carolina, Chairman

FRANK C. GUINTA, New Hampshire, Vice

Chairman

ANN MARIE BUERKLE, New York

JUSTIN AMASH, Michigan

PATRICK MEEHAN, Pennsylvania

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

MIKE QUIGLEY, Illinois, Ranking Minority

Member

CAROLYN B. MALONEY, New York

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

JACKIE SPEIER, California

JIM COOPER, Tennessee

(III)

SUBCOMMITTEE ON GOVERNMENT ORGANIZATION, EFFICIENCY AND FINANCIAL

MANAGEMENT

TODD RUSSELL PLATTS, Pennsylvania, Chairman

CONNIE MACK, Florida, Vice Chairman

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

PAUL A. GOSAR, Arizona

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

EDOLPHUS TOWNS, New York, Ranking

Minority Member

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

ELEANOR HOLMES NORTON, District of

Columbia

(V)

C O N T E N T S

Page

Hearing held on March 10, 2011 ............................................................................ 1

Statement of:

Schapiro, Mary, chairman, U.S. Securities and Exchange Commission,

accompanied by Jeffrey Risinger, Director, Office of Human Resources,

U.S. Securities and Exchange Commission; Jonathan Katz, former Secretary, Securities and Exchange Commission; Stephen J. Crimmins,

K&L Gates, LLP; and Helen Chaitman, esq., Becker & Poliakoff, LLP .. 11

Chaitman, Helen ....................................................................................... 59

Crimmins, Stephen J. ............................................................................... 51

Katz, Jonathan .......................................................................................... 28

Risinger, Jeffrey ........................................................................................ 28

Schapiro, Mary .......................................................................................... 11

Letters, statements, etc., submitted for the record by:

Chaitman, Helen, esq., Becker & Poliakoff, LLP, prepared statement

of ..................................................................................................................... 61

Crimmins, Stephen J., K&L Gates, LLP, prepared statement of ................. 53

Katz, Jonathan, former Secretary, Securities and Exchange Commission,

prepared statement of ................................................................................... 31

Quigley, Hon. Mike, a Representative in Congress from the State of

Illinois, prepared statement of ..................................................................... 6

Schapiro, Mary, chairman, U.S. Securities and Exchange Commission,

prepared statement of ................................................................................... 14

(1)

FINANCIAL MANAGEMENT, WORK FORCE,

AND OPERATIONS AT THE SEC: WHO’S

WATCHING WALL STREET’S WATCHDOG

THURSDAY, MARCH 10, 2011

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TARP,

FINANCIAL SERVICES AND BAILOUTS OF PUBLIC AND

PRIVATE PROGRAMS, JOINT WITH THE SUBCOMMITTEE

ON GOVERNMENT ORGANIZATION, EFFICIENCY AND FINANCIAL MANAGEMENT, COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM,

Washington, DC.

The subcommittees met, pursuant to notice, at 1:30 p.m. in room

2157, Rayburn House Office Building, Hon. Patrick T. McHenry

(chairman of the Subcommittee on TARP, Financial Services and

Bailouts of Public and Private Programs) presiding.

Present from the Subcommittee on TARP, Financial Services and

Bailouts of Public and Private Programs: Representatives

McHenry, Guinta, Buerkle, Amash, Meehan, Walsh, Gowdy, Ross,

Quigley, Maloney, Welch, Yarmuth, and Speier.

Present from the Subcommittee on Government Organization, Efficiency and Financial Management: Representatives Platts, Mack,

Lankford, Amash, Gosar, Guinta, Farenthold, Towns, Cooper,

Connolly, and Norton.

Also present: Representatives Issa and Cummings.

Staff present: Molly Boyl, parliamentarian; Larry Brady, staff director; Sharon Casey, senior assistant clerk; Katelyn E. Christ, research assistant; Benjamin Cole, policy advisor and investigative

analyst; Drew Colliatie, staff assistant; Tyler Grimm, Ryan M.

Hambleton, and Tabetha C. Mueller, professional staff members;

Peter G. Haller, senior counsel; Frederick Hill, director of communications and senior policy advisor; Christopher Hixon, deputy chief

counsel, oversight; Hudson Hollister, counsel; Justin LoFranco,

press assistant; Mark Marin, senior professional staff member;

Tegan Noelle Millspaw, research analyst; Laura L. Rush, deputy

chief clerk; Ronald Allen, minority staff assistant; Carla Hultberg,

minority chief clerk; Scott Lindsay, minority counsel; Jason Powell

and Steven Rangel, minority senior counsels; and Dave Rapallo,

minority staff director.

Mr. MCHENRY. The committee will now come to order.

I will start today’s hearing by reading the Oversight and Government Reform Committee’s Mission Statement.

We exist to secure two fundamental principles. First, Americans

have the right to know that the money Washington takes from

2

them is well spent. Second, Americans deserve an efficient, effective government that works for them.

Our duty on the Oversight and Government Reform Committee

is to protect these rights. Our solemn responsibility is to hold government accountable to taxpayers because taxpayers have a right

to know what they get from their government.

We will work tirelessly in partnership with citizen watchdogs to

deliver the facts to the American people and bring them genuine

reform to the Federal bureaucracy. This is the mission of the Oversight and Government Reform Committee.

Today, we are here for a joint hearing between the Oversight and

Government Reform Subcommittee on TARP, Financial Services

and Bailouts of Public and Private Programs and the Subcommittee on Government Organization, Efficiency and Financial Management on ‘‘SEC: Who’s Watching Wall Street’s Watchdog.’’

When we called this hearing originally, we were concerned about

capital formation and accountability at the SEC. A number of management practices had come to light at that point that we thought

it would be important to discuss, but a lot has changed just in the

last 2 weeks in terms of disclosures of what is happening at the

SEC and larger issues of concern with management that strike the

agency’s credibility. So there will be a lot of questions to that regard in today’s hearing.

I welcome the panel. I thank you for being here and with that,

I yield to the chairman of the full committee, my customary 5 minutes as subcommittee Chair, for his opening statement.

Chairman ISSA. I thank the chairman and I thank him for his

generosity with the opening statement.

I, too, thought this hearing would be about slightly different matters, but in recent days, the committee has become aware of what

could be the greatest challenge to the SEC’s credibility since Bernie

Madoff managed to dup so many Americans, steal so much money

with his ponzi scheme, and escape the proper scrutiny of the SEC

for so long.

As we have learned, in 2009, the former general counsel, Mr.

Becker, came to the SEC and informed the chairman that he had

a potential conflict of interest. We hope to learn exactly how that

was expressed, but in fact, he had received, along with his siblings,

$2 million that came from the liquidation of a Bernie Madoff fund

in 2005. That would be serious enough that anyone would normally

consider that he should be recused from any activity related to the

Madoff after action.

Notwithstanding that, Mr. Becker, feeling that this was, as we

have understood it, a de minimis amount relative to his estate, in

fact, not only continued to be involved, but was instrumental in

having the SEC inserted into the process of trying to change how

the determination of how much money would be considered to be

eligible to be retained by those who got their money out before the

collapse versus how much would be clawed back for the greater

good of all those involved and victimized by the ponzi scheme.

Had Mr. Becker’s suggestions been taken, in fact, Mr. Becker’s

mother’s estate of $2 million would have benefited well all those

who were there to the end and lost so much would have been victimized.

3

The problem we are going to be probing in this hearing, in addition to others, is can we trust an SEC where the process allows an

individual to inform the chairwoman, to inform the ethics individual who actually reports to the general counsel, and get effectively

a clean bill of health not to disclose and not to recuse and even to

be involved in an action that had it been accepted, as our understanding is, by the trustees, would have led to a distortion of process in favor of Mr. Becker’s family.

We take Mr. Becker at his word that, in fact, he intended no

wrong. We are willing to take factually in 25 minutes, the ethics

individual at SEC made a determination there was no problem and

stuck by it. We are willing to hear the Chairwoman here today.

What we are not willing to do, as the committee that deals in

waste, fraud and abuse, and as a committee of Congress, all of us

being concerned a great deal about the confidence in what the SEC

represents in its oversight, its fairness and its competence, we are

not willing to accept that this can ever happen again.

Mr. Chairman, I am not going to presume any facts not yet in

evidence. So far, we only have a limited amount of reports, a

clawback procedure against Mr. Becker and Mr. Becker’s own

interview here with some of our investigators. Today, we have an

opportunity to listen to the Chairwoman, to realize that she inherited an organization that had no flaws, but her independent agency

has, in fact, been the subject of the President’s attention, her attention.

We have not yet high confidence but high hope that the SEC will

live up to its mandate, not just of having a complex web of rules

that tell public companies that if their own child works for a company, they cannot be outside or independent officers or directors of

the company, or, for example, what a conflict is to the people who

oversee, who can be on the compensation committee, who cannot.

It is a complex business but it relies on a belief that the rules are

necessary, they are implemented in a sensible way, uniformly and

that they are for a purpose.

I believe as we look further into the Becker matter, we are going

to find the SEC failed to have the highest level of fear so that public confidence could be maintained. I can find no way out of this.

I hope today we at least understand how this mistake came to happen.

Mr. Chairman, once again, thank you for holding this important

hearing and I yield back.

Mr. MCHENRY. Thank you, Mr. Chairman. Thank you for your

statement. With that, I recognize the distinguished Member from

Illinois, the chairman of the Subcommittee on TARP, Financial

Services and Bailouts of Public and Private Programs, Mr. Quigley,

for 5 minutes.

I am sorry, I just promoted you to chairman—ranking member,

Mr. Quigley.

Mr. QUIGLEY. Thank you so much, Mr. Chairman. I soon will be

joined by Chairman Platts, as well.

I thank our witnesses for their time today and their contributions.

As we all know, in December 2008, Bernard Madoff was arrested

for running the largest ponzi scheme in American history. Losses

4

from Madoff’s fraud have been estimated at $18 billion, devastating

the savings of many Americans.

We all know the SEC missed Madoff despite being tipped off on

several occasions. Although no regulatory agency should be expected to be perfect, a failure of this magnitude is clearly unacceptable.

How did this happen? Many have blamed the SEC’s outdated

technology, which is woefully behind what the financial firms are

using; many have blamed the SEC’s silo problem which prevents

coordination among the SEC’s many offices. Another culprit that

has been cited is the SEC’s work force which some argue includes

too many lawyers and not enough industry veterans. We have all

heard about the SEC employees viewing pornography instead of

doing their jobs. These are reasonable concerns and all merit oversight from these two subcommittees.

We have also heard about a potential conflict of interest from

David Becker, formerly senior counsel at the SEC. It is my understanding that SEC IG David Katz is investigating this matter. I

look forward to his report.

Just a few years removed from Madoff and the worst financial

crisis since the Great Depression, we need the SEC to do its job

and do it well. The SEC is Wall Street’s policeman. It was estimated by the 1934 Security Exchange Act to prevent fraud and

abuse in the securities market. Creating the SEC was essential to

restoring investor trust in our country’s economic system. If our

economic system is going to work, says Nobel laureate, Joseph

Stiglitz, then we have to make sure that what people gain when

they cheat is offset by a system of penalties.

Each year, the SEC brings hundreds of enforcement cases

against firms that have sold fraudulent financial products. In 2010,

for example, the SEC brought 681 enforcement cases against 1,800

defendants.

Just as all of us feel more comfortable in our neighborhoods

when they are well policed, investors feel more comfortable buying

financial products when the SEC is doing its job and prosecuting

white collar crime. The SEC is more important today than ever before. Trust in our financial system is at its lowest ebb and this lack

of trust is impeding our economic recovery.

The financial regulatory reform law passed here was a step in

the right direction, but it alone is insufficient. Laws have to be enforced and the SEC needs to be a strong enforcer.

Unfortunately, the House-passed budget would reduce SEC funding from its current $1.1 billion. For comparison’s sake, City Bank

spent $1.6 billion on marketing alone in 2010. How is the SEC expected to police Wall Street when its entire budget is less than the

marketing budget of one Wall Street Bank?

In a May 2010 report, the minority staff of the Oversight Committee found that the Commission security disclosure procedures

are technologically backward. Yet, under the House-passed cuts,

the SEC won’t be able to continue any improvement of its IT systems. If the SEC’s budget is reduced to 2008 levels, as some have

proposed, the SEC would have to layoff 600 workers.

My point is this. Just a few years after the Madoff incident and

the worst financial crisis in recent history, should we really be

5

talking about taking 600 cops off Wall Street? Let us strengthen

the SEC, not weaken it. Let us also ensure that the SEC undertakes common sense report to avoid past mistakes.

Put another way, after 9/11, despite our intelligence failures, we

did not cut the intelligence budget, we doubled it. It is my understanding that the SEC has already reorganized, brought in a COO

and designed a new tips referral system. These are all commendable steps.

In the end, our country will be safer from another financial crisis

if the SEC is well organized and well funded.

I look forward to hearing from our witnesses who I hope will provide some constructive ideas on how to improve the SEC’s oversight of financial markets.

Thank you. I yield back.

[The prepared statement of Hon. Mike Quigley follows:]

6

7

8

Mr. MCHENRY. I thank the ranking member.

With prior agreement on our side, Dr. Gosar from Arizona will

have 5 minutes for an opening statement.

Mr. GOSAR. Thank you, Mr. Chairman.

Let me preface my comments with the following. I am not a financial analyst, I am not an accountant and I am not a lawyer, but

I do have skin in the game, as do most Americans. Most Americans

are compelled to invest in the markets through their employersponsored retirement plans whether they are 401(k) plans or public

or union pension plans. The money largely goes to Wall Street.

The public needs assurances that those who handle our money

and our retirement futures are playing by the rules and are being

fair and are honoring their fiduciary responsibilities and obligations.

The public assurances come from the Securities Exchange Commission. The SEC is supposed to be guarding the hen house. This

hearing raises troubling questions. Who is watching the hen

house—the fox or the guard?

Mr. Chairman, recent news reports have focused on David Becker’s conflict of interest, but this hearing is not about a single incident. This problem is actually far deeper and goes to the very heart

of management practices at the SEC.

Every organization needs a set of mechanisms to prevent or detect fraud, waste or mismanagement. These are commonly known

as internal controls. It would appear that internal controls at the

SEC are not functioning properly.

One, the Government Accounting Office tells us that the SEC is

unable to reliably track its finances because it cannot control its

own financial reporting. Two, the SEC’s inspector general tells us

that 30 employees, including an assistant regional director, viewed

sexually explicit materials at work and only one was actually fired.

Was anyone else ever disciplined? Three, now the news media tells

us that the SEC’s general counsel was allowed to advise the Commissioners on the Madoff case when he had a personal, financial

interest.

All these matters represent a breakdown in oversight and management, a failure of internal controls. The sad irony is that the

SEC is the Federal agency in charge of making sure publicly traded

companies have effective internal controls and public governance

structures. In fact, Mr. Chairman, if these events happened at a

publicly traded company, the SEC would be investigating itself and

what would be the penalties?

Federal agencies are subject to the Federal Managers Financial

Integrity Act which dictates that they provide annual assurances

to Congress that their internal controls are adequate. This law has

been in effect since 1982 and governs not just financial management, but program management as well.

The Federal Managers Financial Integrity Act is within this committee’s jurisdiction. Therefore, this hearing has an important legislative and oversight purpose in the Commission’s compliance with

the law and others. Mr. Chairman, the anecdotal example of internal breakdowns are symptoms of a much larger systemic breakdown. Since there is no SEC to investigate the SEC, today I challenge my colleagues.

9

Thank you, Mr. Chairman. I yield the balance of my time.

Mr. MCHENRY. I thank the gentleman.

I now recognize the ranking member of the Subcommittee on

Government Organization, Efficiency and Financial Management,

Mr. Towns, former chairman of the full committee, for 5 minutes.

Mr. TOWNS. Thank you very much, Mr. Chairman, and thank

you for holding this hearing today.

The SEC is at an important crossroad. It is successfully emerging

from a troublesome period leading up to collapse of the country’s

financial system. It is paused to take the lead in reforming Wall

Street and preventing another financial meltdown through its enforcement of the Dodd-Frank Act.

This hearing will examine financial management, the work force

and internal operations at the SEC. It is encouraging to see all the

new initiatives Chairman Schapiro has put in place in the last 2

years. The SEC hired its first chief operating officer to oversee the

accounting functions, financial reporting and internal controls, and

we salute you for that, Madam Chair.

The SEC has also hired a new chief information officer to oversee

its information technology functions. The Chairperson has restructured the entire Enforcement Division, recruited experts and has

put a new governing structure in place. This is commendable as

well.

As with any organization, lapses can, do and will occur. I understand the SEC has taken disciplinary action against those who

have been accused of misconduct at the Commission and that

greater accountability has been integrated into the disciplinary

process.

The SEC is responsible for safeguarding the confidence of American investors in the financial markets and I hope our hearing

today will help our financial watchdog fulfill its mission.

I now yield the balance of my time to the ranking member of the

full committee.

Mr. CUMMINGS. I thank the gentleman for yielding.

This committee is responsible for ensuring that our government

operates effectively and efficiently. That means holding public officials to the highest standards, demanding excellence at every turn

and eliminating even the appearance of impropriety.

Today, the committee intends to examine against David Becker,

the former general counsel of the SEC. I do not know Mr. Becker,

I have never met him, never talked to him, and the minority was

excluded from Mr. Becker’s interview when Chairman Issa’s staff

interviewed him, but I do want to make sure that everyone who

comes before this committee is treated fairly, including Mr. Becker,

Chairwoman Schapiro and others.

If I understand the facts correctly, Mr. Becker’s parents invested

about $500,000 with Bernie Madoff in 2000. Mr. Becker’s mother

died in 2004 and when her funds were divided among Mr. Becker

and his two brothers in 2006, they had increased to about $2 million.

Mr. Becker joined the SEC in 2009, he notified the SEC officials

about his inheritance and when issues arose relating to his inheritance, he sought advice from SEC ethics officials and received clearance to proceed. Some have suggested that Mr. Becker may have

10

benefited financially from the SEC’s later decisions, but it appears

that the opposite may be true.

The basic question the SEC faced was whether to support an

asset valuation method used by the trustee representing the

Madoff victims, called the cash-in-cash-out method, or a different

valuation method proposed by several law firms called the last

statement method.

Under the first, Mr. Becker’s inheritance would be subject to litigation to recover or clawback assets on behalf of the Madoff victims. Under the second, it appears that it would not. Based on the

court filings, the SEC chose to support the first method. This

meant that the trustee could sue Mr. Becker and his brothers to

recover some of his mother’s inheritance which is exactly what happened.

Mr. Chairman, in your briefing memo for today’s hearing, you acknowledged that the SEC’s decision was ‘‘actually detrimental to

Mr. Becker’s interest.’’ Nevertheless, I have serious questions about

the conclusions of the SEC’s Ethics Office, Chairman Schapiro, that

these issues had no effect on Mr. Becker’s financial interest. Someone else of questionable character might have tried to take advantage of this situation. I also have questions about whether Mr.

Becker’s interests should have been disclosed more widely within

the SEC and I hope we can learn more about this process today.

I also invite my Republican colleagues to join us in making sure

that the SEC has all the resources it needs. There is a proposed

cutting of $148 million from their budget and we do need a robust

SEC.

Chairwoman Schapiro, I read what you have done and what you

have accomplished. You inherited a mess. You inherited an agency

that Senator McCain said the former Chair should resign, so we

understand that.

Again, I am looking for a fair hearing and one where we can get

to the bottom of all of this.

I yield back.

Mr. MCHENRY. I thank the ranking member.

All Members may have 7 days to submit opening statements for

the record.

I will now recognize the panel. We have the Honorable Mary

Schapiro, Chairman, Securities and Exchange Commission; Mr.

Jeffrey Risinger, Director, SEC Office of Human Resources; Mr.

Jonathan Jack Katz, the former Secretary of the Securities and Exchange Commission for 20 years; Mr. Stephen Crimmins, a securities attorney with K&L Gates—he served as deputy chief litigation

counsel of the SEC’s Enforcement Division from 1993–2001; and

Ms. Helen Chaitman, the attorney representing approximately 350

investors in Mr. Bernard L. Madoff’s investment securities firm.

It is the policy of the committee that all witnesses be sworn before they testify. Please rise and raise your right hands.

[Witnesses sworn.]

Mr. MCHENRY. The record will reflect that all the witnesses answered in the affirmative. With that, I thank you.

We will begin at this time with Chairman Schapiro. I think you

heard the Members’ opening statements and we would love to hear

11

your comments, especially about this conflict that has been discussed. Ms. Schapiro.

STATEMENTS OF MARY SCHAPIRO, CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION, ACCOMPANIED BY JEFFREY RISINGER, DIRECTOR, OFFICE OF HUMAN RESOURCES, U.S. SECURITIES AND EXCHANGE COMMISSION;

JONATHAN KATZ; STEPHEN J. CRIMMINS, K&L GATES, LLP;

AND HELEN CHAITMAN, ESQ., BECKER & POLIAKOFF, LLP

STATEMENT OF MARY SCHAPIRO

Ms. SCHAPIRO. Thank you very much, Chairman McHenry, Ranking Members Quigley and Towns, members of the subcommittee.

Thank you for inviting me to testify today regarding the financial

management, work force management and internal operations of

the Securities and Exchange Commission. As you know, I am

joined by Jeff Risinger, Director of our Office of Human Resources.

When I arrived at the SEC 2 years ago, the agency was reeling

from a variety of economic events and mission failures and in need

of across the board reform. We needed more experts, better training, improved communication among our divisions and offices and

an effective strategy for handling tips and complaints. These challenges were exacerbated by inadequate infrastructure, material

weaknesses in financial management and a culture that had failed

to keep up with an increasingly complex financial marketplace. We

immediately and comprehensively set out to change the way the

Commission worked. My written testimony details the reforms of

the last 2 years, but I would like to highlight a few.

We brought new leadership and senior management to virtually

ever office and hired the Commission’s first chief operating officer.

We revitalized and restructured our enforcement and examination

operations and revamped our handling of tips and complaints. We

broke down internal silos and created a culture of collaboration. We

recruited more staff with specialized expertise and real world experience and expanded our training. We enhanced safeguards for investors’ assets through new rules and the leveraging of public accounting firms.

Although we have made significant progress, we continue to seek

ways to improve our operations. After all, our core responsibility is

pursuing fraud, reviewing corporate disclosures, overseeing the

largest capital markets in the world and inspecting the activities

of thousands of financial intermediaries are essential to restoring

investor confidence in the wake of the financial crisis.

Our funding has presented challenges. From 2005 to 2007, the

SEC experienced 3 years of frozen or reduced budgets, forcing a 10

percent reduction in the agency staff. Similarly, the agency’s investment in new or advanced systems declined approximately 50

percent between 2005 and 2009.

While SEC staffing levels are just now returning to 2005 levels,

the securities markets have undergone tremendous growth since

then. Indeed, during the past decade, trading volume has more

than doubled, the number of investment advisors grew by 50 percent and the funds they manage increased to $38 trillion. OperatVerDate 11-MAY-2000 15:11 Jul 29, 2011 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67368.TXT KATIE PsN: KATIE
12

ing under the continuing resolution only exacerbates the imbalance

between our resources and the magnitude of our mission.

At the same time, the Dodd-Frank is significantly expanding the

SEC’s responsibilities for the derivates market, hedge fund advisors and union support advisors. In addition, we are also charged

with enhanced supervision of rating agencies, heightened regulation of asset-backed securities and the creation of a new whistleblower program.

For these reasons, I am concerned that without additional resources, we will not be able to fulfill these responsibilities in the

manner in which Congress intends and the American people deserve.

Finally, I would like to address the issue of former Counsel

David Becker’s role in light of his mother’s ownership of an account

at Madoff that was closed years before the fraud was revealed.

Mr. Becker informed me, I believe shortly after he arrived in

2009, that his mother had an account with Madoff before she died

and that it had been closed a number of years before he returned

to the agency. It did not strike me that his mother’s account closed

years ago would present a financial conflict of interest.

Mr. Becker was, and is, an experienced attorney who had served

as general counsel under three chairmen. I relied on him to present

any ethics related issues to the ethics counsel and follow the ethics

counsel’s advice. I understand that is what he did.

When I returned to the agency in 2009 having served there in

the late 1980’s and early 1990’s, appointed by President Reagan

and President Bush, I read many letters from Madoff’s victims,

people who have lost everything. My entire focus was on how to fix

the SEC to ensure that another tragedy like Madoff could never

happen again, and how to make sure within the contours of the Securities Investors Protection Act that we could get the most money

to people who were literally losing their homes.

I am proud of how much we have accomplished in the past 2

years working tirelessly with an extraordinary staff to improve the

operation of the Commission and enhance the public’s perception of

the integrity of our work and the fairness of our decisions.

While Mr. Becker did solicit and follow advice from the ethic’s

counsel, I realize in light of this incident that as chairman, I have

to ensure that we go beyond what may be required in any particular situation. On matters like these, I have to be looking around

the next corner, looking beyond the horizon and thinking above and

beyond what may be appropriate advice from the ethics counsel to

make sure nothing occurs that could raise questions about the

Commission’s mission or processes.

To ensure that this matter is fully reviewed, I requested that the

SEC inspector general conduct an independent review and analysis

of all of the relevant facts. In addition, under the leadership of our

new ethics counsel, we have been performing a top to bottom review of our ethics program.

In the meantime, I look forward to answering questions about

this matter to the best of my recollection, but I can say to this committee with assuredness, we will learn from this experience and we

will take all actions necessary to earn the trust the public places

in us.

13

Thank you.

[The prepared statement of Ms. Schapiro follows:]

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Mr. MCHENRY. Thank you, Chairman.

I would counsel the committee that the lights before you, at 1

minute to go, it will turn yellow and red means stop. With that,

if you could keep your comments to 5 minutes we would certainly

appreciate it.

Mr. Risinger.

STATEMENT OF JEFFREY RISINGER

Mr. RISINGER. Mr. Chairman, I am happy to be before the committee today. I look forward to taking your questions. I don’t have

any further statements.

Mr. MCHENRY. Five seconds. That might be a record. Thank you

and congratulations.

Mr. Katz.

STATEMENT OF JONATHAN KATZ

Mr. KATZ. Good afternoon, Chairman McHenry, Chairman Platz,

Ranking Member Quigley, Ranking Member Towns, members of

the two subcommittees. It really is an honor to be invited to testify

on the operations of the Securities and Exchange Commission

today.

It is a matter of great interest and importance to me personally

because for most of my career, I was an employee of the SEC. For

20 of those years, I served as the Commission’s Secretary, which

was one of those unusual positions that afforded me a rare opportunity to participate firsthand in virtually every aspect of the Commission’s responsibilities.

I retired from the Commission in January 2006. In the five intervening years, I have really been fortunate. I have served as a technical advisor to a variety of securities commissions in governments

in emerging market countries and have also had the opportunity

to speak and write about financial regulation in the United States.

In 2008, the Center for Capital Market Competitiveness at the

U.S. Chamber of Commerce invited me to conduct a study and to

write a report on how to improve the efficiency and effectiveness

of the SEC. I wrote this study based upon interviews with more

than 50 current and former SEC staff persons and Commissioners

who agreed to be interviewed and gave me their ideas, insights and

criticisms, the best of which I shamelessly stole.

In addition to this report, in 2009, I wrote a second article for

the Pittsburgh Law Review. This article focused primarily on the

Enforcement Division of the SEC, a subject that I did not discuss

in the Chamber report. Unlike the Chamber report which reflected

the collective views of a wide range of people, this article was really

my own personal views. In both documents, I attempted to constructively identify what could be done to make the agency a more

effective capital market regulator.

Today, I am aware that one of the focal points is, of course, the

SEC’s budget and question of resources. I have to answer that I,

like most people, agree that the SEC does need more staff to carry

out its responsibilities, but why more money and more staff is necessary, I don’t think it is sufficient. To do the job well, the agency

has to reexamine how it does that job and I think it has to make

changes. I think it is time to critically self examine the core funcVerDate 11-MAY-2000 15:11 Jul 29, 2011 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67368.TXT KATIE PsN: KATIE
29

tions and recognize that most of them just haven’t been very effective.

My concern is that just having more people do more of the same

thing in the same way is not the best solution. I think we need fundamental changes in organization and management and mission

definition. Chairman Schapiro has identified a number of the initiatives she has undertaken and I commend her on them.

I worked for seven chairmen and four acting chairmen and I will

tell you that with the possible exception of John Schad, the first

chairman I worked with, Chairman Schapiro has probably focused

more of her attention on management and organization than any

of the other intervening Chairmen, but again, these are first steps

and I think more needs to be done.

I want to highlight five points that are contained in my witness

statement. I don’t have time to go through all of them but if people

have questions, I would be happy to do it.

I think the agency needs a partial reorganization. I advocate

what is referred to internationally as the Twin Peaks approach,

one division that deals with all aspects of retail financial services

regulation and another division that handles all credential functions, the so-called safety soundness and stability functions.

I think the agency needs a chief operating officer. I applaud

Chairman Schapiro for appointing one, but I think you have to go

further. You need a chief operating officer who really is that and

has more than the title. The way I distinguish it is when you try

and build a house, the architect and owner design the house, but

you need a general contractor to actually get it done, to build it

well, to keep you on budget and on time.

I see my time is almost up, so I will quickly identify two other

things. I think there needs to be substantial changes in enforcement. When you look at Madoff, you understand, in my opinion,

this was not a question of culpability, a few bad people doing bad

things.

Madoff is similar to other failures of the Commission in the past.

These are structural issues that go with how the Division of Enforcement frames its responsibilities and conducts those responsibilities. It has to be proactive, not reactive, and its results have

to be aimed at remediation, not penalties. Penalties are the function of the Justice Department. In that respect, I would advocate

very strongly for beefing up a Criminal Securities Office in the Department of Justice so that the agency doesn’t have to rely upon

the Southern District of New York which has limited jurisdiction.

Just in closing, I want to mention what I think is the most important recommendation of all, the need for a special study of the

securities markets. In 1961, the SEC was similarly troubled, the

markets were in similar upheaval.

30

Congress appropriated funds to create a special study of the securities market. A group of technocrats, experienced people in government and from industry spent 18 months studying the markets

and studying how the SEC functioned. They issued a five volume

report that literally for 25 years was the touchstone for everything

the SEC did. I think we need another one.

Thank you very much for the time. I am happy to answer questions.

[The prepared statement of Mr. Katz follows:]

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

Mr. MCHENRY. Thank you, Mr. Katz.

Mr. Crimmings, you are recognized for 5 minutes.

STATEMENT OF STEPHEN J. CRIMMINS

Mr. CRIMMINS. Thank you, Mr. Chairman.

Chairman McHenry, Chairman Platts, Ranking Member Quigley

and Ranking Member Cummings, thank you for hearing us today.

Over the last decade, we have seen an explosion and the size and

complexity of our capital markets, exponential increases in trading

volume, workers doing thousands of trades in a few seconds instead

of maybe a hundred trades a day, high speed, computer driven

trading strategies, fragmentation of trading away from the exchanges and into dark pools and ECNs and 24/7 globalized stock

trading.

We have seen investment products become so complex that the

sophisticated traders that trade them don’t always fully understand what they are and scary systemic risk that threatens recurring crises.

Now after the crash, we see many investors pulling out and staying out of stocks and mutual funds. Investors are still scared and

sidelined with their decimated 401(k)’s. Investor perceptions are

critical. These people will be unwilling to continue to risk their capital or risk their capital again if Wall Street’s cop on the beat becomes the cop on furlough.

Last summer, in the depths of the worst financial crisis in 80

years, Congress recognized that the Securities and Exchange Commission needed twice the budget to be relevant in today’s huge,

complex and hyper-charged markets. Whatever issues anyone in

Congress has with the SEC, I would respectfully suggest that the

answer is not to starve in the wake of the crash, the answer is not

to create an environment where it will be easier for the frauds just

to prey on investors.

Instead, the answer is for all of us, here and now, to commit

firmly to do whatever it takes to make the SEC the strong and

smart overseer that our capital markets deserve to recover and

grow.

One thing is of paramount importance. Nobody is asking the taxpayer for one dime to fund the SEC. What is often forgotten in the

discussion is that American taxpayers pay absolutely nothing to

run the SEC each year. Under 1996 legislation adopted by a Republican Congress and a Democratic President, the money to run

the SEC comes entirely from Wall Street transaction fees and assessments designed to cover the entire cost of the SEC’s budget.

Because of this a substantially increased SEC appropriation paid

for with this successful 15-year old funding mechanism would require no tax dollars whatsoever and would add nothing to the deficit. In short, the Wall Street user fee money is already there. Congress just has to let the SEC use it to police Wall Street.

Madoff was a tragedy. The SEC missed Madoff and Chairman

Schapiro and others have not tried to evade or run away from that

fact, but so did FINRA whose predecessor installed Madoff as its

vice chairman, and so did the Justice Department, and so did the

New York attorney general with Madoff right in his own backyard,

and so did how many others, including the sophisticated financial

52

services firms that regularly interacted with him. Madoff was an

industry icon and idol and nobody knew that he was really a crook.

Yet, through thick and thin, the SEC was out there bringing almost 700 complex cases for enforcement every year against almost

2,000 defendants every year and with greater funding, could have

brought far more.

We hear criticism of the SEC’s recently departed general counsel,

David Becker. His power, I suggest, is misunderstood. He was not

the Secretary of some Cabinet level department. Instead, he was

the general counsel, one of multiple senior advisors at a five member, bipartisan commission, composed of two Republicans, two

Democrats and one independent.

Whatever his power, the point is that he did not use it to benefit

himself. The month after he left the agency still to this day, it remains unclear exactly how any of the Madoff related claims are ultimately going to be calculated. In any event, the Madoff Trustee,

Irving Packard reports to the court, not to the SEC, and he will

make his own decisions on what he wants to claim.

Finally, we need some perspective. What we are talking about is whether the Dorothy Becker estate will get to keep the $500,000

that Dorothy originally invested or whether it will also get to keep

some small amount on top, the inflation adjustment. That seems to

be where this is all breaking down and being discussed.

The senior ethics official with whom Becker consulted ruled that

whatever theoretical conflict this may actually have presented, it

did not create such a conflict that he needed to recuse himself,

based on what was known at that time. The possibility of a claim

against this estate of a particular type at some future date was at

that time speculative. Now we know more, of course.

[The prepared statement of Mr. Crimmins follows:]

53

54

55

56

57

58

59

Mr. MCHENRY. Thank you for your testimony.

Ms. Chaitman, you are recognized for 5 minutes.

STATEMENT OF HELEN CHAITMAN

Ms. CHAITMAN. Thank you so much for giving me this opportunity to speak to you. I speak on behalf of approximately 500

Madoff investors whom I represent and I speak, as well, on behalf

of every American who hopes to save enough money in his lifetime

to retire on that money. I speak on behalf of every American who

relies upon the brass plaque on his broker’s desk, SIPC. We are

told when we invest that every account is insured up to $500,000

and yet, SIPC has taken the position in the Madoff case that the

law doesn’t apply to it.

If I had to grade the SEC’s performance with respect to its essential function of protecting investors with respect to the Madoff case,

I would give the SEC an ‘‘F.’’ The SEC, instead of enforcing the law

against SIPC, which it is charged by Congress with the obligation

to do, instead of enforcing the law, we now know that in January

2009, the SEC agreed with SIPC that for the first time in its history, it would not pay SIPC insurance to each Madoff victim based

upon the investor’s last statement.

SIPC is an insurance entity established by Congress which has

the power to assess the Wall Street firms who raised the funds to

protect investors. The statute doesn’t give SIPC the right to define

how it is going to allow a claim. The statute mandates that a claim

is based upon the customer’s last statement. Yet, the SEC joined

in SIPC’s violation of the statute.

This is not just my opinion, this is the opinion of Chairman Garrett who has proposed H.R. 757 and in proposing H.R. 757, which

is simply a clarification of the law, one could view H.R. 757 as a

statement to the SEC, you cannot avoid the law and SIPC cannot

avoid the law. Mr. Garrett made a statement when he introduced

this bill that SIPC has violated the law and the trustee in the

Madoff case has violated the law.

If you recall, in 1970 when SIPC was enacted, investors were encouraged to relinquish the protection of having certificated securities. That was something that Wall Street wanted. In exchange for

relinquishment of that protection, investors were promised SIPC

insurance. SIPC insurance was raised to $500,000 in 1978; it was

never raised thereafter.

In the Madoff case, SIPC decided that was going to be too expensive for its Wall Street members and so it was going to try to come

with an entirely new basis for insuring accounts. For the first time

in SIPC’s history, it decided it didn’t insure the balance on the last

statement, it only insured the net investment over the life of the

account which might have been 20 years, 30 years, 40 years.

There is no evidence that any investor in today’s stock market

has or what he owns other than the statements he receives from

his broker. We don’t have the luxury of going back to certificated

securities. The Internal Revenue Service relies upon those statements, every investor relies upon those statements for planning

their retirement, for their estate plans for their children. There is

no basis in law for what the SEC did in this case.

60

This is not a question of insufficient funding for the SEC. This

is a question of doing its mission which is to protect the investor.

I am not here to opine on whether or not Mr. Becker had a conflict of interest. I don’t think there can be any doubt about it.

Whether he advocated the constant dollar adjustment, which obviously reduced his own exposure, or whether he said to the SEC

when he came onboard in February 2009, you have made an illegal

agreement with SIPC which would have worked to his advantage,

his judgment was clouded because everyone in the SEC forgot the

law.

There is one way to remedy this and to restore confidence in the

capital markets for the average American. That is to enact H.R.

757.

Thank you.

[The prepared statement of Ms. Chaitman follows:]

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

Mr. MCHENRY. Thank you for your testimony. I thank the panel

for its testimony. With that, we will begin questioning on our side

by Dr. Gosar of Arizona. He is recognized for 5 minutes.

Mr. GOSAR. Chairman Schapiro, when David Becker, your brand

new general counsel, first came to you in February 2009 and said,

my mother had an account with Bernie Madoff, why didn’t you ask

him any questions about it? Why didn’t you even ask simple questions like, how much money?

Ms. SCHAPIRO. Congressman, to the best of my recollection, and

just so I can be clear, I haven’t looked at any emails or whether

there might be any contemporaneous notes or anything like that in

this period of time, so I am recalling back because our inspector

general is looking at all that, so I am recalling 2 years ago.

The best of my recollection was that Mr. Becker told me that his

mother, who had passed away years ago, had an account at Madoff.

Because the account was closed years before, I did not think that

the account of a long deceased relative would raise an issue of a

conflict of interest in Mr. Becker’s work.

I did expect that he would go to the ethics counsel, an experienced government official, a government lawyer who served under

three Chairmen at the SEC, and we use our ethics counsel all the

time for their advice. I expected him to run it by the ethics counsel

and to follow their advice and that is the way it went forward.

Mr. GOSAR. It seems that if the same situation existed in a publicly trade company that you were investigating, would you have

such a cavalier approach to that?

Ms. SCHAPIRO. It is hard for me to imagine this situation. These

are the government ethics rules.

Mr. GOSAR. An ethics rule nonetheless.

Ms. SCHAPIRO. It is very hard to answer in the abstract. It would

depend on the rule.

Mr. GOSAR. It just seems there is a very different aspect that

what is good in the private sector and publicly trade situations is

not going well for the government.

Let us go to my next question. Ms. Chaitman, do you believe the

account valuation method that David Becker recommended to the

Commission as its attorney would have befitted his personal financial interest?

Ms. CHAITMAN. There is no question that the constant dollar approach, which apparently Mr. Becker invented, would benefit him

personally and reduce his clawback exposure, but the more significant problem with the conflict of interest Mr. Becker had is that

it clouded his judgment. The law is absolutely clear that every investor is entitled to SIPC insurance based on his last statement.

Mr. Becker had an obligation, as general counsel of the SEC, to

make sure that the SEC complied with the law and enforced it

against SIPC. That is the great failure which has caused devastation to all of my clients.

Mr. GOSAR. Chairman Schapiro, your agency’s inspector general

compiled a 457-page report about the SEC’s failure to uncover

Madoff’s ponzi scheme. That report devotes 2 sections out of 11 to

describing in great detail every possible connection between SEC

employees and Madoff.

119

Do you think that your general counsel’s receiving funds from a

Madoff account would have been appropriate material, the inspector general or not?

Ms. SCHAPIRO. That would be a much better question for the inspector general. I have a pretty high level of confidence that he did

quite a thorough report on the agency’s failures with respect to

Madoff.

Mr. GOSAR. The Inspector General’s Madoff report mentions on

page 382, that two family members of an employee in the Office of

Internet Enforcement invested $11⁄2 million and $500,000 respectively with Madoff. The inspector general found it necessary to

make sure that this employee had no involvement in any Madoff

examination.

Do you think that the inspector general would have been interested in a similar situation involving your chief lawyer, a senior

SEC official who served as general counsel from 2000 to 2002 while

the SEC was ignoring whistleblower complaints about Madoff?

Ms. SCHAPIRO. I can’t predict. I can imagine that he might have

been and of course he is looking at all of these issues now. I expect

that he will thoroughly explore that.

Mr. GOSAR. I understand that you inherited a horrific problem

but it always starts with top down. Private sector, businesses always look at accountability within the hierarchy. It seems like we

have a two-edge sword here that we should have demanded better

accountability. Would you agree?

Ms. SCHAPIRO. Congressman, I would agree that from where I sit

now and understanding all the things that I understand now that

I didn’t understand in 2009, having arrived at the SEC and discovered that I had an agency in absolute ruin in some regards on my

hands to manage and not knowing obviously all the steps that

would be taken by the Trustee or the decisions the Commission

would make down the road, but knowing those things now, I wish

that Mr. Becker had recused himself, absolutely.

Mr. MCHENRY. The gentleman’s time has expired.

The gentleman from Illinois, Mr. Quigley, is recognized for 5

minutes.

Mr. QUIGLEY. Thank you, Mr. Chairman.

Madam chairman, the New York Times reported on March 5th

of this year that the SEC has declined to enforce the requirement

from Dodd-Frank that would make rating agencies subject to expert liability under the securities law. This would make rating

agencies liable for faulty ratings. Could you comment on the

timeline for implementing this measure?

Ms. SCHAPIRO. Yes, I would be happy to. The way the rule works

is that if a rating is included in a registration statement for securities, then the rating agency must consent to having liability. That

is the Dodd-Frank requirement.

We had preexisting SEC rules that require for AXA-backed securities registration statements, that if a rating was used to sell the

securities, the rating needed to be included in the registration

statement. Rating agencies have absolutely, unequivocally—at least

the ones that are in existence now—refused to consent. That made

public offerings of AXA-backed securities impossible because they

120

couldn’t get the consent of the rating agencies to include the ratings, but they used the ratings to sell the securities.

We temporarily set aside our rule, our requirement that the AXA

backed issuers disclose the ratings in the registration statements

because we didn’t want to be holding up all public offerings of

AXA-backed securities and pushing them into the private markets

which we felt were not as good for investors.

Right now, our staff is working through reconsideration of our

disclosure requirements. I believe they will recommend that we

eliminate our preexisting requirement for including the ratings and

therefore, the liability provisions can go forward.

We are also hopeful that some of the newer rating agencies that

have indicated an interest in becoming registered with us will actually be willing to consent, which is I think how Congress hoped the

law would work.

Mr. QUIGLEY. Can you guess on the timeframe for that?

Ms. SCHAPIRO. I can’t but I would be more than happy to. I

would say over the next couple of months, but I would be happy

to get you a more definitive answer right away.

Mr. QUIGLEY. Thank you. You talked about the agency that you

inherited and you talked to a certain extent about the reforms necessary and those you have implemented. As to Mr. Katz’s point,

whether or not more assets, and I think you need the assets to do

your job, help more than the need for in a sense restructuring, reforming and reinventing yourself.

Are you looking at the agency from that perspective and the

broader picture? If you were to start over, what would you do and

how would you do it?

Ms. SCHAPIRO. Absolutely. I actually would do again many of the

things we have already done. This has been an agency that has

been sort of taken upside down and shaken pretty hard over the

last 2 years—new leadership across the board in every major office

and division, a new chief operating officer, a new chief ethics counsel, our first ever chief compliance officer.

We also restructured our Enforcement Division and put people

into specialized groups where they could get deep expertise to bring

enforcement cases more quickly in particular areas like structured

products or the Foreign Corrupt Practices Act or insider trading.

We have also restructured our examination program, both of

those, enforcement and examination, largely in response to the failures that were so vividly demonstrated in the inspector general’s

report on Madoff.

We have also brought new technology, which is going to be critical to us. We have too many people doing low value work because

we don’t have the technology.

Mr. QUIGLEY. What do you mean low value work?

Ms. SCHAPIRO. For example, when we bring enforcement cases,

we bring in massive amounts of electronic data so that we can look

at trading records or we can look at email transmissions between

parties who might be sharing non-public information.

We need to be able to use analytics to find the important information and all of that, not have people plowing through all that

information. When the markets fell so dramatically on May 6th, it

121

took us 5 months to reconstruct trading data because we don’t have

the capacity in the SEC.

Mr. QUIGLEY. That was the final question we have limited time.

Are you a technological match for those that you are regulating?

Ms. SCHAPIRO. Not at the moment, we aren’t. We have a phenomenal new chief information officer who is making real progress,

I think, but we are a long way from the people that we are regulating in terms of our technical capability, but I think we can get

there. I think we can put up a good fight anyway.

Mr. QUIGLEY. Thank you. I yield back.

Mr. MCHENRY. I thank the gentleman. I now recognize the Vice

Chair of the TARP, Financial Services and Bailouts Subcommittee,

Mr. Guinta of New Hampshire, for 5 minutes.

Mr. GUINTA. Thank you very much, Mr. Chairman.

Mr. Katz, thank you and thank all of the witnesses for being

here today. wanted to direct my first question to you, sir.

In your testimony, you talked about the size, structure and complexity of the U.S. capital markets and financial companies that

have grown substantially in the past 30 years. I think your position

is that you are comparing the SEC over that same period of time

and the fact that it has not grown, changed or modified substantially. I wanted to get a little clarification on that first, if you

would.

Mr. KATZ. Obviously I think everyone would agree that the capital markets of today are exponentially greater, but my point was

more directed to the way the SEC is structured. It is not just a

question of size; it is a question of a structure that corresponds to

the entities you are regulating. The point I was making is that in

the early 1970’s when basically the current organizational structure of the SEC was last reformed, you had market regulation that

focused on stock exchanges and broke dealers. You had a Division

of Investment Management Regulation which focused on mutual

funds and investment advisors. They were two very separate components of the industry and there really was very little overlap.

That no longer exists. Because of consolidation in the industry

and the blending of the roles, the fundamental distinction between

a stock broker who is a commission-based seller of securities and

an investment advisor, who is an under management advisor on a

comprehensive portfolio, is a historical artifact. It doesn’t exist.

Because you have two divisions upon two different laws, according to a model that no longer exists, you get these anomalies. The

fight over fiduciary duty differential was embedded in the laws but

more importantly, you had two different divisions who had different ways of thinking about it and neither of them wanted to

compromise. They both wanted to maintain their piece of it.

Mr. GUINTA. Does that speak a little bit to the silo effect that you

have been referring to?

Mr. KATZ. Absolutely. I used to joke that the silos at the SEC

were so real that in fact, that they had locked doors and that because all the paper in the agency used to have to come through my

office, I actually had a skeleton key that occasionally allowed me

to unlock each of the silo doors and get inside. Most people don’t.

Turf is a real issue in any organization, no matter what the size.

It is compounded because remember you have different securities

122

laws that were written at different points of time for different segments of the industry. Each division sort of jealousy guards the law

that it controls. The market has changed.

Mr. GUINTA. I listened to what Chairman Schapiro mentioned in

her earlier comments about some of the improvements, modifications and changes that she has made and they sound laudable and

responsible. That being said, I wonder what type of congressional

action may or may not be necessary given the systemic problem

that we have seen within the SEC. I don’t want to get into the specifics, but the things we have been talking about here. We have to

prevent these from happening again. People in our Nation need to

have confidence, not just in the SEC, but in the markets as well.

I wonder what you could say about the type of intervention you feel

Congress should be considering?

Mr. KATZ. That is a very difficult question for me to answer. The

reason is I spent virtually my entire career at the SEC and I think

it is very different for Congress to micromanage the internal organization and operations of a government agency. You can set policy,

you can give direction, but I think it is dangerous when Congress

tells the agency this is how you get it done. I think the agency really has to take this responsibility on. Chairman Schapiro has

brought in an entirely new team of senior people. I don’t know

most of them. They seem very competent.

My hesitation is this. If you rely exclusively on a team of people

coming in to effect change, when those people walk out the door,

the change walks out with them. You need to change the structure,

you need to change the culture and most importantly, you need the

agency to define what it is it is trying to do and how do you measure whether it has gotten it done. You need that discipline, but

that is for the agency to do.

Mr. GUINTA. Thank you, sir.

Chairman Schapiro, I only have a few seconds left, but what assurance can you give us that new management team is effectively

managing and maintaining the necessary changes?

Ms. SCHAPIRO. I have to say I think change starts with leadership absolutely and having a whole new leadership team makes an

enormous difference. They are very committed to working together

and institutionalizing cooperation and collaboration among all of

the divisions.

For example, we now have the College of Regulators for the largest financial institutions. It is no longer just the Trading and Markets Division that looks at them, it is no longer just the examination group. There is a group of people drawn from all over the

agency who could have potential interest in the health of that financial institution who meet regularly to talk about what is going

on in that company, to look at the financials, to meet with the staff

of that financial institution. So the College of Regulators is just one

example. We have task forces across the agency. We are merging,

in some of our offices and will eventually in all of them, our examination programs for investment advisors and broker dealers which

Mr. Katz mentioned.

Finally, I should say that we have just commissioned, and I believe it is going to be released today, Dodd-Frank required us to

hire an independent consultant to do a very in-depth study of the

123

SEC’s organizational structure. That will be released today. I fully

expect that there will be some really helpful ideas there for us to

further improve how we operate.

Mr. MCHENRY. The gentleman’s time has expired. With that, I

recognize the ranking member, Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman.

Let me thank all of you for being here. I really appreciate you

taking the time to come.

Chairman Schapiro, the SEC plays a critical role in protecting investors and ensuring that our financial markets operate effectively.

You have stated that freezing the SEC budget impedes the agency’s

ability to meet its mission, which is to protect investors, to maintain fair, orderly and efficient markets, and facilitate capital information. Can you put that in concrete terms for us?

If the SEC does not have the budget to properly oversee capital

markets, how would this effect your staffing?

Ms. SCHAPIRO. Yes, sir, I would be happy to. I think the two

things that are most severely impacted by a limited budget at the

SEC are capability to hire the new kinds of talent and expertise

we need, economists, people who worked in hedge funds on trading

desks, financial analysts, the new expertise that will help us keep

up with what is going on in the marketplace.

The second is the fact that it will slow down and really hurt our

efforts at reforming our technology and bringing it up to speed and

giving us the capacity to do the things we need to do in order to

keep up with Wall Street. I know we will never meet their budgets.

I understand that. I have no expectation and don’t believe the

American public should pay for us to have a $3 billion a year technology budget, but we have to do much better than we have been

able to do.

I think those are the two primary things that are really impacted. It plays out in lots of other ways. When we don’t have a

sufficient travel budget, examiners can’t travel to go into that mutual fund where most Americans hold their investing wealth, and

examine the mutual fund’s books and records. They can’t go to the

investment advisor or to the broker dealer.

In little ways, the lack of resources plays out but the real fundamental ways are bringing in those people that we need to really

reform and transform the agency so people know that we have at

least a fighting chance at staying on top of what is happening on

Wall Street so we can also respond when the emergencies come

along as we saw on May 6th when the market absolutely fell apart,

scared people very badly in the retail investing public and in the

institutional investing public as well. We need the capability to respond to those things very, very quickly.

Mr. TOWNS. What about the flexibility? Do you have that? For instance, if there is a crisis situation and you need a specific type of

person and in order to get that person, you might need additional

resources to be able to track who you need to do the job at that

particular time, do you have that kind of flexibility?

Ms. SCHAPIRO. We have had some flexibility over the last 2 years

because Congress has been generous in our budget, but if we continue with the CR level or are cut, the answer to that is no. May

6th required us to go out and bring in experts to help us analyze

124

and go through all the trading data so we could reconstruct for the

public to see what was happening every second in the marketplace

when the Dow dropped 500 points in a matter of a few minutes.

Responding to emergencies is one of the things I do worry about.

That is where we lose flexibility if we don’t have a sufficient appropriation.

Mr. TOWNS. Thank you, very much. On that note, I yield back.

Mr. MCHENRY. Thank you. With that, I recognize Mr. Mack from

Florida for 5 minutes.

Mr. MACK. Thank you, Mr. Chairman. I also want to thank the

panel for being here today to give us an opportunity to get your insights and to ask a few questions on a very serious topic.

I would like to start with Chairman Schapiro, if I might. Do you

feel as Chair of the agency that ultimately it is your responsibility

to ensure that all of the employees are acting in accordance with

SEC employee conduct standards?

Ms. SCHAPIRO. I have responsibility for the agency in that sense.

I cannot tell you that with 3,800 employees, I can take individual

responsibility for each and every one to ensure that they are following the requirements the way they should be.

Mr. MACK. Ultimately, it is your responsibility as the Chair of

the SEC?

Ms. SCHAPIRO. Ultimately, I am responsible for the agency’s conduct.

Mr. MACK. If I could direct your attention to slide No. 4, Chairman Schapiro, are you familiar with the rule that is being presented on the screen?

Ms. SCHAPIRO. Yes.

Mr. MACK. After reading through my material and hearing your

testimony, it seems to me that you weren’t completely knowledgeable of this rule at the time you hired David Becker. Please allow

me to read it so everyone in the room can understand the entire

rule.

‘‘The Securities and Exchange Commission has been entrusted by

Congress with the protection of the public interest in a highly significant area of our national economy. In view of the effect which

Commission action frequently has on the general public, it is important that members, employees and special government employees maintain unusually high standards of honesty, integrity, impartiality and conduct. They must be constantly aware of the need

to avoid situations which might result either in actual or apparent

misconduct or conflicts of interest and to conduct themselves in the

official relationships in a manner which commands the respect and

confidence of their fellow citizens.’’

Chairman Schapiro, were you familiar with this rule at the time

that you received David Becker as your general counsel?

Ms. SCHAPIRO. I can’t tell you whether I had read it. I have been

in and out of government most of my career, so I am generally

aware of the ethics rules.

Mr. MACK. I only have a little bit of time. A moment ago, you

said you were familiar with the rule.

Ms. SCHAPIRO. I am but you just asked me was I aware of it at

the time that David Becker arrived at the Commission. I am telling

125

you I can’t recall whether I had reread the rule recently at that

point or not.

Mr. MACK. Throughout your time in the 1980’s and 1990’s, you

were familiar with this rule?

Ms. SCHAPIRO. Yes, I am generally aware of the ethics rules and

that it is each employee’s obligation.

Mr. MACK. Regarding David Becker’s work with the Madoff case,

do you believe that Mr. Becker was sufficiently aware of the need

to avoid actual or apparent conflicts of interest?

Ms. SCHAPIRO. I want to be very careful. I believe he did what

he thought was appropriate and what was required of him, going

to the ethics counsel and seeking advice, getting that advice and

following it. Do I wish now that he had been more sensitive to the

potential for this issue to raise an appearance of a conflict? Yes, I

wish that had happened.

Mr. MACK. A few more questions. Do you think that you were

sufficiently aware of the need to avoid actual or apparent conflicts

of interest?

Ms. SCHAPIRO. On my part, yes. I believe I am.

Mr. MACK. You said now a couple times, I think, that you wished

Mr. Becker would have recused himself. Is that because of the fallout or do you really believe he should have recused himself?

Ms. SCHAPIRO. I believe, as I said, at the time from my perspective, a close account from a long since deceased relative didn’t appear to me to raise a conflict of interest, but I believe now, knowing

what we know now, not because of the fallout, though that is very

real, but because if we could connect the dots and look ahead and

see what all the steps would have been, yes, it would have been

appropriate to have recused.

Mr. MACK. Let me say this. Also earlier, you kind of referred to

the budget as kind of the reason why some of these mistakes happened. How much does it cost to follow that rule?

Ms. SCHAPIRO. That is a personal initiative. It doesn’t really cost

anything.

Mr. MACK. So the argument about the budget as it pertains to

this rule, doesn’t hold water? The argument about the budget in

your opening statement that you talked about really doesn’t pertain to this rule?

Ms. SCHAPIRO. No, and I didn’t mean to suggest in any way that

it did.

Mr. MACK. Thank you.

Mr. MCHENRY. The gentleman’s time has expired. With that, I

recognize the ranking member of the full committee.

Mr. CUMMINGS. I don’t want that to be left hanging. I never

heard you, and I heard all of your testimony and I have read your

testimony, Ms. Schapiro, you never made that allegation. I want to

make that clear. I haven’t heard it. I think it is a very unfair statement.

Let me go on. Chairman Schapiro, I must tell you that when I

was talking to my staff—as a matter of fact, when we were

emailing back and forth at 4 a.m. this morning about this case, because it does trouble me to a degree with regard to the appearance

of a conflict of interest.

126

I think when we hear what Ms. Chaitman had to say, that shows

you why, and I am sure you see it, we have to make sure that we

don’t even have the appearance because what happens is that

every decision made by Mr. Becker then becomes suspect. It is my

favorite author, Covey who in the book, ‘‘The Speed of Trust,’’ says

that ‘‘Once trust is lost, everything moves more slowly.’’ So I cannot

begin to tell you how pleased I was when you walked in here today

and said we will go beyond what may be required. That is so very,

very important.

In my office, I have five people that whenever there is an ethics

question, they all have to agree and if one vetoes, it is out the door.

Why? Because the public is looking over our shoulders, we want to

do the right thing and we want to make sure that it is right.

This has been a major wake up call, hasn’t it. Here in this committee, it is so easy for us to get into a gotcha mode, but I must

tell you, after I read about what you had done at the SEC since

you have been there, and having sat on this committee and

watched Mr. Cox and what he did with this organization and how

it went down under him, to see you come and try to sweep up the

mess, I must commend you.

The sad part about it is that one of these little incidents basically

can almost destroy that trust. Do you understand what I am saying?

So I want you to commit to this committee, if you will. Tell me,

if these incidents come up again, tell us the difference in how you

might approach it. I understand what you did. A fellow comes to

you, he tells you, years ago, I got an inheritance and he wants to

know about a conflict. You listened to it for a while. You have 3,800

employees to deal with, you hear him and then you say, you know

what, the expert on this is the ethics guy. Make sure you check

with him and he got an opinion.

How would you deal with this differently now, looking backward?

Ms. SCHAPIRO. We have a new ethics counsel, first of all, who is

doing sort of a top to bottom review of our program, but I think

I need to work with all of our employees and communicate with all

of our employees about a heightened sensitivity to issues like this.

I have worked so hard in the last 2 years to try to put this agency back on the right path and to earn the trust of the public. You

are right, a small thing like this, not so small thing like this, can

really set us back. It is not fair to 3,800 hardworking employees.

It is just like when somebody mentioned in their opening statement that employees had viewed pornography at the SEC. It infuriates me because most people there are working their hearts out

day and night to try to do the right thing. It hurts the reputation

of every single one of us.

I have to work with our employees to make sure that we increase

their sensitivity to issues like this. I think with our new ethics

counsel and their review of the program and how it might be

strengthened, we will get some good advice. I think the inspector

general is likely to have some recommendations that will be very

helpful too.

Mr. CUMMINGS. I read in your testimony where you talked about

technology and trying to keep up with these ever changing transactions and how complicated they have become. I want to make

127

sure you have all the resources you need to address this because

so many of our constituents on both sides lost a lot of money. Like

Mr. Crimmins said, they need confidence to reenter this system of

stocks.

Ms. SCHAPIRO. I agree.

Mr. CUMMINGS. Thank you.

Mr. MCHENRY. I thank the ranking member. With that, we yield

for 5 minutes to Mr. Ross of Florida.

Mr. ROSS. Thank you, Mr. Chairman.

As a kid, I always wanted to be a lawyer and fortunately I found

a law school that would take me. I went to law school and I always

had a deep seated respect for the sanctity of the law, so much so

that I was gratified that the American Bar Association and my

state bar association required not only a course but an examination

on the Code of Professional Responsibility.

Ms. Schapiro, I understand that you too are a lawyer and that

even though you inherited quite a mess at a time of great disarray

at the SEC, my question is as a lawyer, when Mr. Becker came to

you, did you not think that a further investigation should be made?

As a lawyer, we do conflicts checks, we make sure of that and it

just seems to me that if further inquiries had been made at that

time, this might have been avoided.

Ms. SCHAPIRO. I don’t disagree with you that if further inquiries

had been made, this might have been avoided. I can only say what

I said at the beginning, that when he raised it with me, that he

had a closed account, I didn’t know if it had been a net winner account, a net loser account or anything else, from a deceased relative, it didn’t raise for me a conflict of interest question.

Mr. ROSS. The fact that he asked for a waiver from his subordinate is indicative of a problem, an inherent internal problem there

from an ethical standpoint.

Ms. SCHAPIRO. I don’t know that he asked for a waiver and I

again, I have no access to any contemporaneous documents of any

sort. He asked whether or not he had a conflict and was advised

that he did not have a conflict.

Mr. ROSS. Did you know who was advising him that there was

no conflict?

Ms. SCHAPIRO. It was the ethics counsel of the SEC at that time

who is no longer the ethics counsel.

Mr. ROSS. As general counsel, that would be under him, would

it not?

Ms. SCHAPIRO. I believe that is the case in most agencies.

Mr. ROSS. Do you feel this would be avoided again in the future?

Ms. SCHAPIRO. I would love to say absolutely without a doubt,

but it would be my very strong hope that with a very strong new

ethics counsel that we hired from the Treasury Department with

long government experience, with a revamping of our programs and

with some additional education and training for our people, I would

hope and expect that we could avoid this.

Mr. ROSS. I think the American public needs that assurance that

credibility is going to be there.

Mr. Risinger, with regard to human resources, are your employees all part of the general schedule in terms of compensation?

128

Mr. RISINGER. Congressman, actually we have a separate pay

schedule that we received from legislation of Congress back in

2001, 2002.

Mr. ROSS. Were you subject to the pay freeze that the President

issued?

Mr. RISINGER. Yes, we are.

Mr. ROSS. That just really affected the cost of living increases,

didn’t it?

Mr. RISINGER. It does affect the cost of living increases.

Mr. ROSS. What about within pay grade or step increases? Did

it affect that?

Mr. RISINGER. We have a merit pay process that is the equivalent of step increases for the rest of the government, so that is

technically affected by the pay freeze.

Mr. ROSS. In your disciplinary procedures, let me ask you this.

What is the probationary period for any employee?

Mr. RISINGER. It is generally a year.

Mr. ROSS. One year. After 1 year, if there is a disciplinary situation, is a presumption in favor of the employee if they have been

found in violation or alleged violation of any personnel policies?

Mr. RISINGER. The Federal laws that we have to follow in terms

of disciplining employees set out a number of standards that we

have to go through. There are actually 12 factors that you have to

look at when you are issuing discipline and one of them is a factor

that says, is this the level of discipline that is necessary to stop the

behavior and not more than that. So there is a presumption that

you are taking a preventive or corrective step, not necessarily a punitive step.

Mr. ROSS. These would have been the same procedures employed

in those involved in the viewing of pornography, correct?

Mr. RISINGER. That is correct.

Mr. ROSS. Only one person was fired as a result of that?

Mr. RISINGER. Of the cases we have had since 2005, 50 percent

or 51 percent have either resigned, retired or have proposed removals in place. We have had a number of suspensions and reprimands

as well.

Mr. ROSS. What is the attrition rate in your agency?

Mr. RISINGER. In the agency, in normal years, it is 7 to 8 percent.

In the last couple of years because of the economy, it has been in

the 31⁄2 to 4 percent range.

Mr. ROSS. How does that compare with Federal agencies overall?

Mr. RISINGER. If we are talking just attrition in general, I think

that is pretty equivalent with other agencies.

Mr. ROSS. Last question. Ms. Chaitman, with regard to the

Madoff situation specifically, I saw where you put them on notice,

what was going on. What action do you think would have requested

be done in order to avoid this conflict?

Ms. CHAITMAN. Under the statute, Congress mandated that the

SEC go into court and enforce the law against SIPC. That is precisely what I asked Ms. Schapiro to do in my April 2, 2009 letter.

In fact, when Ms. Schapiro testified on July 14th before the Subcommittee on Capital Markets that she was going to do everything

in her power to provide the maximum SIPC coverage for all investors, I assumed that she was, in fact, going to follow my request.

129

Now I have learned that in January 2009, the SEC had already

agreed with denial of SIPC insurance to more than half of the victims.

Mr. ROSS. Thank you. I yield back.

Mr. MCHENRY. Thank you. Mr. Yarmoth of Kentucky for 5 minutes.

Mr. YARMOTH. Thank you, Mr. Chairman.

Thanks to all the witnesses for your testimony.

Over the last couple weeks I have been plowing my way through

the Financial Crisis Inquiry Report which is anything but bedtime

reading. It will not put you to sleep, I guarantee you that—as a

matter of fact, quite the contrary.

I am sure, Chairman Schapiro, that you are aware of what the

report concluded, particularly with regard to the SEC. I was interested in an assessment of where you think you still need to go to

make sure that the failings in the system as it concerned your

agency won’t recur?

Ms. SCHAPIRO. As I have not looked at the report recently, it obviously focused a lot on the failures of the SEC’s Consolidated Supervision Program for the five largest investment banks, all of

which during the financial crisis essentially disappeared or converted to bank holding companies under the regulation of the Fed.

I think there are a lot of lessons. I testified before the FCIC about

the failures of the agency with respect to that program.

There are a couple of things. One is that it was a voluntary program, a voluntary regulatory program which, in my view, doesn’t

work very well. We had insufficient resources devoted to the regulation of the five largest investment banks. We didn’t have people

with the right kind of expertise and I think in some ways perhaps

the most important thing is it required a very different kind of supervision than the SEC has traditionally done. It required prudential supervision as opposed to the SEC’s going onsite, doing an examination, leaving and then perhaps bringing an enforcement case.

We didn’t have the right mindset within the agency I think for

that kind of constant prudential oversight approach that was really

necessary. There was a lack of management focus, I think, with respect to the program. There was a willingness to believe what our

people were being told by some of the leaders in some of those financial institutions that failed, a lack of skepticism which I think

really hurt us as well. That program was discontinued by my predecessor, Chairman Cox.

Mr. YARMOTH. With regard to the present situation, because

most people who observe the situation now, agree I think that the

situation in terms of too big to fail, the largest investment banks

have, in fact, gotten larger and that the wild west atmosphere in

terms of risk taking and so forth may not have been curtailed at

all. Is this a concern that you share? Anyone else on the panel is

welcome to respond as well.

Looking at the Wall Street profit picture and so forth, it looks

like there hasn’t been a whole lot of change in behavior.

Ms. SCHAPIRO. I do think I can speak perhaps most particularly

to the over-the-counter derivatives market where we have a very

direct responsibility, although much progress is being made interVerDate 11-MAY-2000 15:11 Jul 29, 2011 Jkt 000000 PO 00000 Frm 00135 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67368.TXT KATIE PsN: KATIE
130

nationally with respect to accounting standards and other prudential measures.

Getting the over-the-counter derivatives market into a transparent marketplace so that regulators can understand the buildup

and concentration of risk in financial institutions I think is going

to be a very, very important piece of this. We are working through

those rules as is the Commodities Futures Trading Commission.

About half of them or so have been proposed and I would expect

while we are going to miss for some of them the July 21st deadline,

we will get them over the finish line over the course of the rest of

this year. Then there will be implementation and phasing periods

to go through. I think that will make a difference.

I think the work the FDIC is doing with the Fed and others on

living wills and plans for financial institutions to wind down their

business appropriately will also make a very big difference and

then, of course, the capital requirements.

Mr. YARMOTH. A final question on that subject. We talked about

the problem potentially with resources and the dangers that would

ensue if your budget was cut. Are you confident that the legislative

action that was taken, Dodd-Frank, is sufficient or that there are

things that we yet need to do to make sure that we don’t have a

situation recur as it did 2 years ago?

Ms. SCHAPIRO. I think it makes large strides toward filling the

gaps that existed in the regulatory regime. I will say that one of

my concerns about the budget is that we don’t have the capacity

to operationalize the rules that we are putting into place—getting

swap markets participants registered and the swap data analyzed

and market surveillance taken care of. Those are things that we

will have to put off, but I think it is incumbent upon all of us as

regulators who see these markets close up to continue to tell Congress where we think the issues are, where perhaps Dodd-Frank

wasn’t the right approach and where we think there are still gaps.

Mr. YARMOTH. Thank you very much.

Mr. MCHENRY. I thank the gentleman. With that, I yield 5 minutes to the chairman of the full committee, Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman.

Madam Chair, I just went over to the Business Roundtable and

back, so I had the opportunity to see about one-third of corporate

America’s profits in that room, almost all public companies, probably all public companies except one, all regulated by the SEC. I

was there talking about impediments to job creation.

I am going to give you a little relief from the question de jour

for a moment and ask, Dodd-Frank is not perfect and it was not

what you might call a low cost, low budget way to get better performance with less cost. You have asked for 28 percent budget increase. In fact, if you had only the budget increase necessary to do

the work you were not doing as well as you wanted to without all

the new losses, what would that budget increase be in your estimation? In other words, what would it cost to do it right without

piling on new regulations when there is no question there have

been problems properly enforcing your existing portfolio?

Ms. SCHAPIRO. Mr. Chairman, I would have to actually do the

math but maybe this helps.

131

When we did our 2012 request, we viewed 40 percent of the positions and it was a total of 780 positions or 584 full-time equivalents. We viewed 40 percent of those as going to our ongoing programs—that is 312 positions—and 60 percent going to Dodd-Frank

in limitations, so hedge funds, oversight, over the counter derivatives, municipal advisors, whistleblower programs, clearing agencies and so forth.

Mr. ISSA. To followup on that quickly, the transparency elements

that were asked for and agreed on by SEC and other agencies

never got into Dodd-Frank, so you don’t have a common mandate

for reporting for transparency that had been worked out in the conference and then didn’t happen.

From this committee’s standpoint we are interested, and you can

answer for the record if you are not completely ready today, how

much savings could you get if, in fact, there was transparent interoperability both inward and whenever possible, out to the public for

oversight?

Ms. SCHAPIRO. That is a great question and I would like to answer it for the record because I do think it is important, particularly when you have a market like the over-the-counter derivatives

market with two regulators in the same space, that we try to be

as consistent as we possibly can and leverage each other as effectively as we can. If I can come back to you on that, I would like

to.

Mr. ISSA. I appreciate that and I want to give you an opportunity

to be thoughtful because that is a major initiative of this committee

on a bipartisan basis in the last Congress that didn’t happen and

we would like to renew it but would certainly take your input.

In the remaining 2 minutes, I do want to ask, Mr. Becker’s conduct in retrospect was not a good idea. It certainly has not led to

confidence in the independence, transparency and non-biased behavior of the SEC when we look through the tail light.

How can we know that the changes you are asking to be reviewed are going to clearly eliminate anything like this in the future? Where do we get the confidence in that?

Ms. SCHAPIRO. Mr. Chairman, I think it is a fair question. You

and I have had many conversations and I try to be very transparent and up front. We will obviously be public about what our

inspector general finds and what recommendations he makes, what

our new ethics counsel finds as she reviews our program and recommendations she makes. We will be happy to come back and talk

to Congress about those findings and those recommendations and

see if we can develop some metrics that would actually help us figure out whether we are getting it right.

Mr. ISSA. Your ethics counsel served under the general counsel,

a career position but under the general counsel, correct?

Ms. SCHAPIRO. Yes.

Mr. ISSA. Would you consider moving that to be independent direct report so that there would only be one person, a political appointee like yourself, that would be between the public and ethics

questions rather than having a general counsel who has a number

of jobs?

You don’t have to answer that today but I would like you to consider that. In so many different HR situations in the private sector,

132

there is a clear independence of HR which is a lot of the questions.

A question of conflict was more than a legal question, particularly

when it included somebody who was the boss of the person they

went to for this 25 minute session and clearance, so give that some

thought. I won’t ask for an answer today.

Ms. SCHAPIRO. I will do that.

Mr. ISSA. Finally, as the time runs out, we on the committee

want to work to try to be helpful. We realize we only have a portion of the portfolio that you see; you see much more of the regulatory and financial oversight of another committee, but the question I have for you is, in our conduct of this investigation, as we

look at Mr. Becker’s total portfolio of money, other things he may

have done and how this might have affected or not affected the

Madoff Trust, will you promise your cooperation to this committee

today?

Ms. SCHAPIRO. I will promise my cooperation to the fullest extent

I can. I don’t know that I can compel him in any way to do anything.

Mr. ISSA. He has already come in voluntarily. We have the ability to compel him but it is really making sure that we can have

a quick and transparent. Your IG would normally be willing to

share any information that was not directly related to a criminal

referral and so on. Anything you can do to pledge to help us will

allow us to move from where we are as quickly as possible onto

something else. That is why I ask today.

Ms. SCHAPIRO. Yes, of course I will help.

Mr. ISSA. Thank you. I thank you all for your indulgence and I

yield back.

Mr. MCHENRY. Thank you.

Mr. Connolly of Virginia for 5 minutes.

Mr. CONNOLLY. Thank you, Mr. Chairman.

Chairman Schapiro, aren’t you the chairman who appointed the

inspector general who, in fact, is charged with investigating Mr.

Becker?

Ms. SCHAPIRO. No, sir. He was appointed by my predecessor.

Mr. CONNOLLY. By your predecessor. That investigation continues?

Ms. SCHAPIRO. Yes. I requested the investigation.

Mr. CONNOLLY. You requested the investigation?

Ms. SCHAPIRO. Yes.

Mr. CONNOLLY. We just heard a line of questioning asking you

to look at a budget without additional regulation that was burdensome and so forth. The Dodd-Frank legislation added some regulation in areas that heretofore had not been regulated at all, is that

correct, Chairman Schapiro?

Ms. SCHAPIRO. Yes, that is absolutely correct.

Mr. CONNOLLY. For examples, take derivates. How big are

derivates? What is the value of the derivatives market?

Ms. SCHAPIRO. The last number I saw was $600 trillion, I believe.

Mr. CONNOLLY. I am sorry, did you say trillion?

Ms. SCHAPIRO. Yes, sir.

Mr. CONNOLLY. It is entirely unregulated until Dodd-Frank

passed, is that correct?

133

Ms. SCHAPIRO. Yes, it is largely unregulated.

Mr. CONNOLLY. Whatever could go wrong with an entirely un- regulated $600 trillion market?

Ms. SCHAPIRO. We saw some things that went wrong and presumably that is what motivated the Dodd-Frank Act.

Mr. CONNOLLY. So maybe that is one of those burdensome additional pieces of regulation we are just going to have to put up with.

That burdensome additional regulation requires SEC to staff up

and to acquire the requisite expertise to enforce the regulation you

are now charged with, is that correct?

Ms. SCHAPIRO. Yes, we believe so. We are able to do the rule

writing that has been ongoing this year but to operationalize those

rules, we need additional staff.

Mr. CONNOLLY. We heard Mr. Katz in his testimony say that

simply having more SEC staffers do the same thing would not protect investors or promote capital formation. How many areas of additional or new regulation are requiring you to ramp up in terms

of expert staffing?

Ms. SCHAPIRO. We obviously have derivatives, hedge fund regulation, we are creating a new whistleblower office although that is

work that we need more help with but it is not unknown to us. We

have to increase our oversight of credit rating agencies under the

act and we have to register a whole new category of registrant in

the municipal securities markets called municipal advisors, so

there are half a dozen or so new areas for us to undertake regulation.

Mr. CONNOLLY. Just listening to you tick off that list, none of

those sound like frivolous burdensome additional pieces of regulation. They sound like thoughtful additions to the regulatory framework in light of the biggest meltdown on Wall Street in 80 years.

Would you share that view?

Ms. SCHAPIRO. I do think all of these areas are ones that needed

to be addressed. As we write the rules, we are working very hard

in collaboration with other regulators, but also with the public,

with investors and the industry to make sure that we write as sensible rules as we possibly can.

Mr. CONNOLLY. Mr. Katz, would you share that view or is this

just another example of having simply ‘‘more SEC staffers doing

the same thing?’’

Mr. KATZ. There is a quantitative nuance difference in what I

said and the way I think you characterized it. The agency has an

enormously large number of new areas of regulatory authority. The

question is, when you go about regulating hedge funds, or regulating municipal securities markets, are you going to regulate hedge

funds exactly the way you regulate investment advisors, which is

arguably what they are, or investment companies, which is sort of

a close cousin?

My point is that if you look at the way the Commission has regulated advisors, and regulated mutual funds, it hasn’t been terribly

effective. If you take the same approach for hedge funds, yes, that

would be doing the same thing in those approaches, even if it is

a new substantive responsibility with a new category of registrant.

Mr. CONNOLLY. Would you say, Mr. Katz, that some of the problem preceding the Wall Street meltdown in September 2008, for exVerDate 11-MAY-2000 15:11 Jul 29, 2011 Jkt 000000 PO 00000 Frm 00139 Fmt 6633 Sfmt 6633 C:\KATIES\DOCS\67368.TXT KATIE PsN: KATIE
134

ample, had to do frankly with the quality of the appointees, namely

a whole bunch of people who didn’t believe in regulation in the first

place and therefore, didn’t do it?

Mr. KATZ. I have to tell you that there is an old saying at the

SEC that the Commissioners decide the policy, but ultimately, it is

the staff that decides what it means and how it gets done. One of

the interesting things about the SEC, the relationship between

Commissioners and the staff is that it is a close relationship. Because the Commission is a bipartisan body, you are always going

to get five people with diverging points of view, some of whom will

support the staff, some of whom will disagree with the staff.

I can’t think of an occasion where you had five Commissioners

on one side of the table and the staff on the other side at loggerheads. That doesn’t happen. You invariably get some supportive of

Commissioners, some Commissioners who are critical and you also

get that divergence of view among the staff.

Financial regulation is never a question of identifying a single

right answer.

Mr. CONNOLLY. Thank you, Mr. Katz. Unfortunately, my time is

up but I would love to pursue this further, but I certainly believe

that the narrative that somehow SEC is treading into waters it has

no business treading into is fallacious. If anything, we needed more

people guarding the hen house. If we are going to talk about the

fox guarding the hen house, that may have been true in the 2008

period of time but is not true today.

I thank the Chair.

Mr. KATZ. Excuse me, Mr. Chairman, if you might indulge me?

There is one very quick point I wanted to make that Mr. Yarmoth

brought up.

Mr. MCHENRY. Please.

Mr. KATZ. That was the question of the consolidated supervised

entities regulatory process at the SEC. There is a lot of confusion

about that. There was a voluntary process. The reason it was a voluntary process is not because of a deregulatory attitude at the

SEC; it is because the Commission sought from Congress the authority to make it a mandatory process as part of the Gramwich

Bill, which eliminated glass eagle.

Congress explicitly prohibited the Commission from making it a

mandatory process. The Commission had a weak hand, it played

the weak hand as best it could.

Mr. PLATTS. Thank the gentleman.

I will yield 5 minutes to myself.

I chair the Subcommittee on Government Organization, Efficiency and Financial Management, so I am going to focus on a related but slightly different area that relates to our jurisdiction. I

had the privilege of chairing the same subcommittee from 2003 to

2007.

We had a subcommittee hearing July 2003 about the SEC, about

financial management at the SEC, about internal controls and we

heard testimony at that point they had just put in a new financial

management system in 2002. In the testimony of the Executive Director, James McConnor at the time in July 2003, he said we have

this new system and we are going to be certified basically in January 2004 for audited financial statements. Here we are 7 years

135

later, plus, and we are now talking about the same thing, a new

system using DOT Enterprise system to put in place a new system.

Chairman Schapiro, I appreciate the changes you have made, the

COO, the new chief operating officer and other leadership changes

and systemic changes within the SEC. Why should the American

people believe when we were told 7 years ago we got it right and

we were going to be able to go forward; how is it different today?

Ms. SCHAPIRO. Thank you. My understanding is that was the

Momentum system, I believe, and it was deployed 9 or 10 years ago

and in the beginning, it did meet the agency’s needs, but then over

time, the agency deferred upgrading over many years and as a result, it began to lack the functionality that was necessary to do the

job. Gaps were created, work arounds were developed and as a result, the SEC ended up with two material weaknesses in its controls over financial reporting in our audit which is a disgraceful position for the Securities and Exchange Commission to be in.

With our new chief operating officer, our new chief financial officer and our new information officer, we made the decision that

rather than incur the risks of developing a new system at the SEC,

perhaps not really a core competency for us, that we would be better served by outsourcing financial management.

We went through a process and identified the Department of

Transportation, which is an authorized Federal Share Service provider used by the GAO for their financial management system, and

made the decision that the best way for us to remediate our material weaknesses, generate the kind of reporting that we need, minimize all these manual workarounds and all of this would be to

outsource to them. I think it is the right decision for the taxpayer,

I think it is the right decision for the SEC.

Mr. PLATTS. The followup related to that is, in the audit that was

done at the end of this past year, a clean opinion, but failure to

sign off on the internal controls, two related questions.

First, how would you describe the internal effort to get the clean

opinion other than the internal controls and I ask in the sense of

in July 2003, SEC said it was a heroic end of the year effort, it

wasn’t because we had a system in place, here is the data, we are

ready to go. Was there again a heroic end of the year effort to be

able to have that audit?

Ms. SCHAPIRO. I think there were some heroics involved. I can’t

compare to 2003 but I think we did put together a senior team of

people to really shepherd the process through. They were diligent

and they stuck with it, but they are also very much onboard for

this decision to outsource.

Mr. PLATTS. Interim controls, not until last year in Dodd-Frank

did it require the auditor to sign off on the internal controls. For

almost 20 years under the Federal Managers Financial Integrity

Act adopted in 1982, actually over 20 years, that we have to have

strong internal controls. Although that wasn’t required to be signed

off, I assume you are really conscious of the fact that it wasn’t a

new requirement that you have good internal controls, it was just

a new requirement that it be signed off by the auditor and whoever

has been overseeing those internal control systems, clearly were

not fulfilling their responsibilities?

136

Ms. SCHAPIRO. Absolutely, and under our chief operating officer,

we will deal both with the audit issues with respect to internal controls, but also the attendant business processes, so it is not just a

technology answer for us. It is going to have to be business process,

free engineering process as well.

Mr. PLATTS. I am going to try to squeeze in two more questions

in 20 seconds.

In your testimony, you talk about the follow-on person that you

have for the audit recommendations of your IG and GAO. In your

testimony, you state that you appointed an audit followup official

and empowered her to ensure that agency managers are held accountable for timely and appropriate followup.

How are they being held accountable? One thing that frustrates

me is when we find something that went wrong and I have asked

for many years now, was anyone disciplined, was anyone fired for

not doing what they were supposed to do? In what way are they

being held accountable?

Ms. SCHAPIRO. We are very closely tracking audit recommendations, both from GAO and from our inspector general. I can tell you

that in my 2 years as chairman, we have successfully closed 350

inspector general recommendations compared to 190 in the prior 2

years. We are aggressive about doing it and I will tell you that in

the inspector general’s semiannual report, he also talks about our

progress with respect to closing recommendations and whether

there has been any management disagreement with his recommendations. He is quite on top of it and quite transparent.

Mr. PLATTS. I think that is critical going forward. My subcommittee is especially going to look at staying on top of those recommendations and special internal controls. It goes to the broader

issue discussed here about ethics and if you don’t have internal

controls, that is the foundation for not just good financial management, but for a good ethics environment.

Ms. SCHAPIRO. I agree completely.

Mr. PLATTS. We, as a subcommittee, and partner with Chairman

McHenry here today, that is what we are going to be looking at.

I will yield back and yield now to Ms. Speier from California for

5 minutes.

Ms. SPEIER. Thank you, Mr. Chairman.

I thank you all for your participation in this hearing. I was particularly impressed by the testimony of Mr. Katz and Mr.

Crimmins.

I am somewhat surprised because I am looking at the title of the

hearing and the sign above the chairman’s head that reads, ‘‘Can

American Taxpayers Trust Today’s SEC to Manage Itself and Do

Its Job.’’ I thought it might be interesting to substitute Congress

and ask the same question and see if we would fare as well.

Chairman Schapiro, having served over 2 years on the Financial

Services Committee, I have watched you and I think you are truly

committed to doing the right thing. Before you came back as Chair,

under Chairman Cox, the number of actual enforcement actions at

the SEC was reduced by 80 percent and the number of

disgorgement actions were reduced by 60 percent—a stunning failure at a time when all the mischief was going on with Wall Street.

137

We look back at the savings and loan crisis and we recognize

that referrals from various regulators, there were 10,000 of them,

and of those 10,000, there were 1,000 that turned into convictions

and 500 people went to jail. These were CEO level folks that went

to jail.

The American people are looking at us, looking at Congress, looking at you and saying, who is going to jail? Who is being charged?

The truth is there hasn’t been a lot. My first question is, have you

made any referrals to the Justice Department, to the U.S. attorney,

as a result of the Wall Street meltdown?

Ms. Schapiro. I am confident that we have. I guess I would like

to supplement the record, if I might, on that. I just don’t know the

numbers or the details about it because, as you know, we don’t

have criminal prosecution authority, although we have continued to

bring a relatively high number of cases and some very large impact

cases coming out of the financial crisis in the past year.

Ms. SPEIER. So you will get back to the committee and actually

tell us how many referrals you have made?

Ms. SCHAPIRO. I would be happy to.

Ms. SPEIER. The CEO of Galian is being tried now. Mr. Kupta

who is a director of a significant Wall Street firm, evidently is

being looked at as having shared insider information, although he

didn’t appear to have acted on it. Have any actions by the SEC

been taken against those two individuals?

Ms. SCHAPIRO. We filed a proceeding against Mr. Kupta last

week and we have filed multiple proceedings coming out of the

Galian investigation over the course of the last 6 months or so.

Ms. SPEIER. In 2004 and 2005, the GAO said to the SEC that it

should take a look at and close its revolving door. The SEC then

reported back to the GAO that it had done that, although the GAO

now says that never happened. The reverse situation of Mr. Becker

is the fact that you have staff that work within the SEC and then

they are lured away by lucrative salaries outside and oftentimes,

the people that are lured away are lured away by the companies

that they were actually investigating.

We need to do something about the lack of a revolving door and

I want to know, first of all, have you made any policy changes in

an attempt to deter these revolving door practices?

Ms. SCHAPIRO. We have instituted requirements that senior employees seek ethics counseling before they leave the agency. We require all employees to have a post employment briefing so they

don’t violate ethics rules when they are leaving. Of course we are

subject to the governmentwide restrictions and we have some

unique to the SEC restrictions, but our inspector general in looking

at a specific revolving door incident has given us last week some

additional recommendations for tightening up our rules. We are

going to look at those very seriously and I hope to go forward with

them.

Ms. SPEIER. What about a cooling off period? Why not require

that persons within the Commission that have the authority to

make determinations and were investigating are not allowed to be

hired by those who they have investigated for a period of 2 years?

Ms. SCHAPIRO. I think there is a lot of appeal to that. The only

hesitation I have is that we are so dependent on getting people to

138

come to us, even if it is just for a few years just to bring us current

industry expertise, we have to get the balance right.

Ms. SPEIER. I don’t disagree, because that is precisely the problem.

Mr. MCHENRY. The gentlelady’s time has expired.

I recognize myself for 5 minutes.

Chairman Schapiro, I want to get this out of the way. I know

there have been a number of questions about the David Becker

conflict of interest question. I just have a couple of questions, yes

or no. I want to proceed with it because I have some other issues

I do want to touch on beyond this.

After David Becker told you that he received proceeds of a closed

Madoff account, did you suggest that he recuse himself from the

Madoff case, yes or no?

Ms. SCHAPIRO. I am sorry, the premise isn’t exactly right. My

recollection is that he told me that his mother had a Madoff account before she died and that it had been closed. I don’t honestly

recall whether he told me he had received proceeds or not. He may

well have, I just can’t recall. As you know, I haven’t been able to

look at anything.

Mr. MCHENRY. But he brought this up that he received proceeds

from a Madoff account?

Ms. SCHAPIRO. He brought up that his mother had had a Madoff

account.

Mr. MCHENRY. In light of that, did you suggest he recuse himself?

Ms. SCHAPIRO. No, I didn’t.

Mr. MCHENRY. Did you suggest that he settle with the Trustee

as other Madoff investors were doing at the time?

Ms. SCHAPIRO. No.

Mr. MCHENRY. Did you suggest that Mr. Becker disclose his interest to other SEC staff or Commissioners who relied on his advice?

Ms. SCHAPIRO. I did not. I expected him to go to the Ethics Office

and get ethics counsel and follow their advice.

Mr. MCHENRY. You are aware that the ethics counsel of the SEC

reported to the general counsel?

Ms. SCHAPIRO. Yes, although the Ethics Officer is a career employee.

Mr. MCHENRY. But his direct report.

Ms. SCHAPIRO. Yes.

Mr. MCHENRY. Did you suggest that Becker do any research to

determine the amount or the character of interest that he had?

Ms. SCHAPIRO. No.

Mr. MCHENRY. Later when Becker was providing advice about

the net equity evaluation method, did you direct Mr. Becker to take

any actions with respect to this potential conflict of interest?

Ms. SCHAPIRO. No, because it didn’t occur to me that this long

ago closed account would be in any way impacted, it just didn’t

occur to me.

Mr. MCHENRY. So he didn’t disclose to you that he was, in fact,

the trustee who closed the account?

Ms. SCHAPIRO. I don’t recall.

139

Mr. MCHENRY. I understand. I am just trying to get to the heart

of this. This raises major questions and I think you can understand

the public’s interest and the investors’ interest.

To that same degree, when Mr. Becker was filing briefs in court

that took recommendations in terms of the net equity position valuation method, you didn’t direct Mr. Becker to recuse himself?

Ms. SCHAPIRO. No.

Mr. MCHENRY. OK. I just wanted to get those out of the way. Obviously we care deeply about transparency and disclosure both here

in Congress and with regulators.

Chairman Schapiro, Mr. Risinger, thank you for your public service, but we need to get to the heart of this issue. I think that is

why we are asking these questions today and why I am.

Ms. SCHAPIRO. I agree, Mr. Chairman. It is why I have asked the

inspector general to do a review, so we can get all the information.

Mr. MCHENRY. The point is you said you wish you had known

then what you know now and had you asked any of these questions, you would have known it then. That is at the heart of this

issue. That is what is disappointing and of great concern in terms

of public policy.

Ms. Chaitman, in dealing with this Madoff valuation question, I

understand the insurance piece, I do, would it have changed your

dealings with SEC’s legal counsel had you known that Mr. Becker

was the trustee of a Madoff account?

Ms. CHAITMAN. If I had known that, I would have, myself, demanded that he recuse himself and that the SEC take steps to clarify its position because as I say, both Congressman Garrett and I

believe that the SEC has taken an illegal position in supporting

SIPC. If I had know that Mr. Becker had a personal interest, I certainly would have asked Ms. Schapiro to do something about it.

Mr. MCHENRY. Thank you.

Mr. Katz, this raises a larger management issue. We are talking

about capital formation, we are trying to be the world’s markets,

which we have been. When you have a dysfunctional agency like

this with these management problems that you described, you said

the SEC has never engaged in serious self examination of its performance or used appropriate measures of performance. Is that still

the case?

Mr. KATZ. Not having seen this Boston consulting group report

that is apparently due out, I think yes, that is the case. It has been

a long time since the agency took a hard look at itself in the mirror.

Mr. MCHENRY. My time has expired. With that, I recognize Ms.

Maloney for 5 minutes.

Votes have been called on the floor, we have 11 minutes remaining in the votes, so I would defer to my colleagues on that side of

the aisle if they want to work something out in terms of time.

The gentlelady is recognized now for 5 minutes.

Mrs. MALONEY. First of all, I would like to welcome all the panelists and thank the chairman for this important hearing. Certainly

honesty and transparency is very important in government.

I would like to get further clarification from Chairman Schapiro.

As I understand, the controversy around Mr. Becker’s alleged conflict of interest is about an SEC decision that appears to be against

140

his financial interest. As I understand it, prior to Mr. Becker’s return to the SEC, he was working at a private law firm, correct?

Ms. SCHAPIRO. Yes, he was.

Mrs. MALONEY. When he arrived at the SEC, you testified he

took steps to notify both you and the SEC’s ethics counsel of his

inheritance from his mother which had been liquidated long before

Madoff’s ponzi scheme had been discovered, correct?

Ms. SCHAPIRO. That is my understanding.

Mrs. MALONEY. The ethics official said it was OK for him to work

on Madoff-related issues. That is what is in the memo and information that I read, that the Ethics Committee is there to be consulted, he consulted them and they said there was no conflict, that

is fine, go to work. Is that your recollection?

Ms. SCHAPIRO. Yes, I believe.

Mrs. MALONEY. Your memory is the same as the Ethics Committee. Chairman Schapiro, it appears that the basic question the SEC

faced was whether to support an asset valuation method used by

the Madoff Trustee called the cash-in, cash-out method, or a different evaluation method used by several law firms called the last

statement method. Is that correct?

Ms. SCHAPIRO. Yes.

Mrs. MALONEY. Under the first method, Mr. Becker’s inheritance

would be subject to clawback litigation and under the second method, his inheritance would not have been subject to clawback. The

SEC choose to support the first, the decision was against the financial interest of Mr. Becker. This meant that the Trustee could sue

Mr. Becker and his brothers to recover some of his mother’s inheritance which is exactly what happened, correct?

Ms. SCHAPIRO. That is right. The SEC did take the position that

was cash-in, cash-out in constant dollars to reflect that some very

elderly people who had long held Madoff accounts would be able to

get some more money from SIPC under that formulation, but it

was not the final statement approach that you mentioned that

would have potentially prevented the clawback.

Mrs. MALONEY. But the decision was to allow the clawback, so

I assume he participated in a decision allowing the clawback that

was against his financial interest?

Ms. SCHAPIRO. The decision to clawback is one of the Trustee,

not of the SEC.

Mrs. MALONEY. The SEC did not make that decision, the Trustee

made that decision?

Ms. SCHAPIRO. The Trustee makes that decision.

Mrs. MALONEY. The Trustee makes that decision, but it was a

decision that affected Mr. Becker.

Ms. SCHAPIRO. Yes.

Mrs. MALONEY. I would like either you or Mr. Crimmins to answer. Basically, Mr. Becker or the SEC sided with the Madoff

Trustee. The SEC actually took action that was potentially detrimental to Mr. Becker’s financial interest and it exposed him to

a potential litigation worth roughly $11⁄2 million because that was

the proceeds, correct, in addition to the $500,000. Everybody seems

to be criticizing Mr. Becker, but Mr. Becker and the SEC’s decision

appears to have been completely against his financial interest.

141

I understand you have an IG report coming out and that eventually will clarify things more, but in first reading the information,

it appears that the decision made was against him and against his

financial interest and what he or the SEC thought was the right

way to go.

If the SEC had supported the banks’ interpretation or the law

firm’s interpretation instead of the Trustee’s interpretation, Mr.

Becker might not have had any exposure at all, is that correct? Mr.

Crimmins.

Mr. CRIMMINS. The point is that the $500,000 that Dorothy Beck- er invested was going to come back. The $11⁄2 million, as you indicated, was the Madoff fictitious profit was going to Picard’s claim

as the Trustee, independent reporting to the court, not to the SEC,

that dealt with a little bit of difference is whether there should be

some modest rate of return, whether there should be some adjustment for inflation.

That is still not finally determined. A month after Becker has left

the agency, it is a small amount and to an individual who was compensated at $3 million a year, roughly, and gave that up to go work

in the public service, it is totally inconsequential and I would respectfully submit to the subcommittee, be a distraction.

Mrs. MALONEY. May just complete with one observation for 2 seconds.

Basically, if someone in Mr. Becker’s position wanted to help

himself financially, he would have taken the opposite point of view

than the one that he took or the one that the SEC took.

Mr. MCHENRY. The gentlelady’s time has expired. We have votes

on the floor, Madam.

Mrs. MALONEY. I look forward to the IG’s report.

Mr. MCHENRY. I think we all do. I appreciate the gentlelady

wrapping up. We do have votes on the floor.

I want to thank the panel.

Ms. SCHAPIRO. Mr. Chairman, I am so sorry, I wanted to just say

one thing. I want to make it very clear, I don’t recall specifically

whether Mr. Becker told me he had inheritance from the account

or whether his mother had had an account and I made that assumption. Because it is 2 years ago, I just don’t recall. I want to

be so clear about that.

Mr. MCHENRY. We will let the record reflect that.

Ms. SCHAPIRO. Thank you.

Mr. MCHENRY. Certainly. I think it is important the record accurately reflect what happened. The findings of this hearing are very

important. We are interested in management issues. The Members

certainly took a specific direction today dealing with this conflict of

interest of Mr. Becker, the general counsel for the SEC because of

the fact he was a trustee of a Madoff account a few years before,

and the decision, as Ms. Chaitman mentions, that was a very different valuation than was existent under law and the decision he

made that in some ways benefited him disproportionately than the

other two methods.

In terms of the budget, I think it is appropriate that SEC have

a sufficient budget and we have strong management practices to

make sure there is transparency and disclosure, safety and soundness in investing in our markets.

142

In the wake of the Enron scandal, in February 2003, the SEC

was given the largest spending increase in its history. The GAO

said in testimony before this subcommittee in 2003, it was a 45

percent increase at that time. This was supposed to prevent a future crisis, yet Madoff still occurred and the excuses cannot always

be based on money. We would ask that we tighten up management

practices, do what is appropriate in terms of bringing technology to

the fore and do the best possible of any regular.

It isn’t wrong to use a crisis to request more. It is wrong to use

a crisis just to request more money. So with that, the committee

stands adjourned. Thank you for your testimony.

[Whereupon, at 3:40 p.m., the subcommittee was adjourned.]

Æ