U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

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

93–323 PDF 2016

S. HRG. 113–566 

WALL STREET REFORM: ASSESSING AND ENHANCING THE FINANCIAL REGULATORY SYSTEM 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE PROGRESS FINANCIAL REGULATORY AGENCIES ARE 

MAKING TOWARD COMPLETING RULES THAT IMPLEMENT THE DODD– 

FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT 

SEPTEMBER 9, 2014 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada 

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director 

LAURA SWANSON, Deputy Staff Director 

GLEN SEARS, Deputy Policy Director 

GREG DEAN, Republican Chief Counsel 

JELENA MCWILLIAMS, Republican Senior Counsel 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, SEPTEMBER 9, 2014 

Page 

Opening statement of Chairman Johnson ............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Crapo ................................................................................................... 2 

WITNESSES 

Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve 

System ................................................................................................................... 4 

Prepared statement .......................................................................................... 41 

Responses to written questions of: 

Chairman Johnson .................................................................................... 101 

Senator Crapo ............................................................................................ 101 

Senator Merkley ........................................................................................ 104 

Senator Toomey ......................................................................................... 110 

Senator Kirk .............................................................................................. 117 

Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation ......... 5 

Prepared statement .......................................................................................... 47 

Thomas J. Curry, Comptroller of the Currency, Office of the Comptroller 

of the Currency ..................................................................................................... 7 

Prepared statement .......................................................................................... 60 

Responses to written questions of: 

Senator Crapo ............................................................................................ 119 

Senator Merkley ........................................................................................ 121 

Senator Hagan ........................................................................................... 126 

Senator Toomey ......................................................................................... 127 

Senator Kirk .............................................................................................. 129 

Senator Heller ........................................................................................... 131 

Richard Cordray, Director, Consumer Financial Protection Bureau ................... 8 

Prepared statement .......................................................................................... 69 

Responses to written questions of: 

Chairman Johnson .................................................................................... 132 

Senator Crapo ............................................................................................ 134 

Senator Toomey ......................................................................................... 137 

Senator Kirk .............................................................................................. 139 

Senator Heller ........................................................................................... 141 

Mary Jo White, Chair, Securities and Exchange Commission ............................ 10 

Prepared statement .......................................................................................... 72 

Responses to written questions of: 

Senator Crapo ............................................................................................ 141 

Senator Tester ........................................................................................... 146 

Senator Merkley ........................................................................................ 147 

Senator Warren ......................................................................................... 155 

Senator Kirk .............................................................................................. 162 

Senator Heller ........................................................................................... 164 

Timothy G. Massad, Chairman, U.S. Commodity Futures Trading 

Commission ........................................................................................................... 12 

Prepared statement .......................................................................................... 95 

Responses to written questions of: 

Senator Crapo ............................................................................................ 164 

Senator Merkley ........................................................................................ 168 

Senator Kirk .............................................................................................. 170 

Senator Moran ........................................................................................... 171 

Senator Heller ........................................................................................... 172 

(III)

(1) 

WALL STREET REFORM: ASSESSING AND ENHANCING THE FINANCIAL REGULATORY 

SYSTEM 

TUESDAY, SEPTEMBER 9, 2014 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:01 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call this hearing to order. 

Today, I welcome back the financial regulators for another one 

of our many Wall Street Reform oversight hearings in this Committee since the enactment of the law. You all have been busy over 

August as you continue to make progress in completing 

rulemakings to implement Wall Street Reform. I thank you and 

your staffs for your hard work. 

I strongly believe today, as I did in 2010, that Wall Street Reform was the appropriate response at the time to the financial crisis. We can already see the benefits. We have an enhanced system 

of regulation for our largest banks and nonbank financial companies. We have greater transparency and oversight for derivatives. 

We have a dedicated and accountable watchdog focused on better 

protecting consumers. We have strengthened coordination between 

regulators. And, we have new ways to monitor threats to financial 

stability. 

As we all know, the road to implementing Wall Street Reform 

has been long and it has not always been easy. This is especially 

true for regulators trying to work together to write effective rules 

for an increasingly complex and global financial system. For some, 

this work has been done while Congress has not provided adequate 

funding. Proposed rules have not always been met with open arms 

from Congress, industry, or consumer groups. However, through robust and constant oversight, Members of this Committee have had 

the opportunity to express their views, and each of you and your 

agencies have listened. Because of it, the finalized rules are stronger. 

Going forward, as we get farther away from the crisis and calls 

to water down Wall Street Reform grow louder, policymakers cannot forget the lessons from the crisis and how costly a weak regulatory system can be. Our financial system is strongest when we 

2 

have tough, but fair, oversight to provide a level playing field for 

all financial firms to better serve their clients. 

Today, I look forward to hearing from the witnesses their next 

steps to complete the remaining Wall Street Reform rulemakings. 

Because of your diligent work, our financial institutions are stronger, our economy is more stable, and the rest of the world is looking 

to us when it comes to strong financial regulation. This is a vast 

improvement from where our country was before and during the financial crisis. 

I now turn to Senator Crapo for his opening statement. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you, Mr. Chairman. 

Dodd-Frank requires about 400 new rules to be written and approved by the Federal financial regulators, and to date, slightly 

more than 50 percent of these rules have been finalized, and nearly 

25 percent are still in the proposed stage. The remaining 25 percent are yet to be written. 

With some 220 rulemakings finalized, we still have no idea what 

the cumulative cost of Dodd-Frank is or will be. The Volcker Rule 

and the conflict minerals rule alone will add approximately 4.6 million paperwork burden hours and over one billion for services of 

outside professionals, according to the regulators’ own Paperwork 

Reduction Act estimates, and that is just for 2 of the 220 rules finalized. 

We cannot pretend that these additional costs are not passed on 

to consumers. Without a cumulative analysis of the true costs and 

burdens of the rules, we cannot understand their overall impact on 

the regulated entities, consumers, and the markets. 

For example, while Dodd-Frank was intended to exempt small 

institutions from some regulations, what I hear back in Idaho is 

that regulatory demands are trickling down even to the smaller 

banks and entities. Community banks are disproportionately affected because they are less able to absorb additional costs. Out of 

concern about what new regulations may be imposed next, financial institutions keep money for compliance costs set aside rather 

than investing it in local communities. 

We can and should make commonsense changes to lessen the 

regulatory burden. In past hearings, the regulators have supported 

several Dodd-Frank fixes, including the end-user fix, the swaps 

push-out rule, and giving the Fed flexibility to tailor the capital 

standards it places on insurance companies. Regarding the latter, 

the Senate passed by unanimous consent a fix so that insurance 

companies are not subject to bank-like capital requirements contrary to their business model. 

I look forward to hearing from the witnesses what specific fixes 

should be made so that traditional banking services do not become 

so complicated or expensive that banks like those in Idaho and 

other rural communities can no longer offer such services. 

I appreciate that some of your agencies have commenced the 

statutorily mandated interagency review of existing regulations to 

identify outdated, unnecessary, or unduly burdensome regulations. 

A similar review led to the 2006 Regulatory Relief law, and I encourage the remaining agencies to join in this effort. I urge all of 

3 

you to make this review a priority, to set up outreach meetings and 

with community banks and others, and to provide a list of recommendations to Congress. For example, several of our witnesses 

have discussed eliminating a paper version of the Annual Privacy 

Notice, a measure that has passed the House by a voice vote and 

currently has more than 70 cosponsors in the Senate. 

In addition to Dodd-Frank regulatory mandates, the law also established the Financial Stability Oversight Council. At the July 

FSOC hearing, I reiterated my concerns to Secretary Lew about the 

lack of transparency of FSOC’s designation process. Last week’s action by FSOC on Met Life only reinforces those concerns and 

threatens to disrupt a carefully forged regulatory balance for an industry that has been traditionally under the purview of State regulators. The U.S. financial system and capital markets cannot remain the preferred destination for investors throughout the world 

if our regulators operate under a cloak of secrecy. 

Secretary Lew stated that each of the designated nonbank SIFIs 

was given detailed explanations as to why they were designated, 

but this information was provided only after the designations were 

made. This is not how our regulatory framework should operate. I 

urge you to publish indicator-based SIFI designation criteria in the 

Federal Register for public comment, and I urge you to impose a 

moratorium on new designations until there are objective metrics 

and increased transparency. Only then can we restore accountability to the FSOC designation process. All of your agencies should 

recognize the benefit in having an open and transparent regulatory 

process. Transparency does not weaken rulemakings, it gives them 

much-needed legitimacy. 

Mr. Chairman, the issues we are discussing today are very important, especially as they relate to our smaller financial institutions. I know that the Committee will be looking at the small business issues in the near future, and I thank you for that. 

Chairman JOHNSON. Thank you, Senator Crapo. 

This morning, opening statements will be limited to the Chairman and Ranking Member to allow more time for questions from 

the Committee Members. I want to remind my colleagues that the 

record will be open for the next 7 days for opening statements and 

any other materials you would like to submit. 

Now, I would like to introduce our witnesses. Daniel Tarullo is 

a member of the Board of Governors of the Federal Reserve System. 

Martin Gruenberg is the Chairman of the Federal Deposit Insurance Corporation. 

Tom Curry is the Comptroller of the Currency. 

Rich Cordray is the Director of the Consumer Financial Protection Bureau. 

Mary Jo White is the Chair of the Securities and Exchange Commission. 

Tim Massad is Chairman of the Commodities Futures Trading 

Commission. Tim, welcome back to the Committee. 

Mr. MASSAD. Thank you. 

Chairman JOHNSON. I thank you all for being here today. I would 

like to ask the witnesses to please keep your remarks to 5 minutes. 

Your full written statements will be included in the hearing record. 

4 

Governor Tarullo, you may begin your testimony. 

STATEMENT OF DANIEL K. TARULLO, GOVERNOR, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. TARULLO. Thank you, Mr. Chairman and Senator Crapo and 

other Members of the Committee. 

Senator Johnson, I understand that this may be the last time 

that this group of six appears before you in your time as Chairman 

of the Committee, and I just want to say before I begin that I think 

everybody appreciates the care and even-handedness with which 

you have approached the substance of these important issues of financial regulation. And, speaking as one who has testified before 

you over the years, I also want to thank you for the patience and 

courtesy that you have extended to all witnesses in your time as 

Chair. I think it is something that we have all appreciated and 

that people have broadly admired, and we obviously will miss your 

presence on this Committee. 

In appearing before this Committee in February, I noted my hope 

and expectation that this year would be the beginning of the end 

of our implementation of the major provisions of the Dodd-Frank 

Act. Seven years later, we are on track to fulfill that expectation, 

as detailed in my written testimony. To be clear, though, this is the 

beginning of the end, not the end itself. The agencies still have 

some work to do in adopting some regulations specifically required 

by Dodd-Frank. Moreover, the Fed has some additional work to do 

in filling out a regime of additional prudential requirements for 

systemically important financial firms. 

Let me mention here two priorities. First, we will be proposing 

capital surcharges for the eight U.S. banks that have been identified as of global systemic importance. By increasing above Basel III 

levels the amount of common equity required to be held by these 

firms, we look to improve their resiliency to take account of the impact their failure would have on the financial system. While we 

will use the risk-based capital surcharge framework developed by 

the Basel Committee as a starting point, we will strengthen that 

framework in two respects. 

First, the surcharge levels for the U.S. institutions will extend 

higher than the Basel Committee range, which will mean higher 

applicable surcharges for most U.S. firms—most of the eight U.S. 

firms, noticeably so in some cases. 

Second, the surcharge formula will directly take into account 

each U.S. G–SIB’s reliance on short-term wholesale funding, which 

we believe to be a very important indicator of systemic importance 

because of the potential for funding runs and contagion under 

stress. 

I would note that while some other countries have also applied 

higher surcharges on their G–SIBs than required by the Basel 

Committee, none has explicitly taken account of short-term wholesale funding vulnerabilities. 

Second, we are developing a proposal for these same eight banks 

to maintain a minimum amount of long-term unsecured debt. 

Should one of these firms ever go into resolution or bankruptcy, 

this structurally subordinated debt would have been previously 

identified as available for conversion into loss absorbing equity. 

5 

The presence of a substantial tranche of such long-term unsecured 

debt should reduce run risk by clarifying the position of other 

creditors in an orderly liquidation or bankruptcy process. It should 

also have the benefit of improving market discipline, since the 

holders of that debt would know they face the prospect of loss 

should the firm become insolvent. 

You will note I mentioned short-term wholesale funding a couple 

of times in connection with the most systemically important institutions. We are also mindful of the risks that runnable funding can 

pose more generally. We have been working with our international 

counterparts on a proposal for minimum margins for security financing transactions, such as repos, that would extend to lending 

of this sort to all market actors. 

While there is more to be done with respect to the largest institutions and vulnerable wholesale funding markets, I would close by 

suggesting it may be time to consider raising some thresholds or 

eliminating altogether the application of some Dodd-Frank provisions to other banks. The three banking agencies before you today 

have all been working on ways to reduce regulatory and supervisory burdens on smaller- and mid-sized banks. There would also 

be benefit, I think, from some statutory changes. One would be to 

raise the current $50 billion asset threshold that determines which 

banks are in the systemic category. 

A second would be to exempt community banks entirely from 

provisions such as the Volcker Rule and the incentive compensation provision of Dodd-Frank, which are really both directed at 

practices in larger institutions. 

Thank you for your attention. I would be pleased to answer any 

questions you may have. 

Chairman JOHNSON. Thank you. 

Chairman Gruenberg, please proceed. 

STATEMENT OF MARTIN J. GRUENBERG, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. GRUENBERG. Thank you, Chairman Johnson, Ranking Member Crapo, and Members of the Committee, for the opportunity to 

testify today on the FDIC’s implementation of the Dodd-Frank Act. 

If I may, like Governor Tarullo, I would like to begin by thanking 

Chairman Johnson for his strong personal support and encouragement to me, both during my service on the staff of this Committee 

as well as since I have been at the FDIC. I am very grateful for 

the support and encouragement you have given me and will greatly 

miss your steady, thoughtful leadership of this Committee. 

The recent actions by the banking agencies to adopt a supplementary leverage capital ratio, a final rule on the liquidity coverage ratio, and a proposed rule on margin requirements for derivatives address three key areas of systemic risk that, taken together, are an important step forward in addressing the risks 

posed, particularly by the largest, most systemically important financial institutions. 

In April of this year, the banking agencies finalized an enhanced 

supplementary leverage ratio final rule for the eight largest and 

most systemically important bank holding companies and their insured banks. This rule strengthens the supplementary leverage 

6 

capital requirements well beyond the levels required in the Basel 

III Accord. The enhanced supplementary leverage standards will 

help achieve one of the most important objectives of capital reforms, addressing the buildup of excessive leverage that contributes 

to systemic risk. 

Just last week, the Federal banking agencies issued a joint interagency final rule implementing a liquidity coverage ratio. During 

the recent financial crisis, many banks had insufficient liquid assets and could not borrow to meet their liquidity needs, which 

greatly exacerbated the depth of the crisis. The liquidity coverage 

ratio standard will be the first quantitative liquidity requirement 

in the United States and is an important step toward bolstering 

the liquidity position of large internationally active banking organizations. 

And, finally, establishing margin requirements for over-thecounter derivatives is one of the most important reforms of the 

Dodd-Frank Act. Before the crisis, some institutions entered into 

large OTC derivative positions without the prudent exchange of collateral, or margin, to support those positions. The margin requirements required by the proposed rule should promote financial stability by reducing systemic leverage in the derivatives marketplace. 

The FDIC and the Federal Reserve have completed their reviews 

of the 2013 Resolution Plans submitted to the agencies by the 11 

largest, most complex bank holding companies as required by Title 

I of the Dodd-Frank Act. On August 5, the agencies issued letters 

to each of these firms detailing the specific shortcomings of each 

firm’s plan and the requirements for the 2015 submission. While 

the shortcomings of the plans varied across the firms, the agencies 

identified several common features of the plans’ shortcomings, including unrealistic or inadequately supported assumptions and the 

failure to make or even to identify the necessary changes in firm 

structure and practices to enhance the prospects for orderly resolution. 

The agencies will work closely with the companies to implement 

required improvements in the resolution plans, including simplifying their legal structures, amending derivative contracts to provide for a stay of early termination rights, ensuring continuity of 

critical operations during bankruptcy, and demonstrating operational capabilities to produce reliable information in a timely 

manner. The agencies are also committed to finding an appropriate 

balance between transparency and confidentiality for proprietary 

and supervisory information in the resolution plans. 

Finally, in its role as supervisor of the majority of the community 

banks in the United States, the FDIC has been engaged in a sustained effort to better understand the issues related to community 

banks, those institutions that provide traditional relationship-based 

banking services in their local communities. Since the beginning of 

this year, FDIC analysts have published new papers dealing with 

consolidation among community banks, the effects of long-term 

rural depopulation on community banks, and the efforts of minority 

depository institutions to provide essential banking services in the 

communities they serve. We have also instituted a new section of 

the Quarterly Banking Profile that focuses specifically on commuVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
7 

nity banks and are providing technical assistance to them, including assisting with critical cyber risks. 

Mr. Chairman, that concludes my remarks. I would be glad to respond to your questions. 

Chairman JOHNSON. Thank you. 

Comptroller Curry, please proceed. 

STATEMENT OF THOMAS J. CURRY, COMPTROLLER OF THE 

CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. CURRY. Chairman Johnson, Ranking Member Crapo, and 

Members of the Committee, I am pleased to appear here today to 

provide an update on the steps the OCC has recently taken to further enhance the effectiveness of our bank supervision and to provide a status report on the completed and current projects required 

by the Dodd-Frank Act. 

Like my colleagues, I, too, however, would like to first thank 

Chairman Johnson for his guidance and steady leadership over the 

years. I have been in public service for a long time and learned 

early on that when Congressman Johnson or Senator Johnson had 

something to say on a financial matter, it was worth listening to. 

I thank you for your years of service and wisdom and wish you well 

in your retirement. 

In the 4 years since passage of the Dodd-Frank Act, new tools 

have been developed and new rules have been put in place to address regulatory gaps and to create a stronger financial system. For 

our part, we at the OCC have completed all of the Dodd-Frank 

rulemakings for which we have sole responsibility. For those interagency rulemakings that remain to be completed, I believe we have 

made good progress to date and anticipate finalizing many of them 

in the near term. 

Since the crisis, we have also seen steady improvements in the 

overall financial condition of the banking system. Despite the improving strength and health of banks, however, I am keenly aware 

of the need for supervisors to remain vigilant. 

Last week, I was pleased to sign a new rule that not only memorializes the heightened standards we have applied to large, complex banks since 2010, but provides also an enforcement mechanism to compel compliance when necessary. Requiring higher supervisory standards for the largest and most complex banks we 

oversee is consistent with the Dodd-Frank Act’s broad objective of 

strengthening the stability of the financial system. These heightened standards address the need for comprehensive and effective 

risk management, an engaged board of directors that exercises 

independent judgment, a more robust audit function, talent management recruitment and succession planning, and a compensation 

structure that does not encourage inappropriate risk taking. 

Consistent with the heightened standards we are requiring of the 

largest banks, we are holding ourselves accountable to supervisory 

improvements, as well. Last year, I asked a team of international 

regulators to provide a broad, candid, and independent assessment 

of our supervision of mid-sized and large banks. The review identified a number of areas where we performed really well, but also 

highlighted areas where we need to improve. The OCC has emVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
8 

braced the team’s findings and taken steps to execute recommendations that include transformational improvements. 

One key improvement includes expanding our Lead Expert Program, which will allow us to better compare the operations of the 

institutions we regulate to identify trends, best practices, and 

weaknesses. Another change will improve our ability to identify 

systemic risk by enhancing our risk monitoring processes and reporting, and that fits squarely with the semi-annual public reports 

by our National Risk Committee. Those reports highlight emerging 

industry trends and identify those risk areas where we will focus 

our resources. 

While the OCC has taken many steps to improve our supervision 

of large banks, we also recognize the impact of our activities on 

community banks. While we are focused on strong and effective supervision, we are always mindful of the need to avoid unnecessary 

burden on community banks. We have responded by tailoring our 

supervisory programs to the risks and complexity of a bank’s activities. In each rulemaking, the OCC has sought and listened to the 

concerns of community banks. As an example, the lending limits 

rule provides a simpler option for small banks to use for measuring 

credit exposures, and the final domestic capital rules address concerns of small banks with respect to the treatment of TruPS, accumulated other comprehensive income, and residential mortgages. 

My written statement includes a full status report on the many 

Dodd-Frank Act rulemakings the OCC has been involved in and 

our efforts to better coordinate with other domestic and international regulators. My statement concludes with an update of our 

activities to shore up the industry’s defenses against cyberthreats, 

which I regard as one of the most significant emerging issues facing the industry. 

Thank you again, and I would be happy to answer the Committee’s questions. 

Chairman JOHNSON. Thank you. 

Director Cordray, please proceed. 

STATEMENT OF RICHARD CORDRAY, DIRECTOR, CONSUMER 

FINANCIAL PROTECTION BUREAU 

Mr. CORDRAY. Chairman Johnson, Ranking Member Crapo, 

Members of the Committee, thank you for the opportunity to testify 

today about implementation of the Dodd-Frank Act. 

It will surprise nobody to learn that I will join my colleagues in 

expressing our respect and admiration for your leadership on financial reform and in this body. Your obvious commitment to fair consumer financial markets set an example for this Bureau in our 

work that, I think, is improving the lives of so many people across 

your State and this country. And, I will always remember your personal kindness and your family in welcoming me to South Dakota 

and having me hear from your constituents about these issues, and 

your personal kindness, in particular, in advising me that if I pronounced the State capital as ‘‘Pierre’’ rather than ‘‘Pier,’’ that 

would make me a dude. 

[Laughter.] 

Mr. CORDRAY. The Consumer Financial Protection Bureau, as 

you know, is the Nation’s first financial agency whose sole focus is 

9 

on protecting consumers in the financial marketplace, and over the 

past 3 years, we have made considerable progress in fulfilling our 

rulemaking, supervisory, and enforcement responsibilities to protect people across this country. 

Our initial focus, as directed by Congress, by all of you, was to 

address deep problems in the mortgage market that helped precipitate the financial crisis. We began by issuing a series of mortgage 

rules that took effect early this year. They require creditors to 

make reasonable good faith assessments that borrowers are able to 

repay their loans, address pervasive problems in mortgage servicing that caused so many homeowners to end up in foreclosure, 

and regulate compensation practices for loan originators, among 

others. We have worked closely with industry housing counselors 

and other stakeholders to ensure the rules are implemented 

smoothly and timely. 

Last fall, we also issued another mortgage rule to accompany a 

goal long urged in the Congress, which was to consolidate and 

streamline Federal mortgage disclosures under various laws. The 

new ‘‘Know Before You Owe’’ mortgage forms are streamlined and 

simplified to help consumers understand their options, choose the 

deal that is best for them, and avoid costly surprises at the closing 

table. 

This summer, we also issued a proposed rule required by Congress to implement changes made to the Home Mortgage Disclosure Act. As with the redesign of the mortgage disclosure forms, we 

believe this rulemaking presents an opportunity to reduce unwarranted regulatory burdens. 

As each of these initiatives proceeds, we are working diligently 

to monitor the effects of our rules on the mortgage market and 

make clarifications and adjustments to our rules where warranted. 

Right now, for instance, we are pursuing further research to determine how best to define the scope of statutory provisions for small 

creditors that operate predominately in rural or underserved areas 

in order to promote access to credit in those areas. 

We are also addressing pressing issues in nonmortgage markets, 

including the first consumer protections ever for remittance transfers—international money transfers, that is—and a series of larger 

participant rules to supervise operations and activities in other 

markets. And, we are currently in the process of developing proposed rules on prepaid cards, debt collection, and payday lending. 

Another key task for the Bureau has been to build effective supervision and enforcement programs to ensure compliance with 

Federal consumer financial laws. For the first time ever, we have 

the authority to supervise not only the larger banks, but also a 

broad range of nonbank financial companies, including mortgage 

lenders and servicers, payday lenders, student loan originators and 

servicers, debt collectors, and credit reporting companies. 

We made it a priority to coordinate the timing and substance of 

examination activities with our Federal and State regulatory partners. Our supervision program is helping to drive cultural change 

within financial institutions that places more emphasis on treating 

customers fairly. Our work has strengthened compliance management at the large banks and caused many large nonbank firms to 

implement such systems for the first time. 

10 

Consistent enforcement of the laws under our jurisdiction benefits consumers, honest businesses, and the economy as a whole. To 

date, our enforcement actions have resulted in $4.7 billion in relief 

for 15 million consumers who were harmed by illegal practices. 

For example, with officials in 49 States, we took action against 

the Nation’s largest nonbank mortgage loan servicer for misconduct 

at every stage in the mortgage servicing process. With 13 State Attorneys General, we obtained $92 million in debt relief for 17,000 

servicemembers and others harmed by a company’s predatory lending scheme that inflated prices for electronics. 

We worked with the Department of Justice to order a large auto 

lender to pay $80 million in damages to 235,000 Hispanic, African 

American, and Asian and Pacific Islander borrowers because of discriminatory practices, the largest amount the Federal Government 

has ever secured in an auto lending discrimination case. And, we 

took action against two of the Nation’s largest payday lenders for 

various violations of the law, including the Military Lending Act. 

The core of our mission is to stand on the side of consumers and 

make sure they are treated fairly in the financial marketplace. We 

have now handled 440,000 consumer complaints and counting and 

secured monetary and nonmonetary relief on their behalf, including 

many people in each of your States. We are working on other resources for consumers to help them better understand the choices 

they make in the marketplace. 

I would like to say that my outstanding colleagues at the Bureau, as well as the leaders of our Federal agencies represented on 

this panel, are strongly dedicated to a shared vision of a healthy 

financial marketplace and we are working together well to achieve 

this goal. 

Thank you, and I look forward to your questions. 

Chairman JOHNSON. Thank you. 

Chair White, please proceed. 

STATEMENT OF MARY JO WHITE, CHAIR, SECURITIES AND 

EXCHANGE COMMISSION 

Ms. WHITE. Thank you. Chairman Johnson, Ranking Member 

Crapo, and Members of the Committee, thank you for inviting me 

to testify about the SEC’s ongoing implementation of the DoddFrank Act and our efforts to reduce systemic risk, close regulatory 

gaps, and better protect investors. 

Chairman Johnson, I am a relative newcomer to this Committee, 

but I certainly want to add my admiration for you, your professionalism, your leadership of this Committee, and your support, 

really, for all of our efforts. So, thank you very much. 

As you know, the Dodd-Frank Act gave the SEC significant new 

responsibilities and included some 90 provisions that require complex SEC rulemaking. The SEC has made quite substantial 

progress implementing our Congressionally mandated rulemaking 

agenda as we have simultaneously continued our broader core responsibilities of pursuing securities violations, important discretionary rulemaking, reviewing public company disclosures, inspecting the activities of regulated entities, and maintaining fair and efficient markets, which has included a continuing review and initiaVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
11 

tives to enhance the quality of our equity and fixed income markets. 

Since I became Chair in April of last year, we have focused on 

eight key areas of SEC responsibility mandated by the Dodd-Frank 

Act: Credit rating agencies, asset-backed securities, municipal advisors, asset management including regulation of private fund advisers, over-the-counter derivatives, clearance and settlement, proprietary activities by financial institutions, and executive compensation. 

Specifically, in furtherance of these regulatory objectives, the 

Commission has to date created a new regulatory framework for 

municipal advisors, advanced significant new standards for the 

clearing agencies that stand at the center of our financial system, 

along with our fellow regulators implemented new restrictions on 

the proprietary activities of financial institutions through the 

Volcker Rule, finalized rules intended to strengthen the integrity of 

credit ratings by reducing conflicts of interest in ratings and improving their transparency. These rules were adopted on August 27 

and implemented actually 14 credit rating agency rulemakings. 

We have adopted significantly enhanced disclosures of assetbacked securitizations, also adopted last month. We completed reforms in July to address risks of investor runs in money market 

funds, a systemic vulnerability in the financial crisis, pushed forward new rules for previously unregulated derivatives, begun implementing additional executive compensation disclosures, put in 

place strong new controls on broker-dealers that hold customer assets, reduced reliance on credit ratings, and barred bad actors from 

private securities offerings. 

Since April 2013, the SEC has proposed or adopted nearly 20 significant Dodd-Frank Act rules and thus far has proposed or adopted in total rules to address about 90 percent of all the provisions 

of the Dodd-Frank Act that mandate Commission rulemaking. 

In the eight categories of mandated rulemaking that I have identified, the bulk of our work is completed or nearing completion. Our 

focus now is on finishing our Title VII and executive compensation 

rules as required by Dodd-Frank. 

We have also worked closely with our fellow financial regulators 

to ensure that our financial regulatory system works overall to protect against risks, both by promoting financial stability and supporting a sensible and integrated financial regulatory framework 

that works effectively for market participants. The Financial Stability Oversight Council established by the Dodd-Frank Act, on 

which I participate as a member, serves a critical role in that effort. 

While the SEC has made significant progress on both our DoddFrank and JOBS Act rulemakings, more remains to be done, and 

we must continue our work with intensity. As we do so, we must 

be deliberate as we consider and prioritize our remaining mandates 

and deploy our broadened regulatory authority, supported by robust economic analysis. Progress ultimately will be measured based 

on whether we have implemented rules that create a strong and effective regulatory framework and stand the test of time under intense scrutiny in rapidly changing financial markets. We must be 

12 

focused on fundamental and lasting reform that will protect investors and our markets and safeguard our financial system. 

Thank you again for the opportunity to testify today. I would be 

happy to answer any questions. 

Chairman JOHNSON. Thank you. 

Chairman Massad, please proceed. 

STATEMENT OF TIMOTHY G. MASSAD, CHAIRMAN, U.S. 

COMMODITY FUTURES TRADING COMMISSION 

Mr. MASSAD. Thank you, Chairman Johnson and Ranking Member Crapo and Members of the Committee. I am pleased to testify 

before you today on behalf of the Commission. 

While this is my first appearance as CFTC Chair, I also want to 

add my thanks to you, Chairman Johnson, particularly with respect to my prior role at Treasury overseeing the TARP program. 

It was very unfortunate, of course, that we ever had to implement 

TARP, but I appreciate your support for all of our efforts to stabilize the system. 

Before I begin, I would also like to note that my fellow Commissioner, Chris Giancarlo, is here. He, like me, is a new member of 

the Commission and I am pleased that he is here today. 

I would like to review our progress in implementing the DoddFrank Act, Congress’s response to the worst financial crisis since 

the Great Depression. We must never forget that this crisis imposed terrible costs on all Americans—millions of jobs lost, homes 

foreclosed, many businesses shuttered, and many retirements and 

college educations deferred. And, that is why implementation is so 

important. 

In Dodd-Frank, Congress enacted four basic reforms of the swap 

market: Increased oversight of major market players; clearing of 

standardized transactions on central clearinghouses; transparent 

trading of standardized transactions on regulated platforms; and 

regular reporting for increased market transparency. 

The CFTC has made substantial progress in implementing these 

reforms. First, we have put in place a framework for the oversight 

of swap dealers and major swap participants. Today, 104 swap 

dealers and 2 major swap participants are provisionally registered, 

and we require them to observe strong risk management practices 

and business conduct standards. 

Second, standardized swaps must now be cleared with a registered clearinghouse so that risk can be better monitored and mitigated. In December 2007, only 16 percent of outstanding transactions measured by notional value were cleared, according to industry estimates. Last month, 60 percent were cleared. In addition, 

last month, an estimated 85 percent of index credit default swaps 

were cleared. 

Third, standardized swaps must also be traded on a regulated 

platform. There are currently 22 swap execution facilities temporarily registered and volumes are growing. 

And, fourth, rules for data reporting are in place. All swaps, 

whether cleared or uncleared, must be reported to swap data repositories. We have four SDRs provisionally registered and operating. 

13 

And, in getting us where we are today, no group deserves more 

credit than the hard working staff of the agency, and I want to 

publicly thank them for their extraordinary contributions. 

But, much work remains to be done. Let me highlight a few priorities. First, as we gain experience with new regulations, we will 

likely make adjustments to the rules. With reforms as significant 

as these, this is to be expected. And, in particular, we want to 

make sure the new rules do not place undue burdens on commercial end users that were not responsible for the crisis and that depend on these markets to hedge risk. We will also be mindful of 

their interest as we complete the small number of remaining rules 

required by Dodd-Frank. 

To that end, I have scheduled a public meeting on September 17 

where we will consider a rule governing special entities, like public 

power companies. The Commission will also consider at that time 

a proposed rule on margin for uncleared swaps similar to the rules 

put forward last week by my banking regulator colleagues here 

today. 

Second, for reforms to succeed, global regulators must work together to harmonize rules as much as possible. I have been very 

focused on this effort since the day I took office. 

Third, we must make sure that market participants comply with 

the rules. Strong enforcement and compliance efforts are vital to 

maintaining public confidence and participation in our markets. 

And, fourth, technology and data management are priorities. The 

CFTC is leading an international effort to establish consistent 

standards for reporting, and we will also make sure the SDRs and 

market participants report data accurately and promptly, as this is 

critical to effective market oversight and transparency. 

All of these tasks require resources. While the agency staff is excellent and we will do all we can with what we have, I believe the 

CFTC’s current financial resources are insufficient to fulfill our increased responsibilities. I hope to work with Congress to address 

this need. 

The United States has the best financial markets in the world, 

the most dynamic, innovative, competitive, and transparent, and 

they have been an engine of our economic growth and prosperity. 

Effective oversight is vital to maintaining those strong financial 

markets. 

Thank you again for inviting me today and I look forward to your 

questions. 

Chairman JOHNSON. Thank you all. 

I will now ask the Clerk to put 5 minutes on the clock for each 

Member’s questions. 

My first question is for each of the panelists. What Wall Street 

Reform rules will be finalized before the end of the year by your 

agency? For example, should we expect a final risk retention rule 

or rule on long-term debt to facilitate an orderly resolution? Governor Tarullo, let us begin with you and go down the line. 

Mr. TARULLO. Senator, I would expect that we will finalize the 

financial sector concentration rule. And, with respect to risk retention, I am interested, actually, to hear what some of my colleagues 

say. I do not know whether I would say by the end of the year, but 

I think we are definitely in the home stretch. 

14 

Mr. GRUENBERG. Mr. Chairman, the agencies have been working 

hard on the risk retention rule and I think we are in the end game. 

And, I would hope, without making predictions, that we could complete that rulemaking by the end of the year. 

And, you mentioned the long-term debt rule. As you know, the 

FDIC has been working cooperatively with the Fed on that rule 

and I am hopeful the Fed will be able to move forward on that 

area, as well. 

Mr. CURRY. I, too, would hope to complete the risk retention rule 

by the end of the year. The OCC is certainly committed to devoting 

the appropriate resources to get it done, and I hope to be able to 

work cooperatively with both the Federal banking agencies and the 

housing-related agencies, as well. 

Mr. CORDRAY. Mr. Chairman, we are not directly involved in the 

risk retention rule, but we take an interest in it as it overlaps with 

our qualified mortgage rule to some significant degree. 

We continue to work on the HMDA implementation and the 

mortgage rules implementation, generally. We will have other larger participant rules that allow us to supervise other financial markets before the end of the year. And, we continue to work, as I said, 

on a number of other issues that are not mandated by Dodd-Frank 

but are an important part of implementing its goals. 

Ms. WHITE. With respect to the Dodd-Frank Act, as I mentioned 

in my oral testimony, we expect to focus on Title VII and the executive compensation rules. I do not say they will be finished by year 

end, but we will be focusing on those. I do expect to work with our 

fellow regulators in completing the credit risk retention rule. 

Outside of Dodd-Frank, we expect to pursue by the end of the 

year Regulation SCI, which is Systems Compliance and Integrity, 

as well as other initiatives in the equity market structure area. 

Mr. MASSAD. Mr. Chairman, we are not part of the risk retention 

rule, but we will, as I noted, be acting on a rule for special entities 

next week which addresses some of the smaller end-user concerns. 

We will also be acting on a reproposal of the margin rule. Of 

course, with the public comment period, we may not quite get that 

finalized by the end of the year. 

Most of our rules are done, so, again, we are very focused on 

looking at them and making sure we have addressed some of the 

end-user concerns. 

Chairman JOHNSON. Thank you. 

Governor Tarullo, your staff has indicated that the Fed is taking 

a two-track approach with capital rules for insurance companies, 

including one approach the Fed could use if Congress enacts legislation that the Senate passed unanimously months ago to provide 

the Fed with more flexibility to tailor rules for insurance companies. Is it important for Congress to enact that law soon to provide 

for more appropriate rules for insurance companies? 

Mr. TARULLO. Senator, it would be very welcome if the House 

would follow your lead and enact that to give us the kind of flexibility in making an assessment on liability vulnerabilities of insurance companies that are unique to insurance companies. We will 

continue with our two tracks of planning. We are going to conduct 

a quantitative impact study to try to develop some more informaVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
15 

tion on insurance industry specific products, but it would be very 

helpful. Thank you. 

Chairman JOHNSON. Chairman Gruenberg, in August, you announced that the living wills for the 11 largest banking organizations contain important shortcomings. You have given each of these 

banking organizations until July 1 of 2015 to submit a resolution 

plan that addresses the shortcomings. What will your agency be 

doing in the next year to monitor these banks and their efforts to 

address their living will shortcomings? 

Mr. GRUENBERG. Mr. Chairman, as I indicated in my opening 

statement, we have, in effect, now given each of the 11 firms a detailed road map of changes they need to make to improve the resolvability of their firms. We anticipate—by ‘‘we,’’ I mean the FDIC 

and the Federal Reserve, which worked together jointly on these 

letters—to give the firms direction and guidance to follow through 

on compliance and implementation of the directions contained in 

those 11 letters. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

I, too, in my first question, want to talk to each of the agencies, 

but I am going to do it in segments. I am focusing in this question 

on EGRPRA, the Economic Growth and Regulatory Paperwork Reduction Act, which, as you know, has requirements in it for reviews 

that are statutorily mandated to evaluate existing regulations to 

identify outdated, unnecessary, or unduly burdensome regulations. 

It was actually this Act that we used some years back when we 

made some very good progress working with many of you to pass 

a significant Regulatory Relief Act. 

I understand that the Federal Reserve, the FDIC, and the OCC 

are already well into and have been going—well underway and are 

going down the road of doing this, and so my first question is to 

the three of you, which is, will you commit that your agencies will 

provide us with a list of—or a table of regulations that fit this category that we could evaluate for regulatory reform purposes, and 

specifically with focus on community banks? 

Mr. CURRY. Mr. Chairman, I am currently the Chairman of the 

FFIEC, which is overseeing the EGRPRA process, and I think our 

objectives are totally in tune with your objectives that you stated 

today. The focus of our review of unnecessary or burdensome rules 

is really focused on community banks. 

Senator CRAPO. Good. 

Mr. CURRY. We are also looking to make sure that we get adequate input from community bankers directly, so we will be holding 

a series of outreach sessions throughout the country to take in that 

information. And then, ultimately, we do intend to do two things: 

One, to make changes that we have complete control over in terms 

of regulations and policy statements, but also to file a report with 

Congress in which we would make recommendations for appropriate statutory changes. 

Senator CRAPO. Thank you. 

Mr. GRUENBERG. I would simply add that I agree with everything 

the Comptroller said. The EGRPRA process actually offers the 

agencies a nice opportunity to take an overview of the regulatory 

compliance issue and identify opportunities both for addressing 

16 

unneeded regulatory requirements, as well as opportunities for any 

statutory change. This has been a focus of attention and priority, 

certainly for our three agencies. As the Comptroller indicated, we 

are planning a series of public hearings around the country. We 

will be participating directly in some of those hearings and we view 

it as a good opportunity to take a broad overview of this. 

Senator CRAPO. Thank you. 

Governor Tarullo. 

Mr. TARULLO. Tom gave a good summary, Senator, I think, of 

where the three banking agencies are and I agree with him. 

Senator CRAPO. All right. Thank you very much. 

And then to the other three, as I understand it, the CFPB is covered by this law, also, but the timing is not necessarily kicking in 

at the same timeframe for the CFPB, and the CFTC and SEC are 

not technically under the law. But, my question to the three of you 

is that, regardless of that, will you pursue the same process and 

help to provide us with your evaluation of the kind of unnecessary 

or unduly regulatory burdensome regulations that we have, and in 

particular with regard to community banks? 

Mr. CORDRAY. I will simply say, I am part of the FFIEC. We are 

following, as the Comptroller indicated as Chairman of that body, 

his lead on regulatory burden review. We have our own statutory 

provision that requires a 5-year look-back on all rules that the 

CFPB promulgates. We have been actively involved with industry 

looking at the mortgage rules to see if there are tweaks that are 

needed as we go, and we have made a number of those to assist 

compliance. We also have had our own streamlining initiative, 

which led to work on the ATM sticker issue, which Congress ultimately resolved, and we provided technical assistance on that, and 

relief on the Annual Privacy Notices, which is coming very soon in 

final form. 

Senator CRAPO. Thank you. 

Ms. WHITE. And, I think, Senator Crapo, you are correct. I do not 

think the statute applies to us, but I am very much committed to 

reviewing our rules in that fashion. We also are obviously in constant contact with those who our rules impact. Our rules do not 

generally have as much impact on community banks. 

One of the other things that I have tried to do since I became 

Chair is also to review our major rules, both JOBS Act and DoddFrank and others, as they come out the door so that we are making 

changes, making them more efficient, stronger, as we go. 

Senator CRAPO. Thank you. 

And, Mr. Massad, could you be real fast, because I have got to 

get one more question in here. 

Mr. MASSAD. Certainly. We agree with the goal, Senator, and 

will be happy to work with your office on it. 

Senator CRAPO. Thank you. I appreciate that. 

My next question is for Governor Tarullo, and, Governor, in your 

testimony and in your speech at the Federal Reserve Bank of Chicago’s Annual Bank Structure Conference, you called for raising 

the trigger when a bank is systemically important from $50 billion. 

I would like you, if you would for us, please, to just expand on your 

thinking there, because I agree with you very strongly and I hope 

we can make progress in this area. 

17 

Mr. TARULLO. Senator, I think we have had the benefit now of 

several years of stress testing under both Dodd-Frank and also our 

capital requirements assessment process, and I think we have just 

concluded that, given the intensity and the complexity of the work 

around the really good stress testing which we believe is necessary 

for the largest firms, we have not felt that the additional safety 

and soundness benefits of that really aren’t substantial enough to 

warrant the kinds of expenditures that banks above $50 billion but 

well below the largest systemically important institutions have to 

expend. Their balance sheets are pretty easily investigated by us, 

and their lending falls in a fairly discrete number of forms. So, in 

thinking about it, we just thought that having some experience put 

us in a better position to make that judgment, and that is why I 

mentioned it in the Chicago speech. 

Senator CRAPO. Well, thank you. I think your observation is very 

well taken and is one of those examples of what I am talking about 

here today, as well, where we need to find places where we can resolve some of these unnecessary burdens that are causing difficulty. Thank you. 

Chairman JOHNSON. Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman. I thank the witnesses. 

Now, as we speak, the Treasury Secretary and Secretary of 

Transportation are holding a summit with leaders across the country to encourage greater investment in infrastructure projects. But, 

unfortunately, the Administration’s effort to promote greater investment in infrastructure fly in the face of rulemaking finalized 

last week by the Fed, the OCC, and the FDIC. By excluding municipal bonds from being considered as high-quality liquid assets, Federal regulators have run the risk of limiting the scope of financial 

institutions willing to take on investment-grade municipal securities, which we know are the lifeblood of development in this country. 

My city and State, New York City and State, rely on this financing to pave roads, bridges, and start construction in new schools, 

but it is not just New York. Any city or State that have made 

tough decisions to protect their credit ratings—Chicago, Philadelphia, California—are susceptible to the impact of this rule. Investment-grade municipal bonds not only serve as the mechanism 

through which we are able to create bonds and finance critical infrastructure, but the securities service high-quality assets that adequately cover liquidity outflows in periods of stress. 

I certainly support regulatory efforts to ensure the banking section is able to absorb shocks in times of financial and economic 

stress, as well as enhanced liquidity, but I have not yet heard a 

convincing argument why, for instance, corporate debt can be considered a high-quality asset but investment-grade municipal securities cannot. Investment-grade municipal bonds have comparable, if 

not better, trade, volume, and price volatility, and they performed 

well through the financial crisis. In fact, in 2008 and 2009, price 

declines on AAA corporate bonds were greater than the price declines on both AA municipal general bonds and revenue bonds. 

And, this does not even touch on the fact the new rule permits forVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
18 

eign sovereign debt to be qualified as HQLA while these municipal 

bonds are not. 

And, the exclusion of this type of debt from counting toward liquidity coverage for banking institutions has the potential for 

States and municipalities to both increase the cost of interest payments and decrease investment by the largest banking institutions 

in infrastructure. Now, more than ever, we should be wary of blunt 

policies that have the potential to negatively impact the municipal 

bond market and, ultimately jobs. 

The debt issuances from certain States and local municipalities 

are considered high-quality liquid assets by markets and should be 

treated as such by the rule. Developing criteria to assess liquidity 

and performance of various municipal bond offerings is a more narrowly tailored approach that was absent from the rule finalized last 

Wednesday. I hope all three agencies will reassess the finalized 

rule and issue supplemental rules that appropriately account for 

these instruments. 

So, here are my questions. First, Governor Tarullo, I know this 

rule is something you have looked at closely. I was particularly 

struck by your comments last week in which you acknowledged 

that, quote, ‘‘Staff analysis suggests that the liquidity of some State 

and municipal bonds is comparable to that of the very liquidity of 

corporate bonds that can qualify as HQLA,’’ and indicated the staff 

has been working on some idea for determining criteria for such 

bonds which might be considered for inclusion. Would you mind 

discussing what types of ideas do you believe are appropriate, and 

specifically, whether these ideas would allow for greater flexibility 

so that certain investment-grade municipal bonds could be considered high-quality liquid assets. 

And, then, after you opine, I would like to ask Chairman 

Gruenberg and Comptroller Curry if they think a rule that provides greater flexibility in this area would be something that is important to look into. 

Governor Tarullo. 

Mr. TARULLO. Thank you, Senator. As you noted, we, the Board, 

asked the staff to prepare a proposal that would allow for recognition as high-quality liquid assets those State and municipal bonds 

which are in the same league with very liquid corporates, and what 

we have asked the staff to do is an analysis of the liquidity characteristics of State and munis, taking into account daily trading volumes. There are some differences in those markets, but our analysis during the course of the comment period suggested that there 

ought to be a way of identifying the more liquid State and munis, 

because if they are really liquid, we really do want banks to be able 

to take that into account in thinking about their maturity lengths. 

Senator SCHUMER. Right. So, you want some comparability here 

and you do not want to lump all municipal bonds in one pot. 

Mr. TARULLO. That is correct, Senator. 

Senator SCHUMER. OK. Chairman Gruenberg. 

Mr. GRUENBERG. Senator, I—— 

Senator SCHUMER. The question to you is, would you consider revising this rule if the analysis shows that the liquidity levels are 

similar. 

Mr. GRUENBERG. The short answer is yes, Senator—— 

19 

Senator SCHUMER. Good. 

Mr. GRUENBERG. ——and I indicated in my remarks at our Board 

meeting that we would monitor carefully the impact on the market, 

and if there was reason to make adjustments, we would consider 

adjustments. 

Senator SCHUMER. Yes. We have loads of our mayors and our finance directors, as well as Governors, are howling about this, and 

so they really think it will impact their markets and they are experienced to know. 

How about Comptroller Curry. 

Mr. CURRY. Senator, we are certainly looking forward to discussing with the Fed any additional research or thoughts that they 

may have in this area. If there is a possibility to calibrate a standard that differentiates certain municipal securities from the broader characteristics, we would look forward to talking to the Fed 

about it. 

Senator SCHUMER. Would you be open to changing—to modifying 

the rule—— 

Mr. CURRY. Based on—— 

Senator SCHUMER. ——as Mr. Gruenberg and Mr. Tarullo have 

said they would be? 

Mr. CURRY. Certainly, based on supporting research or thoughts 

from the Fed. 

Senator SCHUMER. What does that mean? 

Mr. CURRY. I—— 

Senator SCHUMER. Would you be open to revising the rule? 

Mr. CURRY. We are open, but we need to talk with our colleagues. 

Senator SCHUMER. OK. Thank you, Mr. Chairman, and I thank 

you. If all three of you are open to it, and two of you seemed pretty 

favorable toward it, I hope you will go ahead and do it, because it 

is really important. 

Chairman JOHNSON. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. I appreciate it. I appreciate all of you being here and the job that you do. 

Back when Dodd-Frank was being created, each of us were assigned certain areas to work on, and our friend Mark Warner and 

I worked on Title I and II, and Amy Friend changed it a little bit, 

but still pretty good. And, I want to focus on those two areas. I actually think it was some of the strongest pieces of the Dodd-Frank 

bill. And, I noticed that the FDIC and the Fed had a joint letter 

relative to the living wills. I will say, in fairness, Senator Warner 

was far more focused on the living wills, and I appreciate his efforts in that regard. 

But, I noticed that you had a joint statement, and then what 

happened after that is the Fed backed away from that and wrote 

something separate from the joint letter that really watered down, 

if you will, your concern about living wills, which created a concern 

for me, because I know that there is a process that gets put in 

place if both of you agree that they are inadequate, and, therefore, 

by stepping away, that has been watered down to a big degree. 

And, I am just curious as to why that took place, and both of you 

might want to respond to that. 

20 

Mr. TARULLO. Senator, I did not see any watering down of the 

impact of the letters that we agreed on and jointly sent out. What 

we jointly agreed on were the measures that we actually want the 

banks to take in order to become more resolvable, which, I think, 

is the object of this entire exercise. And, so far as I could determine, there was substantial convergence, certainly at the staff and 

principal levels, on those areas where we expect to see progress. 

I think the difference was that the FDIC made a determination 

of noncredibility of the letters that had been submitted already. 

The feeling at the Board was that there are obviously shortcomings—that is why we wanted to get these specifics out—but, we 

also thought that it was important to go through another stage of 

the iterative process that had been laid out in our reg, and I think 

is contemplated by the statute, because that, after all, is the object 

here, to get us to the point where the firms are resolvable in bankruptcy as well as under Title II. And, as you will note in our statement, the Fed statement and also in the letters, if the firms are 

not able to take the steps that we have jointly indicated they need 

to take by next July, the agencies will be prepared to take action 

under Dodd-Frank in order to enforce those provisions. 

And, so, I think by doing that, by being as specific as we were, 

I think we should put to rest any complaints that there was not 

enough guidance from the agencies along the way. I think the guidance is out there now and it is actually quite explicit. 

Senator CORKER. But, it does have the effect, does it not, of really slowing down and putting off the institutions taking the steps 

they need to take to simplify—there is an iterative process, as you 

mentioned, and, I think, by doing what the Fed did, you added a 

step to that, did you not? 

Mr. TARULLO. Well, I think, actually, what we did was we focused on what we actually want them to change, and we made it 

pretty clear we want a change in the next year. So, I hope there 

is no slow-down here. We are certainly not expecting a slow-down. 

On the contrary. We are expecting acceleration in their planning 

and them to do it with more realistic assumptions than they did 

in their prior submissions. 

Senator CORKER. One of the things that I think there have been 

concerns about is you have been—the FSOC has been given tremendous powers to deal with these entities if you feel like there, 

in fact, is any possibility that because of their size or complexity, 

they could create a risk to the system. I just want to ask the two 

of you, I know we have asked in letter form, several of us, we have 

gotten back, as we might expect, semi-nebulous responses. But, is 

it a fact or is it not that will you use the powers that are given 

to you if these firms—if you find themselves after this year process 

not in a place to be resolved appropriately through bankruptcy, will 

you take the measures that you have—many people are trying to 

pass legislation, but you already have powers within the organizations to take steps and force them to be less complex. Will you do 

that? 

Mr. TARULLO. Sure, Senator. That is, I think, again, the object 

of the process, is to try to get them to the point of resolvability, but 

as we indicated, we are prepared to use the powers granted in 

Dodd-Frank if, in fact, they do not get there. 

21 

I might also add that the things I mentioned this morning—the 

higher level of surcharges for the most systemically important institutions, the attention to the short-term wholesale funding 

vulnerabilities, and the requirement for a substantial amount of 

subdebt that could be convertible—are all measures that are actually intended in the same direction, which is to ensure both the resiliency and the resolvability of these institutions. 

Mr. GRUENBERG. Senator, if I could just add, I think the answer 

to your question is yes, we will be prepared to use the authorities 

of the statute. We have laid down a clear marker at the Fed and 

the FDIC for these firms in terms of the kinds of changes that need 

to be made. 

And, if I may, I would underscore the agreement between the 

two agencies on the substance of the letters, which, I think, was 

really very solid and meaningful. Think the firms are clearly on notice that there is an expectation of compliance with the directions 

in the letters, and there is a joint commitment by the two agencies 

to follow through on that. 

Senator CORKER. Well, I thank you, and Mr. Chairman, I appreciate the time. I will say that a big part of the concerns that were 

expressed during that time in the passage of the bill was about the 

extraordinary actions that we and the American people had to take 

during that time. And, unless you, especially the two of you, are 

willing to take the steps that are necessary to ensure that these 

organizations are not too complex to be resolved through bankruptcy, then all is for naught. So, I hope you will. I thank you for 

your work, and I appreciate the time, Mr. Chairman. 

And, by the way, thank you for creating a bipartisan atmosphere 

on the Committee, too, since everybody is apparently thinking you 

are going to be Chairman of the Universe after this—— 

[Laughter.] 

Chairman JOHNSON. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Madam Chair, you and I have on previous occasions discussed 

the CEO pay ratio provision I offered in the Wall Street Reform 

law, which requires companies to disclose the ratio of compensation 

of their chief executive with the pay of median workers. This measure focuses investors’ attention on the relative value a CEO creates 

in order to facilitate better checks and balances against insiders 

paying themselves runaway compensation packages. 

And, while CEOs undoubtedly can create value for companies, so 

can ordinary workers across an organization. So, when a CEO asks 

for a raise while giving other employees a pay cut, investors should 

have this information so they can ask whether this is a value creation or simply value capture by insiders, especially in an environment in which incomes for the top 1 percent have grown by more 

than 86 percent over the last 20 years, while incomes for everyone 

else has grown by less than 7 percent. 

As you know from my letters of support, I was pleased to see the 

SEC’s proposed rule last year to implement this provision, which, 

in my view, accurately reflects the legislative intent that I and others intended. Can you please give us an update on the status of 

this rulemaking, and when does the SEC expect to finalize it? 

22 

Ms. WHITE. Essentially, as I think I said in my oral testimony, 

we are focused for the balance of this year in terms of our DoddFrank mandated rulemakings on Title VII and executive compensation. Pay ratio is one of those that has been proposed, but not 

adopted. It is certainly a priority to complete it this year. 

Senator MENENDEZ. So, it is your expectation that you would 

complete it this year? 

Ms. WHITE. It is my hope and expectation to complete it this 

year. The staff is still going through the comments, which were extensive, and formulating a final recommendation, but that is my 

expectation. 

Senator MENENDEZ. OK. I hope there will be more expectation 

and less hope. 

Now, let me turn to, Chair White, this summer, the SEC received 

its record one-millionth public comment supporting a rule to require public issuer companies to disclose their political campaign 

spending to investors. Supporters include leading academics in the 

field of corporate governance, Vanguard founder John Bogle, investment managers and advisors, and the investing public. Without 

disclosure, corporate insiders may be spending company funds to 

support candidates or causes that are directly adverse to shareholders’ interests without shareholders having any knowledge of it. 

The amounts being spent may be small or large, but shareholders 

have no way of knowing. And, even where the amounts are small 

relative to the overall size of the company, the impact on an election, and, therefore, on shareholders, can still be very large. 

If corporate political spending is material to investors, as the 

leading experts in the field and over one million members and the 

investing public believe it is, why is not the SEC requiring public 

issuer companies to disclose this information? Do you have any 

plans to engage in a rulemaking on this issue any time soon? 

Ms. WHITE. As you know, we have two petitions actually still 

pending before the SEC to require such disclosure. If, in fact, in a 

particular company the political spending is material under the 

law, that would be required to be disclosed now. The petition is 

broader than that. 

Again, as, I believe, the Senator and others are aware, we are 

very focused on our mandated rulemakings under Dodd-Frank and 

the JOBS Act and the staff is currently not working on a proposal 

in that area. I do note that a number of companies have voluntarily 

made those disclosures and that subject can also be, and often is, 

a subject of a proxy proposal. 

Senator MENENDEZ. Well, I appreciate where you said your focus 

is, but when one million—I think it is very rare that you get one 

million public comments in support of a proposal. And, even if you 

look at Justice Kennedy’s majority opinion in Citizens United, 

which opened the floodgates for corporate election spending and 

that presumed that shareholders should have transparency—it presumed, in his opinion, that shareholders would have transparency 

in order to enforce accountability over executives. So, how is it that 

investors have control, have that transparency, if they cannot even 

get basic information about what is being spent? 

Ms. WHITE. I appreciate the intense interest of investors and others in this issue. The comment letters, of which there have been 

23 

many, have been on both sides. And, it is an area that I am quite 

sensitive to. It is of high interest. But, as I said earlier, at this 

point in time, it is not part of our current regulatory agenda. We 

are focused on the mandated rulemakings. 

Senator MENENDEZ. Well, I appreciate that, as someone who was 

here and helped not only devise Dodd-Frank, but also supported it. 

I will just close on this comment. You know, I would hope that— 

this is true across the spectrum—that all of you realize that while 

you may ultimately deal with significant corporations in this country, that at the end of the day, it is the public who we collectively 

seek to serve. And, that is best served by transparency and openness and an opportunity to understand what companies are doing, 

whether that is CEO pay to worker pay, or whether that is using 

potentially millions of dollars of corporate funds to maybe the disadvantage of the very investors who are investing in that company. 

And, so, I hope that the hallmark of what we can expect from 

all of you, but certainly in this case where you have some particular unique jurisdiction, is a push toward greater transparency 

so that investors really understand what choices they are making 

and whether the company is best serving them. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Johanns. 

Senator JOHANNS. Thank you, Mr. Chairman. 

Governor Tarullo, let me go back to the question that the Chairman asked you about capital standards relative to insurance companies. I fear we have kind of left you folks in a difficult position. 

This bill, as you know, has moved through the Senate by unanimous consent, and I thank my colleague, Senator Brown, for his 

help on this bill. So, I think, on the Senate side, we are in pretty 

good shape. It is even kind of rarer that things would move by 

unanimous consent, but this did. 

On the House side, it has not happened yet. We hope it will. In 

fact, my sincere desire is that that will happen very quickly, certainly by the end of the year, but we do not know if that is going 

to happen, and there you are. You are caught in this kind of limbo 

situation of what do you do here. 

So, let me ask you, how are you folks handling this? Is there a 

track for this law passing and a separate track for this law not 

passing and you having to cobble something together that, hopefully, complies with Dodd-Frank? How are you dealing with this in 

this interim period of time? 

Mr. TARULLO. Senator, you have intuited correctly. We are trying 

to think about it under both alternatives. Under one alternative, 

we would be able to take account of the different liability structure 

of core insurance kinds of activities, and that would allow us to 

shape capital requirements at the consolidated holding company 

level in a way that fully took account of those differences in business models. 

In the absence of the legislation, we will still be able to do some 

things, because there are insurance products that do not resemble 

existing bank products. And, so, in some cases, we can, and we are 

already planning to, assign different risk weights to those based 

upon our assessment of the actual risk associated with those assets. But, that is where the two-tracking is actually taking place. 

24 

I mentioned a little while back the quantitative impact study 

that we are doing. By getting more information from the insurance 

companies, we hope to actually find a few other areas where, consistent with existing statutory requirements, we could still make 

some adjustments. 

But in the end, Senator, it does all come down to core insurance 

activities and the different kind of liability risks that are associated 

with them. The assets are often the same. It is really on that liability side of the balance sheet that you feel a difference in what a 

property and casualty insurer does as opposed to what a bank does, 

and that is what we would like to be able to take into account. 

Senator JOHANNS. Your comments lead me to another kind of 

whole other area of inquiry that we are not going to be able to get 

too far into with the limited time, but let me just throw out a question, and this probably impacts other panel members, too. There is 

so much about the insurance industry that you are telling us you 

want more information on. You want—you have got the quantitative impact study, and there are probably some other areas 

where you are seeking additional information. And, yet, we have 

three insurance companies—Met Life, AIG, Prudential—who have 

been designated systemically risky or whatever. How do you do 

that? How do you get so far down the road and identify these folks 

as being that when, by your own testimony, you acknowledge that 

there are things about the insurance industry that you want more 

information on? 

Mr. TARULLO. So, Senator, I guess I would draw a distinction between the creation of capital standards for traditional or current 

insurance activities, on the one hand, and an assessment of systemic risk on the other. My own reading of the FSOC process with 

respect to Prudential and AIG is that there is not a lot of concern 

about the core insurance activities of those companies. The concerns were with respect to some nontraditional insurance activities 

where runnability is more of a concern, and also with respect to 

things that are not insurance activities of any sort. I think that is 

where the analysis would allow one to conclude there is systemic 

importance. 

I personally do not think that the issue of whether there is systemic importance in traditional insurance activities has really been 

broached, and I am personally not sure we need to broach it. I 

mean, my pretty strong presumption would be that there is not. 

Senator JOHANNS. OK. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Chair White, I sent you a letter on the SEC’s waiver policies. I 

appreciate your response. We received it yesterday, and we will follow up with you. Thank you for that. 

Governor Tarullo, I appreciate especially your comments and 

your discussion, and Mr. Gruenberg’s, with Senator Corker. I 

thought that was helpful. You say that capital surcharges to the 

largest banks could be a good deal higher than the 2.5 percent 

Basel rules. An unnamed Fed official told the Wall Street Journal 

they could be as high as 4.5 percent. Not surprisingly, the industry 

tells us that those additional requirements would be costly, would 

25 

put them at a competitive disadvantage. Tell the Committee why 

they are important for financial stability. 

Mr. TARULLO. Senator, I would say several things. First, as some 

of you may recall, a few years ago, when we were beginning this 

exercise on capital surcharges, we did quite a bit of analysis. And, 

while we did not think that we could come up with a point estimate 

of exactly, precisely what was an appropriate surcharge given the 

additional risks to the system and the impact on the system of the 

failure of one of these firms, we did come up with a range. And, 

in all honesty, the one to 2.5 percent that the Basel Committee concluded, while an important step forward, was at the low end of that 

range. And, I think we will feel more comfortable to be somewhat 

closer to the middle of the range of estimates of the kind of additional resiliency that is needed. 

The second point I would make is that a few other countries have 

already come to similar conclusions. Switzerland has on its own applied higher surcharges than the Basel approach calls for for its 

two large globally active institutions. Sweden and the Netherlands—each has one globally systemically important institution— 

they have done the same, and I think at least one or two other 

countries are thinking of it. I think we are all trying to come to 

grips with what we really need in order to provide more assurance 

that these firms do not threaten the financial system. 

And, the third point I would make, which I alluded to in the 

written testimony, is the whole idea of these being increasingly 

strict surcharges, higher surcharges as the systemic importance of 

the entity increases, is grounded in, the very sound principle embodied in Dodd-Frank that the stringency of these additional prudential standards should increase as the systemic importance of 

the firm increases. 

Now, why is that important? Well, it is important because of the 

potential harm to society if the firm gets in trouble. But, it also 

provides the firm with a kind of tradeoff. You know, if the firm 

really thinks that it has to be this big and this complicated to engage in a certain set of activities or to have a certain size balance 

sheet, then it can do so, but it has to have very high levels of capital. If, on the other hand, those highest levels of capital appear to 

not be worth it, then it has the option of changing what people 

have called its systemic footprint. 

So, I think, for all of those reasons, this is really a quite important step forward globally, for everybody to do surcharges, but, for 

us and some other countries to recognize that we need to go a little 

further than the minimums that have been provided in Basel. 

Senator BROWN. Thank you, and I would note that under these 

estimates, it could take the largest banks to a 14 percent requirement. There is a great deal of support in this Committee and, I 

think, throughout the House and Senate on stronger capital standards like that. 

Comptroller Curry, thank you for your—the OCC finalizing rules 

for heightened expectations for—just because of lack of time, I will 

not ask you a question, but thank you for that. I think that you 

have taken major steps toward changing the culture in board 

rooms. I think we are obviously not there yet—I know you think 

that, too—changing the culture in terms of risk management and 

26 

elevating risk management to a particularly important part of 

large banks’ and holding companies’ decision-making process. 

Thank you. 

For my final question, Chair White, at your confirmation hearing, I asked you about Industry Guide 3, the SEC’s disclosure rules 

for bank holding companies. You responded that you agreed that 

a review of these rules, which an SEC staff report says have not 

been updated since 1986, that a review was warranted. When can 

we expect the SEC to update its Guide 3 disclosures to help make 

the largest banks that have increased measurably and dramatically 

in both size and complexity in this three-decade time period, when 

can we expect you to come forward to make them more transparent? 

Ms. WHITE. As part of our disclosure effectiveness review, the Industry Guide 3 is currently under review by the staff. The staff is 

in the process of actually preparing recommendations to update 

Guide 3, including whether to bring the requirements as they ultimately end up into Regulation SK. If we change our disclosure requirements, they would also be put out for notice and comment. We 

have opened a window in connection with this initiative where we 

have also been receiving some public comments on that. And, so, 

it is moving along. 

In terms of the ‘‘when’’ question, I mean, I cannot answer it precisely, but it is something that we are actively engaged on now. I 

actually reached out, I think, in August to Governor Tarullo to invite the Fed’s input into that, too, because, obviously, of their role 

over bank holding companies. 

Senator BROWN. Thank you. Thanks, Mr. Chairman. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

You know, we have wrestled with this right here with most of 

you for years. Capital—what is adequate capital? What is good capital? What is liquidity, which, I guess, goes to the basis of what we 

are talking about. 

In the insurance field, have you shared with the Committee, the 

Chairman or the Ranking Member, the methodology of how you 

designated some of these big insurance companies, like Met Life 

and Prudential and others, as systemically risky? Do you furnish 

any of the information to the Committee, or would you be willing 

to do that, because this is a topic of more than passing interest 

right now. Governor Tarullo? 

Mr. TARULLO. So, I have to confess, Senator, that I do not know 

the answer to that question. Treasury, as you know, chairs the 

FSOC—— 

Senator SHELBY. OK. 

Mr. TARULLO. I do not know whether any of my colleagues know 

whether there is a formal submission process to the Committee. 

Mr. GRUENBERG. Senator—— 

Senator SHELBY. Chairman. 

Mr. GRUENBERG. ——I do not know if there is a specific submission for the Committee. After a final decision is reached, I believe 

there is a public document that is released laying out the basis for 

the action in some detail, not disclosing proprietary information. 

27 

But, I do not know that there has been a specific communication 

to the Committee apart from that. 

Senator SHELBY. I know a lot of the people, participants and 

CEOs and board members in the insurance company, are really 

concerned, because they do not know what direction. I think they 

see the direction, but do not know what is happening next in the 

field. Is there any way you can give them some certainty there, or 

is it just a work in progress as far as you are concerned? You have 

designated, what, three big insurance companies? How many? As 

systemically risky. 

Mr. TARULLO. Oh, there have been final determinations on 

two—— 

Senator SHELBY. Two. 

Mr. TARULLO. ——Senator. There has been a news report on a 

third. 

Senator SHELBY. News. 

Mr. TARULLO. But, that is not a complete administrative determination yet. The third already designated is GE Capital, which is 

not insurance. 

Senator SHELBY. OK. 

Mr. CURRY. Senator—— 

Senator SHELBY. Yes, sir. 

Mr. CURRY. The FSOC has adopted procedures to outline how we 

approach our determinations. I do believe, to answer your question, 

that we could probably do a better job in explaining and informing 

affected institutions as to how that process works and making sure 

that we get the most relevant information possible to make our decision. 

Senator SHELBY. Let me get into the surcharge a minute. Some 

of our large foreign banks that do business here, will they be subject to the surcharge, too, above three, what, 3 percent or whatever, 

2.5—three percent, 3.5—above Basel III? Governor. 

Mr. TARULLO. Senator, that is not our current intention, although as I mentioned a moment ago, a number of the home authorities of countries have already at a consolidated level imposed 

higher than Basel levels on their own institutions. 

Senator SHELBY. As high as what you are doing here? 

Mr. TARULLO. I am not sure anybody would go as high, but that 

is probably because those three countries do not have anybody who 

is currently in the so-called top buckets. 

Senator SHELBY. OK. Well, but do you basically believe, as a 

matter of public policy, that large foreign banks doing business in 

the U.S. should be subject to—they are—to our regulatory authority and also capital standards? 

Mr. TARULLO. Well, yes. That, is, of course, why we—— 

Senator SHELBY. That is what we did—— 

Mr. TARULLO. ——adopted the intermediate holding company 

regulatory requirement and made sure that all the operations of 

the big foreign banks are brought under one umbrella and they are 

subject to capital standards, liquidity standard, and, if need be, resolution standards here in the U.S. 

Senator SHELBY. Chairman Gruenberg, do you agree with that? 

Mr. GRUENBERG. I do, Senator. 

Senator SHELBY. Comptroller? 

28 

Mr. CURRY. Yes, Senator. 

Senator SHELBY. OK. That is all. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. 

I am going to make a couple quick editorial comments before I 

get to a question, actually, for Chairman White. First of all, I want 

to follow up on what Senator Corker said. We did struggle through 

on Title I and II, and the living wills concept or funeral plans, it 

was a new idea. There were others, Senator Brown and others, who 

had a more clearly defined cap on too big to fail. A fair debate took 

place. I think that debate continues to be revisited. And, I would 

simply say that—or urge, again, I understand this iterative process, but we really need to keep a fire lit underneath this, and if 

at some point the FSOC does not act to start using some of these 

tools that were given, then I really do question whether we, as well 

intentioned as we were, whether we got it right in Title I and Title 

II in terms of ending the too big to fail. 

So, my editorial comment would be, let us speed up this iterative 

process. The fact that we are now going into many, many years of 

getting these plans right, we have got to get it right, but I would 

also like to see it come to a conclusion, and, I think, some evidence 

that some of these tools that were broad in grant would actually 

be used. 

Second, and Governor Tarullo, I was pleased to hear your comments at the outset. I would like to follow up with you both, one, 

on looking at the asset cap size of $50 billion may not be the right 

number. I think we need to acknowledge, again, that historically, 

Congress never gets it 100 percent right. You have got to come 

back and do fix-it bills, and I think it is time for a fix-it bill around 

Dodd-Frank. 

I also hope, echoing what Senator Crapo emphasized, that we 

tried to put in restrictions on smaller enterprises, community 

banks. One part that Senator Crapo raised which I would love to 

echo, as well, is the regulatory creep. But, we tried to be explicit 

on community banks not falling into some of the more burdensome 

regulatory requirements of Dodd-Frank. My fear is that while we 

put that in as a legislated exclusion under, I believe $10 billion 

cap, that kind of best practices creep has kind of come into that, 

and I find repeatedly from smaller institutions enormous additional 

marginal cost added. So, I hope you will come back with some specific suggestions there on how we might look at that. 

Chairman White, I cannot get in front of a public session without 

echoing once again, urging you to continue to move forward on 

JOBS Act. I sent you another letter last Friday. I am again looking 

at what is happening, or not happening, for that matter, around 

the country on equity fundraising. I still think it is a tool we may 

not, again, get 100 percent right, but we have got to try to use that 

tool, the sooner the better. 

I would like to get to a question. I have been spending some time 

looking at the excess complexity in equity trading that, I think, 

sometimes allows entrenched firms advantages over smaller firms. 

For example, Direct Edge, EDGX, as just one example, has a hundred different ways a share stock can be billed. They have 12 different tiers, seven of which pay customers to trade. And, for some 

29 

certain select customers, the rebate per share fee is greater than 

the take fee. I know we have talked about maker taker and some 

of these areas. This is a level of complexity further down. 

Do you have any specific plans to address complexity in the marketplace? For example, would the SEC support ensuring transparency for market participants by providing them the ability to 

audit the fees or rebates, or even looking at potentially banning 

some of these practices? How far down the trail are you at looking 

at this issue? 

Ms. WHITE. We have a number of initiatives, as actually discussed publicly in June, with respect to enhancing the transparency of the equity markets, and particularly on the fees. Also 

we are talking about initiatives on the conflicts of interest in terms 

of complexity of order types. I mean, that is of concern on a number 

of fronts. One of the things that I mentioned in that speech, and 

then followed up on, is to have the exchanges basically do an audit 

of all of those and report back to the SEC. I expect that to be completed in the fall. It is underway. 

We are also looking at, really, across the board a number of other 

near-term initiatives and then a broader review of the structural 

issues, as well. Our markets are very strong and very reliable, but 

that does not mean that enhancements and more level playing field 

initiatives cannot and should not be undertaken. 

Senator WARNER. I would be very interested in continuing to 

work with you on that. 

And then, finally—and you may not get a chance to address it 

since my time is running out—I am concerned about the increased 

leverage ratios among some of the broker-dealers. My understanding from your own data, that firms like Barclays are up toward 30-to-1 on their leverage ratios. That is getting close to where 

Lehman and Bear Stearns and others were. I hope this is a subject 

of some concerns—— 

Ms. WHITE. Yes, and I probably should get back to you in the interest of time, but certainly, that is an area that is monitored by 

us, and FINRA, as well. We can talk about what our net capital 

rule does, as well as some initiatives we have to enhance some of 

our financial responsibility oversight of broker-dealers, including a 

possible rulemaking on leverage. 

Senator WARNER. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Well, thank you, Mr. Chairman. 

Thank you for this excellent testimony. We have all been sort of 

thinking back to some of the challenges of Dodd-Frank. One of the 

challenges on derivatives was to have a regime which would be 

able to be effective, given that there were two different agencies 

that had jurisdiction over derivatives, dictated more by history 

than logic. And, my understanding—and, what we did is we insisted upon some joint rulemaking in critical areas, and I understand that this joint rulemaking has been completed. Is that the 

case, Chair White, Chairman Massad? 

Mr. MASSAD. Yes, that is generally true, and I would just say on 

the point of making sure that we work together well, I think that 

is certainly a priority of mine. I believe Chair White shares that 

30 

feeling, and we have been in touch on a number of issues already 

and our staffs are working together. 

Senator REED. Well, let me commend you on that, because as you 

understood—as we understood—trying to sort out the lines and create different agencies, to do different things—what we tried to do 

is basically take the existing structure and make it cooperate and 

work more congruently, for want of a better term. 

But, let me shift to the SEC. Throughout the course of the testimony, you have pointed out the huge issues that you still have to 

face. My calculation is roughly 18 rules left the SEC has to complete with respect to the swaps, including securities-based swaps, 

execution facilities, rules governing registered security-based swap 

repositories, to rules regarding conflict of interest. And, you have 

pointed out that you are prioritizing Dodd-Frank rules. Can you 

give us the assurance that these derivatives rules are at the very 

top of your list to get done very quickly? 

Ms. WHITE. I can assure you of that. We have a number to complete, as you have pointed out. It is a very high priority of mine 

to get them done as quickly as we can, but also as well as we can. 

And, one of the areas which you also touched on is making sure 

that they are workable for this global market as well as strong and 

robust, working not only with Chairman Massad on these—I have 

the benefit of his rulemaking in a number of those areas—but also 

our international counterparts. But, totally committed to getting 

them done. 

Senator REED. And, Chairman Massad made the point that the 

resources are getting pretty thin. Is that the same case in the SEC, 

Madam Chair? 

Ms. WHITE. It is absolutely the case, Senator. 

Senator REED. So, we can talk the talk here about how you have 

got to get things done, how it is important and so critical, et cetera, 

but if we do not—the Congress—provide you the resources, you 

cannot get it done. 

Ms. WHITE. I very much appreciate that. And also, I think we all 

have to be focused on, the fact that once these rules are finished, 

we have to implement them and enforce them, and that takes resources. 

Senator REED. Thank you. Let me just quickly shift gears because we have been talking about what is already on the table that 

you have to get done. Some of my colleagues have suggested other 

things that you should be interested in. One of the issues, really, 

is cybersecurity, Madam Chair. You have public companies that 

have been reporting significant problems, which leads me to believe 

that they are not alone and that the SEC has to start thinking seriously about routine disclosure for two reasons. 

One is the investing public should know very quickly that there 

is something amiss, but also it is like that old line in the Army. 

What people inspect and evaluate, they tend to do more of, and I 

think this would be an action-forcing device for companies now that 

either feel they are free riders or they are too small, et cetera, to 

really begin to think and take seriously their responsibilities to 

their shareholders, ultimately, in this area. Are you thinking along 

these lines? 

31 

Ms. WHITE. Certainly, in terms of the priority of cyber- and the 

long-term risk it is to not only investors, but the country. No question about that. As you know, Senator, we issued guidance, disclosure guidance, in 2011. We also, in our Division of Corporation Finance, continued to review the filings of the companies under that 

guidance and get comments on that. I have recently also formed an 

interdivisional cyber working group within the SEC to bring all of 

the expertise and information together, and that is one of the 

things that we will look at, among others. I mean, we also, obviously, have cyber responsibilities for our registrants—— 

Senator REED. Right—— 

Ms. WHITE. ——systems and so forth. 

Senator REED. You are moving fast. I suggest we all have to 

move faster. 

Chairman Cordray, thank you for extraordinary work, particularly with the Military Lending Act. Can you explain why it is important to finalize some of the rules that are pending, and update 

the rules to protect these servicemen and women. 

Mr. CORDRAY. I think it is obvious on its face, and Congress, of 

course, intervened very helpfully about a year and a half ago to require a review and revision of the rules that did not implement 

that law as intended by Congress. The statute, as you know, indicated that the CFPB was to consult with the Department of Defense. We have worked closely with them, and organized a larger 

group that included colleagues from the other agencies. Department of Treasury took a lead role. These rules are well along. They 

are at OMB at this point, and my understanding is that they are 

now moving. I think that your efforts to prod that along have been 

helpful, fruitful, and I believe that we will see action very quickly 

at this point, and I am pleased to be able to say that. 

Senator REED. Well, thank you very much, Mr. Chairman. I had 

the opportunity to mention that to Secretary of Defense Hagel, who 

gets it from the E5 level, which he was in Vietnam, to the SECDEF 

level, and we talked, again, a lot about what we owe to our servicemen and women. We certainly owe, as a minimum, fair dealing in 

the marketplace. 

Mr. CORDRAY. Thank you for that, and I think this will go a long 

way to getting us where we should be. 

Senator REED. Thank you, Mr. Chairman. Thank you. 

Chairman JOHNSON. Senator Manchin. 

Senator MANCHIN. Thank you, Mr. Chairman, and I thank all of 

you for being here today. 

I would like to first say that my little State of West Virginia depends an awful lot on community banks, so I am going to be talking about cybersecurity here and the need for reform with cybersecurity. We just learned about Home Depot’s data breach, which 

might be the largest retailer breach and is just on the heels of the 

Target breach. 

According to one report, U.S. banks had to reissue 8 percent of 

all debit cards and 4 percent of all credit cards, on average. For 

small community banks, reissuing those cards cost just over $11 

per debit card and $12.75 per credit card, including production, 

mailing, and staff time. That is what the report said. This is not 

simply a drop in the bucket for these community banks, as I am 

32 

sure you all know. These hacks could prove the difference between 

being in the black and bleeding red for the bottom lines and make 

all of them very vulnerable. 

So, even if your agency is not directly responsible—which I know 

it is not—for cybersecurity, it has an effect on the banks you regulate. What is your opinion about the need for the reform and how 

it is affecting the financial markets today? Mr. Tarullo, I will start 

with you, over at that end. 

Mr. TARULLO. Senator, you are raising an issue that we have discussed in this Committee—I think, somewhat ironically, the last 

hearing was right after the Target breach, I believe. And, I think, 

again, you have just noted that even though there is work to do 

in the banking sector—and there surely is, and I think Tom, in a 

moment, will probably explain some of what we have been trying 

to do together in the FFIEC. I do think, for all of us as bank regulators, when we see the asymmetry in the requirements of nonbank 

companies, or the absence of requirements for nonbank companies 

to take measures to protect personal information, it is frustrating, 

particularly for the smaller banks, but to be honest, for banks of 

all sizes, and I think we feel, to some degree, we have all got one 

hand tied behind our back. 

So, among the many other things that need to be done in this 

area one is to get a set of expectations as to what nonfinancial companies that are not subject to the regulation of those of us sitting 

at this table are expected to do in protecting the very same kinds 

of information that our institutions hold. 

Senator MANCHIN. I think what I am trying to get to is the cost 

that, basically, small community banks are incurring, especially in 

States such as West Virginia, that depends on them, basically, for 

our banking community, if you will. And, you add anything else to 

that from Dodd-Frank that trickles down to the community banks, 

you are just adding more on their vulnerability. So, if you would 

like to—— 

Mr. CURRY. Yes. I would like to add, as Governor Tarullo mentioned, this has been an issue that we are coordinating through the 

FFIEC in terms of making sure that community banks, in particular, are appropriately responding to cyberthreats, and we see 

this as actually a much larger issue—— 

Senator MANCHIN. Sure. 

Mr. CURRY. ——than just the financial costs of reissuing cards, 

because it really goes to the trust between a customer and the security of their deposit or other banking relationship. 

But, as Governor Tarullo mentioned, it is really an issue of leveling the playing field in terms of the regulatory requirements between banks and nonbanks, and in this case, retailers. Banks really have, clearly, longstanding over a decade, expectations in terms 

of maintaining the security of account information, including electronic access to it. We actually assess, as part of our regulatory 

function, their capabilities from an IT standpoint. And, we have 

clear rules on customer notification and notification to law enforcement and regulatory authorities. I think it is important that Governor Tarullo mentioned, that similar requirements need to be in 

place for the nonbank participants in our payment system. 

33 

Senator MANCHIN. OK. Thank you. If I could—I have one more 

question, sir, and I am so sorry, but I wanted to get to Ms. White. 

Chairman White, the Wall Street Journal recently reported that 

two firms are working to create a fund for Bitcoin to allow investors to speculate on Bitcoin’s worth. As you know, I wrote a letter 

describing my concern that the regulators have not yet issued rules 

on Bitcoin. And, this is especially troubling since Bitcoin is wildly 

speculative, as you know, and is especially subject to electronic 

theft and scams. 

I know your agency is taking a particularly long period of time 

to approve a Bitcoin exchange traded fund and I would applaud 

your caution. However, I want to convey my concern with this virtual currency again and hope that the other regulators will help 

you to fill in the gaps so that you can protect all of our American 

consumers. So, if you can just give me a quick update—I know my 

time is running out here—on—— 

Ms. WHITE. I will be quick. Basically, this is an evolving area for 

all the regulators—— 

Senator MANCHIN. Yes. 

Ms. WHITE. ——as you know. We have taken enforcement actions, actually, in Bitcoin-involved Ponzi schemes some time ago. 

We have issued, I think, two separate investor alerts, and as you 

mentioned, we are also reviewing a filing very carefully—— 

Senator MANCHIN. Yes. 

Ms. WHITE. ——that is key to Bitcoin. At this point, there is not 

a conclusion by our staff that the currency itself is a security, so 

there is not that kind of regulation that flows at this point, but we 

continue to look at it very, very carefully and work with our fellow 

regulators on it, as well. 

Senator MANCHIN. Do you think you will be having a rule—— 

Ms. WHITE. Well, I think, at this stage, there is not a planned 

rulemaking. As I say, at this stage, we have not concluded that it 

is a security that would be subject to that kind of regulation by us. 

But, it is something we are still very focused on. 

Senator MANCHIN. Thank you. 

Chairman JOHNSON. Senator Heitkamp. 

Senator HEITKAMP. Mr. Chairman, first, let me thank my good 

friend, Senator Warren from Massachusetts, for letting me bump 

in line. I have to go preside at noon. 

But, I want to make the point, in case you guys have not figured 

that out from my letters and my discussions with you, I really care 

about small community banks. They are the lifeblood, the capital 

lifeblood for the many, many people in the great State of North Dakota. I know we consistently talk about the need for reform, the 

need for look-back, the need to have a very directed discussion 

about the regulatory responsibilities and how that is affecting community banks. 

I would like to be able to go back to my independent community 

banks and tell them when there is going to be regulatory relief enacted, and I know there is always a lot of swirl and a lot of talk, 

but I share Senator Crapo’s discussion, and so I am curious about 

timeframe, because they are making decisions today. And, what 

started out to be too big to fail has become for many of these community banks too small to succeed. They are moving out of lending 

34 

in certain areas as a result of what they perceive to be massive regulatory burden. 

And, so, if we are going to stem the tide of dissolution of that 

portion of their business because of compliance burdens, we need 

to offer a timeframe, and so I am curious to anyone who can tell 

me when we will actually get an answer to small community banks 

on regulatory relief. 

Mr. CURRY. Senator, from an FFIEC perspective, where we are 

coordinating the Federal banking agencies’ EGRPRA process, that 

is already underway. We have put out for comment a series of rules 

and regulations. That comment period closed. There will be two 

more. So, we are programmatically reviewing the regulations that 

are under our authority to make those judgments that you are asking us to do to recommend or to eliminate those rules and regulations under our control. 

An important part of this process, as I mentioned earlier, we are 

going to have direct input from community bankers. We have asked 

them to identify those areas where they are most pressing in need 

of a change and how we can go about doing that. 

Senator HEITKAMP. That does not answer the question about 

time. Maybe—— 

Mr. CURRY. The statute requires a fairly lengthy review process, 

but we intend to do it as quickly as possible and to have either action taken under our own independent rulemaking or to make recommendations to Congress. 

Senator HEITKAMP. Mr. Tarullo. 

Mr. TARULLO. Senator, I would just comment. Sometimes, people, 

when they talk about regulatory burden, they lump together two 

sets of things. One is actual legislative or regulatory requirements, 

called the Federal Register type requirements. 

The second thing, which Senator Manchin and maybe Senator 

Warner, several of you have referred to already today, is the— 

somebody called it, quite aptly, the trickle down effect of supervisory practices, and we do not have to wait for a formal process 

to do something about that. I think Tom met with the same group 

yesterday of small bankers. They were a very good group, and the 

reason I thought they were a particularly good group is they came 

in with specifics. They came in with specifics and they said, look, 

here is a way in which some articulated supervisory expectation is, 

we think, not appropriate for us, creating a problem for us, and we 

think it is trickling down. In some cases, I think they were right. 

It was good for our staff to be there to hear it, as we have done 

with groups of small community bankers in the past. We got a list 

of action items to follow up on. 

So, although the EGRPRA process is kind of formalized, I 

think—and I suspect the same thing is going on at the OCC and 

the FDIC—that we can be constantly in a process of trying to 

change current practices, and, you know, if you do it even at the 

request of a small number of smaller banks, the benefits of that 

can proliferate. 

I do think, in the end, we have this problem of we have got thousands of examiners and it is hard to get them all coordinated without bringing all the decisions to Washington, which none of us 

wants to do. 

35 

Senator HEITKAMP. And, I am running out of time. I have a couple more questions I will submit for the record, with the agreement 

of the Chairman. 

But, just back to this, there is nothing like certainty. I mean, 

there can be promises that this is how supervise—you know, what 

is going to happen in a bank audit, and do not worry about this, 

but they will worry about it, and they will worry about compliance 

burdens because the cost of not being in compliance is so high that 

just the risk will cause those banks to retreat from the market. 

And, I do not think that is in the best interest of this country, and 

it certainly is not in the best interest of my State. 

And, so, thank you for elevating this to one of your top concerns. 

I understand all of the great burdens that you all have in making 

sure that we do not have systemic failure, but, again, what was too 

big to fail has become too small to succeed and we need to fix that 

problem. 

Chairman JOHNSON. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

In the past year, the three largest banks in this country— 

JPMorgan Chase, Citigroup, and Bank of America—have admitted 

to breaking the law and have settled with the Government for a 

combined $35 billion. Now, as Judge Rakoff of the Southern District of New York has noted, the law on this is clear. No corporation can break the law unless an individual within that corporation 

broke the law. Yet, despite the misconduct at these banks that generated tens of billions of dollars in settlement payments by the 

companies, not a single senior executive at these banks has been 

criminally prosecuted. 

Now, I know that your agencies cannot bring prosecutions directly, but you are supposed to refer cases to the Justice Department when you think individuals should be prosecuted. So, can you 

tell me how many senior executives at these three banks you have 

referred to the Justice Department for prosecution? 

Mr. TARULLO. Well, Senator, I do not know the answer to that 

question, but I want to pick up on something you just said, because 

I think it is actually quite important, that although failures of the 

sort that have resulted in these big fines, criminal and civil, almost 

always result from problems in organizations, because there are 

many ways to catch these—— 

Senator WARREN. Governor Tarullo—— 

Mr. TARULLO. Hold on, Senator, if I could. There often are individuals who can clearly be identified as responsible, and although, 

as you know, we do not have criminal prosecutorial power, what we 

do have is the power to insist that firms either discharge current 

employees who have been implicated in this, even if they have not 

been criminally prosecuted—which we have done in the past couple 

of cases—or, as we are doing now, conducting investigations under 

the authorities that are already in the law that would allow us to 

ban these people from working for—— 

Senator WARREN. So, I take it what you are saying, Governor 

Tarullo, is that you do not know of any criminal prosecutions in 

these three banks that the Fed has recommended. 

Mr. TARULLO. Well, we have—— 

36 

Senator WARREN. You have investigated enough to know 

that—— 

Mr. TARULLO. We shared all—— 

Senator WARREN. ——that these banks are responsible. They 

have given—they have admitted to wrongdoing. They have signed 

up for $35 billion in a settlement. And no one has been referred? 

Mr. TARULLO. Well, Senator, we have shared all the information 

that the Department of Justice needed, and I think the Justice Department has probably made its own assessment on both sets of 

criminal and civil—— 

Senator WARREN. So, you are saying you have referred people for 

criminal prosecution? 

Mr. TARULLO. No. We have provided information to—— 

Senator WARREN. But, you have not actually referred someone 

for criminal prosecution. You know, I just—— 

Mr. TARULLO. Well, we—— 

Senator WARREN. I want to be clear about the contrast here. 

After the savings and loan crisis in the 1970s and the 1980s, the 

Government brought over a thousand criminal prosecutions and got 

over 800 convictions. The FBI opened nearly 5,500 criminal investigations because of referrals from banking investigators and regulators. 

So, if we did not even limit it to these three banks, how many 

prosecutions have you all regulated [sic]? What we have to remember here is the main reason that we punish illegal behavior is for 

deterrence, you know, to make sure that the next banker who is 

thinking about breaking the law remembers that a guy down the 

hall was hauled out of here in handcuffs when he did that. These 

civil settlements do not provide deterrence. The shareholders for 

the companies pay the settlement. Senior management does not 

pay a dime. 

And, in fact, if you are like Jamie Dimon, the CEO of JPMorgan 

Chase, you might even get an $8.5 million raise for the settlement 

of negotiating such a great settlement when your company breaks 

the law. So, without criminal prosecutions, the message to every 

Wall Street banker is loud and clear. If you break the law, you are 

not going to jail, but you might end up with a much bigger paycheck. 

So, no one should be above the law. If you steal a hundred bucks 

on Main Street, you are probably going to jail. If you steal a billion 

bucks on Wall Street, you darn well better go to jail, too. 

So, I have another question I want to ask about, and that is 

about living wills, that is, the plans that big banks are supposed 

to submit now so that if they start to fail, they could be liquidated 

without bringing down the economy or needing a taxpayer bailout. 

Last month, the FDIC and the Fed, as we talked about earlier, sent 

letters to 11 of the country’s biggest banks, telling them that their 

living wills did not cut it. You said that if these banks failed, either 

they would need a Government bailout or they would bring down 

the economy. These letters confirmed quite literally that 6 years 

after the financial crisis, all of our biggest banks remain too big to 

fail. 

Now, in your joint statement, you said—and I want to get this 

right—that by next July, the 11 banks must demonstrate, quote, 

37 

‘‘significant progress to address all the shortcomings identified in 

the letter,’’ and if the banks do not address significant progress, 

you told Senator Corker earlier in this hearing, you have tools to 

force the banks to make changes, and I just want to underline that 

means higher capital standards, higher liquidity standards, restrict 

bank growth, limit bank operations. But, these actions take place 

only if there is not significant progress on the part of the banks. 

So, I just would like the two of you, FDIC and the Fed, just to 

speak briefly to the question—because I realize I am out of time 

here, Mr. Chairman—what constitutes ‘‘significant’’ in this case? 

What is it you want to see the too big to fail banks do, and if they 

do not do it, the action you are going to take? Chairman 

Gruenberg, maybe we could start with you, and then Governor 

Tarullo. 

Mr. GRUENBERG. Senator, we laid out in these letters a pretty 

specific set of markers for the institutions to meet that goes to 

some of the key obstacles to orderly resolution of these firms. We 

directed them in the letters to simplify their legal structures so 

that they put their business lines in line with their legal entity so 

that in resolution, you can sort the firm out and figure out how to 

manage the failure. 

A critical issue is their derivatives contracts. Those contracts provide for automatic termination in the event at the beginning of an 

insolvency proceeding. Those contracts need to be changed in order 

to avoid the contagion consequences that we saw in 2008 from a 

disorderly termination of those contracts. We direct in the letters 

the firms to change those contracts. 

Critical operations—a firm has got to be able, during the course 

of a resolution process, to maintain its IT and other critical operations so the whole operation does not fall apart. You may have an 

IT operation in a foreign jurisdiction that could get taken out or 

not made available as a result of problems by the institution. The 

institution has to develop back-up capabilities to sustain its critical 

operations. Otherwise, the public ends up having to pick up the 

slack. 

Information—the institutions have to be able to produce critical, 

timely information that is essential to managing a resolution process. The firms right now do not have that capability. 

These are specific, measurable actions that we have directed the 

firms to take, and we are going to be looking for these firms to take 

specific, measurable actions to address these. And, they have got 

a year now. They are on notice. We are going to be working closely 

with these firms so there is clarity of guidance, and we are going 

to be expecting action, and that is really the whole purpose of this 

effort. 

Senator WARREN. Thank you, Chairman. 

Mr. TARULLO. If I could just underscore that last point that 

Marty made, Senator. None of us wants to be in the situation 

where, next July or August, there is this issue of, well, we made 

this progress. Is this significant or is this not significant? 

Senator WARREN. Right. 

Mr. TARULLO. And, so, what Marty just alluded to is the point 

I was going to make and I will now underscore, that we have our 

supervisors from the Fed and the FDIC in the institutions right 

38 

now and this will be a process of what are you going to do about 

this and wanting to hear in very tangible terms what it is they are 

doing. And, I know at the Fed, I suspect at the FDIC, the boards 

will be regularly briefed on this so that we will be in a position to 

be giving indications that this is what we expected or you guys are 

already falling short, because I think what lay behind your question was the concern that, next July, we get into this palaver of 

whether progress has been significant or not. 

Senator WARREN. So, we are not going to be back here a year 

from now having this same conversation again. You are prepared 

to demand that they take these measurable steps, and if they fail 

to do so, you are going to use your tools to take them for them—— 

Mr. TARULLO. Correct. 

Senator WARREN. ——is that right? Good. Thank you. 

Thank you for your indulgence, Mr. Chairman. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

I want to follow up on Senator Warren’s observations regarding 

the Justice Department and criminal activity in financial institutions or whatever. I realize that you are regulators. You are not 

prosecutors. But, if there is $35 billion, more or less, in fines or settlements because of criminal conduct, and there is no justice—justice is important for the big and the well-being and also small— 

something is wrong with the Justice Department. People should 

not be able, whoever they are, not just financial institutions, should 

be able to buy their way out of culpability, especially when it is so 

strong, it defies rationality. You know, I agree with her on that. 

But, I think, Senator Warren, that it goes to the Justice Department, because I am not defending my regulators, because I call 

them to task at times, but they can make recommendations, they 

can send things over, but, ultimately, it seems like the Justice Department seems bent on money rather than justice, you know, and 

that is a mistake and the American people pick up on that. 

Having said that, Governor, I want to get back on the insurance 

regulation, if I could. Have you or others, have you consulted with 

any of the State regulators in making the SIFI designations for the 

insurers, and if you have, what did they say? For years, we all 

know this, the States have regulated insurance. We know the story 

of AIG. We have hashed it out here many times. But, AIG was not 

running an insurance company. They had visions. But, they got out 

of their basic stuff and it caused them great harm, as we all know, 

and caused headaches right here in this Committee and with you 

guys. 

But, Met Life and Prudential, to my knowledge, they have not 

been involved in credit default swaps and everything, other than 

managing their own risk. I do not know. You might have a better 

feel for this. But, have you consulted or dealt, had a dialog with 

some of the State regulators before you make these designations, 

and if you have, what have they said, and if you have not, why 

have you not? 

Mr. TARULLO. I would say first, Senator, as I am sure you know, 

that on the FSOC, there is a slot reserved for a representative of 

the National Association of Insurance Commissioners—— 

Senator SHELBY. I know. We know. 

39 

Mr. TARULLO. ——and there is also, by statute, the independent 

insurance person, who also brings to bear expertise and experience—— 

Senator SHELBY. Sure. 

Mr. TARULLO. ——and they, obviously, have both been fully involved. I certainly would be a little reluctant to speak for them 

here, but they are fully involved and other commissioners in the 

NAIC have been, as well. 

Senator SHELBY. Is this—you know, the States have regulated 

these insurance companies for years, and this is new for the Federal Government and for you. Is this the beginning of a preemption 

of the Federal over the State in the regulation of insurance? Some 

people would argue that. 

Mr. TARULLO. Yes. Certainly not from the Fed’s point of view. 

Senator SHELBY. Uh-huh. 

Mr. TARULLO. There are two ways that we get supervision of entities that are either owned by or include insurance firms. One, if 

the entity also owns a depository institution, because that is when 

the Holding Company Act requirements come in. 

Senator SHELBY. Uh-huh. 

Mr. TARULLO. Or, two, if they are designated by the FSOC. When 

they are designated by the FSOC, it is because of their systemic 

importance, and our supervision and oversight and regulation of 

those institutions is directed toward the containment of systemic 

risk, not their insurance business. As I said earlier, I, at least, do 

not regard generally traditional insurance activities as posing systemic risk. 

It is the nontraditional, the more runnable things, the new 

things where we see similarities that are more toward contagion 

and runnable assets and the like, the sort of thing that we are regulating in the banking arena, but we do not want to be in the business of regulating insurance companies the way State insurance 

commissioners do, which is trying to preserve the franchise for the 

benefit of the policy holders. Our purpose is a different one, which 

is assuring on a consolidated basis the safety and soundness of 

a—— 

Senator SHELBY. Sure. 

Mr. TARULLO. ——large financial institution. 

Senator SHELBY. Let me ask you a question, if I could—— 

Chairman JOHNSON. One more question. 

Senator SHELBY. I have to ask a long question, then—— 

[Laughter.] 

Senator SHELBY. Would a big insurance company—we will just 

use Met Life or Prudential or anybody—that was managing their 

own risk through derivatives and so forth, would they be considered, for the most part, an end user? 

Mr. MASSAD. Well, generally, our consideration of end users applies to companies that are not primarily financial in nature. 

Senator SHELBY. Uh-huh, like steel and all this? 

Mr. MASSAD. Exactly. Exactly. 

Senator SHELBY. Hard commodities. 

Mr. MASSAD. So, large insurance companies who have a lot of 

swap activity, we would not consider—— 

Senator SHELBY. OK. 

40 

Mr. MASSAD. ——as end users. 

Senator SHELBY. Thank you. Thank you, Mr. Chairman. 

Chairman JOHNSON. I want to thank today’s witnesses, again, for 

their testimony. 

This hearing is adjourned. 

[Whereupon, at 12:10 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

41 

PREPARED STATEMENT OF DANIEL K. TARULLO 

GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

SEPTEMBER 9, 2014 

Chairman Johnson, Ranking Member Crapo, and other Members of the Committee, thank you for the opportunity to testify on the Federal Reserve’s activities 

in mitigating systemic risk and implementing the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (Dodd-Frank Act). In testifying before this Committee 

in February, I noted my hope and expectation that this year would be the beginning 

of the end of our implementation of the major provisions of the Dodd-Frank Act. 

Seven months later, we are on track to fulfill that expectation. The Federal Reserve 

and other banking supervisors have continued to make progress in implementing 

the congressional mandates in the Dodd-Frank Act, promoting a stable financial system, and strengthening the resilience of banking organizations. In today’s testimony, I will provide an update on the Federal Reserve’s implementation of the 

Dodd-Frank Act and describe key upcoming regulatory and supervisory priorities to 

address the problems of ‘‘too big to fail’’ and systemic risk. The Federal Reserve is 

committed to continuing to work with our fellow banking agencies and with the 

market regulators to help ensure that the organizations we supervise operate in a 

safe and sound manner and are able to support activity in other sectors of the economy. 

As we complete our revisions to the financial regulatory architecture, we are cognizant that regulatory compliance can impose a disproportionate burden on smaller 

financial institutions. In addition to overseeing large banking firms, the Federal Reserve supervises approximately 800 State-chartered community banks that are 

members of the Federal Reserve System, as well as several thousand small bank 

holding companies. In my testimony, I also will describe how the Federal Reserve 

is seeking to ensure that its regulations and supervisory framework are not unnecessarily burdensome for community banking organizations so they can continue 

their important function of safe and sound lending to local communities. 

Recent Dodd-Frank Act Implementation Milestones 

Since the passage of the Dodd-Frank Act more than 4 years ago, the Federal Reserve and the other agencies represented at this hearing have completed wide-ranging financial regulatory reforms that have remade the regulatory landscape for financial firms and markets. Internationally, at the Basel Committee on Banking Supervision (BCBS), we have helped develop new standards for global banks on riskbased capital, leverage, liquidity, single-counterparty credit limits, and margin requirements for over-the-counter derivatives. We have also worked with the Financial Stability Board (FSB) to reach global agreements on resolution regimes for systemic financial firms and on a set of shadow banking regulatory reforms. 

Domestically, we have completed many important measures. We approved final 

rules implementing the Basel III capital framework, which help ensure that U.S. 

banking organizations maintain strong capital positions and are able to continue 

lending to creditworthy households and businesses even during economic 

downturns. We implemented the Dodd-Frank Act’s stress testing requirements, 

which are complemented by the Federal Reserve’s annual Comprehensive Capital 

Analysis and Review. Together, these supervisory exercises provide a forward-looking assessment of the capital adequacy of the largest U.S. banking firms. Pursuant 

to section 165 of the Dodd-Frank Act, we established a set of enhanced standards 

for large U.S. banking organizations to help increase the resiliency of their operations and thus promote financial stability. In addition, the Federal Reserve implemented a rule requiring foreign banking organizations with a significant U.S. presence to establish U.S. intermediate holding companies over their U.S. subsidiaries 

and subjecting such companies to substantially the same prudential standards applicable to U.S. bank holding companies. We finalized the Volcker rule to implement 

section 619 of the Dodd-Frank Act and prohibit banking organizations from engaging in short-term proprietary trading of certain securities and derivatives. These 

and other measures have already created a financial regulatory architecture that is 

much stronger and much more focused on financial stability than the framework in 

existence at the advent of the financial crisis. 

More recently, the Federal Reserve, often in tandem with some or all of the other 

agencies represented at this hearing, has made progress on a number of other important regulatory reforms. I will discuss those steps in more detail. 

Liquidity Rules for Large Banking Firms 

Last week, the Federal Reserve and the other U.S. banking agencies approved a 

final rule, consistent with the enhanced prudential standards requirements in secVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00045 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
42 

tion 165 of the Dodd-Frank Act, which implements the first broadly applicable quantitative liquidity requirement for U.S. banking firms. Liquidity standards for large 

U.S. banking firms are a key contributor to financial stability, as they work in concert with capital standards, stress testing, and other enhanced prudential standards 

to help ensure that large banking firms manage liquidity in a manner that mitigates the risk of creditor and counterparty runs. 

The rule’s liquidity coverage ratio, or LCR, requires covered banking firms to hold 

minimum amounts of high-quality liquid assets—such as central bank reserves and 

high-quality Government and corporate debt—that can be converted quickly and 

easily into cash sufficient to meet expected net cash outflows over a short-term 

stress period. The LCR applies to bank holding companies and savings and loan 

holding companies with $250 billion or more in total consolidated assets or $10 billion or more in on-balance-sheet foreign exposures. The rule also applies a less stringent, modified LCR to bank holding companies and savings and loan holding companies that are below these thresholds but with more than $50 billion in total assets. 

The rule does not apply to bank holding companies or savings and loan holding companies with less than $50 billion in total assets, nor to nonbank financial companies 

designated by the Financial Stability Oversight Council (FSOC). The Federal Reserve will apply enhanced liquidity standards to designated nonbank financial companies through a subsequently issued order or rule following an evaluation of each 

of their business models, capital structures, and risk profiles. 

The rule’s LCR is based on a liquidity standard agreed to by the BCBS but is 

more stringent than the BCBS standard in several areas, including the range of assets that qualify as high-quality liquid assets and the assumed rate of outflows for 

certain kinds of funding. In addition, the rule’s transition period is shorter than that 

in the BCBS standard. The accelerated phase-in of the U.S. LCR reflects our objective that large U.S. banking firms maintain the improved liquidity positions they 

have already built following the financial crisis, in part because of our supervisory 

oversight. We believe the LCR will help ensure that these improved liquidity positions will not weaken as memories of the financial crisis fade. 

The final rule is largely identical to the proposed rule, with a few key adjustments 

made in response to comments from the public. Those adjustments include changing 

the scope of corporate debt securities and publicly traded equities qualifying as 

high-quality liquid assets, phasing in reporting requirements, and modifying the 

stress period and reporting frequency for firms subject to the modified LCR. 

Swap Margin Reproposal 

Sections 731 and 764 of the Dodd-Frank Act require the establishment of initial 

and variation margin requirements for swap dealers and major swap participants 

(swap entities) on swaps that are not centrally cleared. These requirements are intended to ensure that the counterparty risks inherent in swaps are prudently limited and not allowed to build to unsustainable levels that could pose risks to the 

financial system. In addition, requiring all uncleared swaps to be subject to robust 

margin requirements will remove economic incentives for market participants to 

shift activity away from contracts that are centrally cleared. 

The Federal Reserve and four other U.S. agencies originally issued a proposed 

rule to implement these provisions of the Dodd-Frank Act in April 2011. Following 

the release of the original proposal, the BCBS and the International Organization 

of Securities Commissions began working to establish a consistent global framework 

for imposing margin requirements on uncleared swaps. This global framework was 

finalized last September. After considering the comments that were received on the 

April 2011 U.S. proposal and the recently established global standards, the agencies 

issued a reproposal last week. Under the reproposal, swap entities would be required to collect and post initial and variation margin on uncleared swaps with another swap entity and other financial end-user counterparties. The requirements are 

intended to result in higher initial margin requirements than would be required for 

cleared swaps, which is meant to reflect the more complex and less liquid nature 

of uncleared swaps. 

In accordance with the statutory requirement to establish margin requirements 

regardless of counterparty type, the reproposal would require swap entities to collect 

and post margin in connection with any uncleared swaps they have with nonfinancial end users. These requirements, however, are quantitatively and qualitatively different from the margin requirements for swaps with financial end users. 

Specifically, swaps with nonfinancial end users would not be subject to specific, numerical margin requirements but would only be subject to initial and variation margin requirements at such times, in such forms, and in such amounts, if any, that 

the swap entity determines is necessary to address the credit risk posed by the 

counterparty and the transaction. There are currently cases where a swap entity 

43 

does not collect initial or variation margin from nonfinancial end users because it 

has determined that margin is not needed to address the credit risk posed by the 

counterparty or the transaction. In such cases, the reproposal would not require a 

change in current practice. The agencies believe that these requirements are consistent with the Dodd-Frank Act and appropriately reflect the low level of risk presented by most nonfinancial end users. 

The agencies in the reproposal have taken several steps to help mitigate any impact to the liquidity of the financial system that could result from the swap margin 

requirements. These steps include incorporating an initial margin requirement 

threshold below which exchanges of initial margin are not required, allowing for a 

wider range of assets to serve as eligible collateral, and providing smaller swap entities with an extended timeline to come into compliance. We look forward to receiving comments on the reproposal. 

Modifications to the Supplementary Leverage Ratio and Adoption of the Enhanced 

Supplementary Leverage Ratio 

Also last week, the Federal Reserve and the other U.S. banking agencies approved 

a final rule that modifies the denominator calculation of the supplementary leverage 

ratio in a manner consistent with the changes agreed to earlier this year by the 

BCBS. The revised supplementary leverage ratio will apply to all banking organizations subject to the advanced approaches risk-based capital rule starting in 2018. 

These modifications to the supplementary leverage ratio will result in a more appropriately measured set of leverage capital requirements and, in the aggregate, are 

expected to modestly increase the stringency of these requirements across the covered banking organizations. 

This rule complements the agencies’ adoption in April of a rule that strengthens 

the internationally agreed-upon Basel III leverage ratio as applied to U.S.-based 

global systemically important banks (G–SIBs). This enhanced supplementary leverage ratio, which will be effective in January 2018, requires U.S. G–SIBs to maintain 

a tier 1 capital buffer of at least 2 percent above the minimum Basel III supplementary leverage ratio of 3 percent, for a total of 5 percent, to avoid restrictions 

on capital distributions and discretionary bonus payments. In light of the significantly higher risk-based capital rules for G–SIBs under Basel III, imposing a stricter leverage requirement on these firms is appropriate to help ensure that the leverage ratio remains a relevant backstop for these firms. 

Key Regulatory Priorities 

As we near the completion of the implementation of the major provisions of the 

Dodd-Frank Act, some key regulatory reforms remain unfinished. To that end, the 

Federal Reserve contemplates near- to medium-term measures to enhance the resiliency and resolvability of U.S. G–SIBs and address the risks posed to financial stability from reliance by financial firms on short-term wholesale funding. 

The financial crisis made clear that policymakers must devote significant attention to the potential threat to financial stability posed by our most systemic financial firms. Accordingly, the Federal Reserve has been working to develop regulations 

that are designed to reduce the probability of failure of a G–SIB to levels that are 

meaningfully below those for less systemically important firms and to materially reduce the potential adverse impact on the broader financial system and economy in 

the event of a failure of a G–SIB. 

G–SIB Risk-Based Capital Surcharges 

An important remaining Federal Reserve initiative to improve G–SIB resiliency 

is our forthcoming proposal to impose graduated common equity risk-based capital 

surcharges on U.S. G–SIBs. The proposal will be consistent with the standard in 

section 165 of the Dodd-Frank Act that capital requirements be progressively more 

stringent as the systemic importance of a firm increases. It will build on the G–SIB 

capital surcharge framework developed by the BCBS, under which the size of the 

surcharge for an individual G–SIB is a function of the firm’s systemic importance. 

By further increasing the amount of the most loss-absorbing form of capital that is 

required to be held by firms that potentially pose the greatest risk to financial stability, we intend to improve the resiliency of these firms. This measure might also 

create incentives for them to reduce their systemic footprint and risk profile. 

While our proposal will use the G–SIB risk-based capital surcharge framework developed by the BCBS as a starting point, it will strengthen the BCBS framework 

in two important respects. First, the surcharge levels for U.S. G–SIBs will be higher 

than the levels required by the BCBS, noticeably so for some firms. Second, the surcharge formula will directly take into account each U.S. G–SIB’s reliance on shortterm wholesale funding. We believe the case for including short-term wholesale 

funding in the surcharge calculation is compelling, given that reliance on this type 

44 

of funding can leave firms vulnerable to runs that threaten the firm’s solvency and 

impose externalities on the broader financial system. 

Resolvability of G–SIBs 

Our enhanced regulation of G–SIBs also includes efforts to improve their resolvability. Most recently, in August, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) completed reviews of the second round of resolution 

plans submitted to the agencies in October 2013 by 11 U.S. bank holding companies 

and foreign banks. Section 165(d) of the Dodd-Frank Act requires banking organizations with total consolidated assets of $50 billion or more and nonbank financial 

companies designated by the FSOC to submit resolution plans to the Federal Reserve and the FDIC. Each plan must describe the organization’s strategy for rapid 

and orderly resolution in the event of material financial distress or failure. In completing the second round reviews of these banking organizations’ resolution plans, 

the FDIC and the Federal Reserve noted certain shortcomings in the resolution 

plans that the firms must address to improve their resolvability in bankruptcy. Both 

agencies also indicated the expectation that the firms make significant progress in 

addressing these issues in their 2015 resolution plans. 

In addition, the Federal Reserve has been working with the FDIC to develop a 

proposal that would require the U.S. G–SIBs to maintain a minimum amount of 

long-term unsecured debt at the parent holding company level. While minimum capital requirements are designed to cover losses up to a certain statistical probability, 

in the even less likely event that the equity of a financial firm is wiped out, successful resolution without taxpayer assistance would be most effectively accomplished 

if a firm has sufficient long-term unsecured debt to absorb additional losses and to 

recapitalize the business transferred to a bridge operating company. The presence 

of a substantial tranche of long-term unsecured debt that is subject to bail-in during 

a resolution and is structurally subordinated to the firm’s other creditors should reduce run risk by clarifying the position of those other creditors in an orderly liquidation process. A requirement for long-term debt also should have the benefit of improving market discipline, since the holders of that debt would know they faced the 

prospect of loss should the firm enter resolution. 

The Federal Reserve is working with global regulators, under the auspices of the 

FSB, to develop a proposal that would require the largest, most complex global 

banking firms to maintain a minimum amount of loss absorbency capacity beyond 

the levels mandated in the Basel III capital requirements. 

Another element of our efforts to promote resolvability of large banking organizations involves the early termination rights of derivative counterparties to G–SIBs. 

Some of the material operating subsidiaries of G–SIBs are counterparties to large 

volumes of over-the-counter derivatives and other qualifying financial contracts that 

provide for an event of default based solely on the insolvency or receivership of the 

parent holding company. Although the Dodd-Frank Act created an orderly liquidation authority (OLA) to better enable the Government to resolve a failed systemically important financial firm—and the OLA’s stay and transfer provisions can prevent exercise of such contractual rights by counterparties to contracts under U.S. 

law—the OLA provisions may not apply to contracts under foreign law. Accordingly, 

counterparties of the foreign subsidiaries and branches of G–SIBs may have contractual rights and substantial economic incentives to accelerate or terminate those contracts as soon as the U.S. parent G–SIB enters OLA. This could render a resolution 

unworkable by resulting in the disorderly unwind of an otherwise viable foreign 

subsidiary and the disruption of critical intra-affiliate activities that rely on the failing subsidiary. The challenge would be compounded in a bankruptcy resolution because derivatives and other qualifying financial contracts are exempt from the automatic stay under bankruptcy law, regardless of whether the contracts are governed 

by U.S. or foreign law. 

The international regulatory community is working to mitigate this risk as well. 

The Federal Reserve is working with the FDIC and global regulators, financial 

firms, and other financial market actors to develop a protocol to the International 

Swaps and Derivatives Association (ISDA) Master Agreement to address the impediments to resolvability generated by these early termination rights. The FSB will be 

reporting progress on this effort in the fall. 

Short-Term Wholesale Funding 

As I have noted in prior testimony before this Committee, short-term wholesale 

funding plays a critical role in the financial system. During normal times, it helps 

to satisfy investor demand for safe and liquid investments, lowers funding costs for 

borrowers, and supports the functioning of important markets, including those in 

which monetary policy is executed. During periods of stress, however, runs by proVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00048 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
45 

viders of short-term wholesale funding and associated asset liquidations can result 

in large fire sale externalities and otherwise undermine financial stability. A dynamic of this type engulfed the financial system in 2008. 

Since the crisis, the Federal Reserve has taken several steps to address shortterm wholesale funding risks. The Basel III capital framework and the Federal Reserve’s stress testing regime have significantly increased the quantity and quality 

of required capital in the banking system, particularly for those banking organizations that are the most active participants in short-term wholesale funding markets. 

Similarly, the implementation of liquidity regulations such as the LCR, together 

with related efforts by bank supervisors, will help to limit the amount of liquidity 

risk in the banking system. 

We have also taken steps to reduce risks posed by the use of short-term wholesale 

funding by actors outside the banking system. These include leading an effort to reduce reliance by borrowers in the triparty repo market on intraday credit from 

clearing banks and increasing the regulatory charges on key forms of credit and liquidity support that banks provide to shadow banks. In part because of these actions and in part because of market adjustments, there is less risk embedded in 

short-term wholesale funding markets today than in the period immediately preceding the financial crisis. The short-term wholesale funding markets are generally 

smaller, the average maturity of short-term funding arrangements is moderately 

greater, and collateral haircuts are more conservative. In addition, the banking organizations that are the major intermediaries in short-term wholesale funding markets are much more resilient based on the measures I discussed earlier. 

Nevertheless, we believe that more needs to be done to guard against short-term 

wholesale funding risks. While the total amount of short-term wholesale funding is 

lower today than immediately before the crisis, volumes are still large relative to 

the size of the financial system. Furthermore, some of the factors that account for 

the reduction in short-term wholesale funding volumes, such as the unusually flat 

yield curve environment and lingering risk aversion from the crisis, are likely to 

prove transitory. 

Federal Reserve staff is currently working on three sets of initiatives to address 

residual short-term wholesale funding risks. As discussed above, the first is a proposal to incorporate the use of short-term wholesale funding into the risk-based capital surcharge applicable to U.S. G–SIBs. The second involves proposed modifications to the BCBS’s net stable funding ratio (NSFR) standard to strengthen liquidity 

requirements that apply when a bank acts as a provider of short-term funding to 

other market participants. The third is numerical floors for collateral haircuts in securities financing transactions (SFTs)—including repos and reverse repos, securities 

lending and borrowing, and securities margin lending. 

Modifications to the NSFR could be designed to help address the types of concerns 

described in my previous testimony regarding SFT matched book activity. In the 

classic fact pattern, a matched book dealer uses SFTs to borrow on a short-term 

basis from a cash investor, such as a money market mutual fund, to finance a shortterm SFT loan to a client, such as a leveraged investment fund. The regulatory requirements on SFT matched books are generally low despite the fact that matched 

books can pose significant microprudential and macroprudential risks. Neither the 

BCBS LCR nor the NSFR originally finalized by the Basel Committee would have 

imposed a material charge on matched book activity. 

In January, the BCBS proposed a revised NSFR that would require banks to hold 

a material amount of stable funding against short-term SFT loans, as well as other 

short-term credit extensions, to nonbank financial entities. By requiring banks that 

make short-term loans to hold stable funding, such a charge would help limit the 

liquidity risk that a dealer would face if it experiences a run on its SFT liabilities 

but is unable to liquidate corresponding SFT assets. In addition, by making it more 

expensive for the dealer to provide short-term credit, the charge could help lean 

against excessive short-term borrowing by the dealer’s clients. 

Turning to numerical floors for SFT haircuts, the appeal of this policy measure 

is that it would help address the risk that post-crisis reforms targeted at banking 

organizations will drive systemically risky activity toward places in the financial 

system where prudential standards do not apply. In its universal form, a system of 

numerical haircut floors for SFTs would require any entity that wants to borrow 

against a security to post a minimum amount of excess margin to its lender that 

would vary depending on the asset class of the collateral. Like minimum margin requirements for derivatives, numerical floors for SFT haircuts would serve as a 

mechanism for limiting the build-up of leverage at the transaction level and could 

mitigate the risk of procyclical margin calls. 

Last August, the FSB issued a consultative document that represented an initial 

step toward the development of a framework of numerical floors. However, the 

46 

FSB’s proposal contained some significant limitations, including that its scope was 

limited to transactions in which a bank or broker-dealer extends credit to an unregulated entity and that the calibration of the numerical floor levels was relatively 

low. Since then, the FSB has been actively considering whether to strengthen the 

proposal along both of these dimensions. 

Financial Sector Concentration Limits 

In May, the Federal Reserve proposed a rule to implement section 622 of the 

Dodd-Frank Act, which prohibits a financial company from combining with another 

company if the resulting financial company’s liabilities exceed 10 percent of the aggregate consolidated liabilities of all financial companies. Under the proposal, financial companies subject to the concentration limit would include insured depository 

institutions, bank holding companies, savings and loan holding companies, foreign 

banking organizations, companies that control insured depository institutions, and 

nonbank financial companies designated by the FSOC for Federal Reserve supervision. Consistent with section 622, the proposal generally defines liabilities of a financial company as the difference between its risk-weighted assets, as adjusted to 

reflect exposures deducted from regulatory capital, and its total regulatory capital. 

Firms not subject to consolidated risk-based capital rules would measure liabilities 

using generally accepted accounting standards. We anticipate finalizing this rule in 

the near term. 

Credit Risk Retention 

Section 941 of the Dodd-Frank Act requires firms generally to retain credit risk 

in securitization transactions they sponsor. Retaining credit risk creates incentives 

for securitizers to monitor closely the quality of the assets underlying a 

securitization transaction and discourages unsafe and unsound underwriting practices by originators. In August 2013, the Federal Reserve, along with several other 

agencies, revised a proposal from 2011 to implement section 941. The Federal Reserve is working with the other agencies charged by the Dodd-Frank Act with implementing this rule to complete it in the coming months. 

Rationalizing the Regulatory Framework for Community Banks 

Before closing, I would like to discuss the Federal Reserve’s ongoing efforts to 

minimize regulatory burden consistent with the effective implementation of our statutory responsibilities for community banks, given the important role they play within our communities. Over the past few decades, community banks have substantially reduced their presence in lines of businesses such as consumer lending in the 

face of competition from larger banks benefiting from economies of scale. Today, as 

a group, their most important forms of lending are to small- and medium-sized businesses. Smaller community banks—those with less than $1 billion in assets—account for nearly one-fourth of commercial and industrial lending, and nearly 40 percent of commercial real estate lending, to small- and medium-sized businesses, despite their having less than 10 percent of total commercial banking assets. These 

figures reveal the importance of community banks to local economies and the damage that could result if these banks were unable to continue operating within their 

communities. 

Banking regulators have taken many steps to try to avoid unnecessary regulatory 

costs for community banks, such as fashioning more basic supervisory expectations 

for smaller, less complex banks and identifying which provisions of new regulations 

are relevant to smaller banks. In this regard, the Federal Reserve has worked to 

communicate clearly the extent to which new rules and policies apply to smaller 

banks and to tailor them as appropriate. We also work closely with our colleagues 

at the Federal and State banking regulatory agencies to ensure that supervisory approaches and methodologies are consistently applied to community banks. 

But several new statutory provisions apply explicitly to some smaller banks or, 

by failing to exclude any bank from coverage, apply to all banks. The Federal Reserve is supportive of considering areas where the exclusion of community banks 

from statutory provisions that are less relevant to community bank practice may be 

appropriate. For example, we believe it would be worthwhile to consider whether 

community banks should be excluded from the scope of the Volcker rule and from 

the incentive compensation requirements of section 956 of the Dodd-Frank Act. The 

concerns addressed by statutory provisions like these are substantially greater at 

larger institutions and, even where a practice at a smaller bank might raise concerns, the supervisory process remains available to address what would likely be unusual circumstances. 

Another area in which the Federal Reserve has made efforts to right-size our supervisory approach with regard to community banks is to improve our off-site monitoring processes so that we can better target higher risk institutions and activities. 

47 

Research conducted for a 2013 conference sponsored by the Federal Reserve System 

and the Conference of State Bank Supervisors addressed the resilience of the community bank model and showed how some banks performed better than others during the recent crisis. Building on this research, we are updating our off-site monitoring screens to reflect experience gained during the crisis and recalibrating our 

examination scoping process for community banks to focus our testing on higher-risk 

banks and activities, and whenever possible reduce procedures for banks of lower 

risk. 

Recognizing the burden that the on-site presence of many examiners can place on 

the day-to-day business of a community bank, we are also working to increase our 

level of off-site supervisory activities. Responding to on-site examinations and inspections is of course a cost for community banks, but this cost must be weighed 

against the supervisory benefit of face-to-face interactions with bank examiners to 

explore and resolve institution-specific concerns. The Federal Reserve aims to strike 

the appropriate balance of off-site and on-site supervisory activities to ensure that 

the quality of community bank supervision is maintained without creating an overly 

burdensome process. To that end, last year we completed a pilot on conducting parts 

of the labor-intensive loan review off-site using electronic records from banks. Based 

on good results with the pilot, we are planning to continue using this approach in 

future reviews at banks where bank management is supportive of the process and 

where electronic records are available. We are also exploring whether other examination procedures can be conducted off-site without compromising the ability of examiners to accurately assess the safety and soundness of supervised banks. 

Conclusion 

The Federal Reserve has made significant progress in implementing the DoddFrank Act and other measures designed to improve the resiliency of banking organizations and reduce systemic risk. We are committed to working with the other U.S. 

financial regulatory agencies to promote a stable financial system in a manner that 

does not impose a disproportionate burden on smaller institutions. To help us 

achieve these goals, we will continue to seek the views of the institutions we supervise and the public as we further develop regulatory and supervisory programs to 

preserve financial stability at the least cost to credit availability and economic 

growth. 

Thank you for your attention. I would be pleased to answer any questions you 

might have. 

PREPARED STATEMENT OF MARTIN J. GRUENBERG 

CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

SEPTEMBER 9, 2014 

Chairman Johnson, Ranking Member Crapo, and Members of the Committee, 

thank you for the opportunity to testify today on the Federal Deposit Insurance Corporation’s (FDIC) actions to implement the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act). 

My written testimony will address several key topics. First, I will discuss capital 

and liquidity rules that the bank regulatory agencies recently finalized, as well as 

a recently proposed margin rule on derivatives. Second, I will provide an update on 

our progress in implementing the authorities provided the FDIC relating to the resolution of systemically important financial institutions (SIFIs). I will then discuss 

an updated proposed risk retention rule for securitizations and implementation of 

the Volcker Rule. Finally, I will discuss our supervision of community banks, including the FDIC’s efforts to address emerging cybersecurity and technology issues. 

Capital, Liquidity, and Derivative Margin Requirements 

The new regulatory framework established under the Dodd-Frank Act augments 

and complements the banking agencies’ existing authorities to require banking organizations to maintain capital and liquidity well above the minimum requirements 

for safety and soundness purposes, as well as to establish margin requirements on 

derivatives. The recent actions by the agencies to adopt a final rule on the leverage 

capital ratio, a final rule on the liquidity coverage ratio, and a proposed rule on 

margin requirements for derivatives address three key areas of systemic risk and, 

taken together, are an important step forward in addressing the risks posed particularly by the largest, most systemically important financial institutions. 

48 

1 An advanced approaches bank is an insured depository institution (IDI) that is an advanced 

approaches national bank or Federal savings association under 12 CFR 3.100(b)(1), an advanced 

approaches Board-regulated institution under 12 CFR 217.100(b)(1), or an advanced approaches 

FDIC-supervised institution under 12 CFR 324.100(b)(1). In general, an IDI is an advanced approaches bank if it has total consolidated assets of $250 billion or more, has total consolidated 

on-balance sheet foreign exposures of $10 billion or more, or elects to use or is a subsidiary of 

an IDI, bank holding company, or savings and loan holding company that uses the advanced 

approaches to calculate risk-weighted assets. 

Supplementary Leverage Ratio 

In April 2014, the FDIC published a final rule that, in part, revises minimum capital requirements and, for advanced approaches banks, 1 introduces the supplementary leverage ratio requirement. The Office of the Comptroller of the Currency 

(OCC) and the Federal Reserve adopted a final rule in October 2013 that is substantially identical to the FDIC’s final rule. Collectively, these rules are referred to as 

the Basel III capital rules. 

The Basel III rulemaking includes a new supplementary leverage ratio requirement—an important enhancement to the international capital framework. Prior to 

this rule, there was no international leverage ratio requirement. For the first time, 

the Basel III accord included an international minimum leverage ratio, and consistent with the agreement, the Basel III rulemaking includes a 3 percent minimum 

supplementary leverage ratio. This ratio, which takes effect in 2018, applies to 

large, internationally active banking organizations, and requires them to maintain 

a minimum supplementary leverage ratio of 3 percent (in addition to meeting other 

capital ratio requirements, including the agencies’ long-standing Tier 1 leverage 

ratio). 

In April 2014, the FDIC, the OCC and the Federal Reserve also finalized an Enhanced Supplementary Leverage Ratio final rule for the largest and most systemically important bank holding companies (BHCs) and their insured banks. This rule 

strengthens the supplementary leverage capital requirements beyond the levels required in the Basel III accord. Eight banking organizations are covered by these Enhanced Supplementary Leverage standards based on the thresholds in the final 

rule. 

The agencies’ analysis suggests that the 3 percent minimum supplementary leverage ratio contained in the international Basel III accord would not have appreciably 

mitigated the growth in leverage among SIFIs in the years leading up to the crisis. 

Accordingly, the Enhanced Supplementary Leverage standards that the agencies finalized in April will help achieve one of the most important objectives of the capital 

reforms: addressing the buildup of excessive leverage that contributes to systemic 

risk. 

Under the Enhanced Supplementary Leverage standards, covered insured depository institutions (IDIs) will need to satisfy a 6 percent supplementary leverage ratio 

to be considered well capitalized for prompt corrective action (PCA) purposes. The 

supplementary leverage ratio includes off-balance sheet exposures in its denominator, unlike the longstanding U.S. leverage ratio which requires capital only for 

balance sheet assets. This means that more capital is needed to satisfy the supplementary leverage ratio than to satisfy the U.S. leverage ratio if both ratios were set 

at the same level. For example, based on recent supervisory estimates of the offbalance sheet exposures of these banks, a 6 percent supplementary leverage ratio 

would correspond to roughly an 8.6 percent U.S. leverage requirement. Covered 

BHCs will need to maintain a supplementary leverage ratio of at least 5 percent 

(a 3 percent minimum plus a 2 percent buffer) to avoid restrictions on capital distributions and executive compensation. This corresponds to roughly a 7.2 percent 

U.S. leverage ratio. 

An important consideration in calibrating the Enhanced Supplementary Leverage 

ratio was the idea that the increase in stringency of the leverage requirements and 

the risk-based requirements should be balanced. Leverage capital requirements and 

risk-based capital requirements are complementary, with each type of requirement 

offsetting potential weaknesses of the other. In this regard, the Basel III rules 

strengthened risk-based capital requirements to a much greater extent than they 

strengthened leverage requirements. The Enhanced Supplementary Leverage ratio 

standard will ensure that the leverage requirement continues to serve as an effective complement to the risk-based capital requirements of the largest, most systemically important banking organizations, thereby strengthening the capital base and 

the stability of the U.S. banking system. 

Maintaining a strong capital base at the largest, most systemically important financial institutions (SIFIs) is particularly important because capital shortfalls at 

these institutions can contribute to systemic distress and lead to material adverse 

49 

economic effects. These higher capital requirements will also put additional private 

capital at risk before the Deposit Insurance Fund (DIF) and the Federal Government’s resolution mechanisms would be called upon. The final Enhanced Supplementary Leverage ratio rule is one of the most important steps the banking agencies 

have taken to strengthen the safety and soundness of the U.S. banking and financial systems. 

On September 3, 2014, the FDIC Board also finalized a rule originally proposed 

in April 2014 that revises the denominator measure for the supplementary leverage 

ratio and introduced related public disclosure requirements. The changes in this 

rule apply to all advanced approaches banking organizations, including the eight 

covered companies that would be subject to the Enhanced Supplementary Leverage 

standards. The denominator changes are consistent with those agreed upon by the 

Basel Committee on Banking Supervision and would, in the aggregate, result in a 

modest further strengthening of the supplementary leverage ratio requirement as 

compared to the capital rules finalized in April. 

Liquidity Coverage Ratio 

On September 3, 2014, the FDIC issued a joint interagency final rule with the 

Federal Reserve Board and the OCC implementing a liquidity coverage ratio (LCR). 

During the recent financial crisis, many banks had insufficient liquid assets and 

could not borrow to meet their liquidity needs. The LCR final rule is designed to 

strengthen the liquidity positon of our largest financial institutions, thereby promoting safety and soundness and the stability of the U.S. financial system. 

This final rule applies to the largest, internationally active banking organizations: 

U.S. banking organizations with $250 billion or more in total consolidated assets or 

$10 billion or more in on-balance sheet foreign exposure and their subsidiary depository institutions with $10 billion or more in total assets. The Federal Reserve also 

finalized a separate rule that would apply a modified LCR requirement to BHCs 

with between $50 billion and $250 billion in total consolidated assets. Other insured 

banks are not subject to the rule. 

The LCR final rule establishes a quantitative minimum liquidity coverage ratio 

that builds upon approaches already used by a number of large banking organizations to manage liquidity risk. It requires a covered company to maintain an 

amount of unencumbered high-quality liquid assets (HQLA) sufficient to meet the 

total stressed net cash outflows over a prospective 30 calendar-day period. A covered 

company’s total net cash outflow amount is determined by applying outflow and inflow rates described in the rule, which reflect certain stressed assumptions, against 

the balances of a covered company’s funding sources, obligations, and assets over 

a 30 calendar-day period. 

A number of commenters have expressed concern about the exclusion of municipal 

securities from HQLA in the final rule. It is our understanding that banks do not 

generally hold municipal securities for liquidity purposes, but rather for longer term 

investment and other objectives. We will monitor closely the impact of the rule on 

municipal securities and consider adjustments if necessary. 

Margin Rule for Derivatives 

Before the passage of the Dodd-Frank Act, the derivatives activities of financial 

institutions were largely unregulated. One of the issues observed in the crisis was 

that some financial institutions had entered into large over-the-counter (OTC) derivatives positions with other institutions without the prudent initial exchange of 

collateral—a basic safety-and-soundness practice known as margin—in support of 

the positions. Title VII addressed this situation in part by requiring the use of central clearinghouses for certain standardized derivatives contracts, and by requiring 

the exchange of collateral, i.e., margin, for derivatives that are not centrally cleared. 

Central clearinghouses for derivatives routinely manage their risks by requiring 

counterparties to post collateral at the inception of a trade. This practice is known 

as initial margin, in effect a type of security deposit or performance bond. Moreover, 

central clearinghouses routinely require a counterparty to post additional collateral 

if the market value of the position moves against that counterparty, greatly reducing the likelihood the clearinghouse will be unable to collect amounts due from 

counterparties. This type of collateral is known as variation margin. 

Sections 731 and 764 of the Dodd Frank Act requires the large dealers in swaps 

to adopt certain prudent margining practices for their OTC derivatives activities 

that clearinghouses use, namely the posting and collecting of initial and variation 

margin. The exchange of margin between parties to a trade on OTC derivatives is 

an important check on the buildup of counterparty risk that can occur with OTC 

derivatives without margin. More generally, the appropriate exchange of margin 

promotes financial stability by reducing systemic leverage in the derivatives marketVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00053 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
50 

place and promotes the safety and soundness of banks by discouraging the excessive 

growth of risky OTC derivatives positions. 

The FDIC recently approved an interagency proposed rule to establish minimum 

margin requirements for the swaps of an insured depository institution or other entity that: (1) is supervised by the FDIC, Federal Reserve, OCC, Federal Housing Finance Administration (FHFA), or Farm Credit Administration (FCA); and (2) is also 

registered with the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC) as a dealer or major participant in swaps. The 

proposed rule will be published in the Federal Register with a 60-day public comment period. 

In developing this proposal, the FDIC, along with the other banking agencies, 

worked closely with the Basel Committee on Banking Supervision (BCBS) and the 

International Organization of Securities Commissions (IOSCO) to develop a proposed framework for margin requirements on noncleared swaps (the ‘‘international 

margin framework’’) with the goal of creating an international standard for margin 

requirements on noncleared swaps. After considering numerous comments, BCBS 

and IOSCO issued a final international margin framework in September 2013. The 

agencies’ 2014 proposed rule is closely aligned with the principles and standards 

from the 2013 international framework. The E.U. and other jurisdictions also have 

issued similar proposals. 

The proposed rule would require a covered swap entity (a swap dealer, major 

swap participant, security-based swap dealer, or major security-based swap participant) to exchange initial margin with counterparties that are: (1) registered with 

the CFTC or SEC as swap entities; or (2) financial end users with material swaps 

exposure—that is, with more than $3 billion in notional exposure of OTC derivatives 

that are not cleared. The rule would not require a covered swap entity to collect initial margin from commercial end users. The agencies intend to maintain the status 

quo with respect to the way that banks interact with commercial end users. 

The proposed rule would also require a covered swap entity to exchange variation 

margin on swaps with all counterparties that are: (1) swap entities; or (2) financial 

end users (regardless of whether the financial end user has a material swaps exposure). There is no requirement that a covered swap entity must collect or post variation margin with commercial end users. 

Because community banks typically do not have more than $3 billion in notional 

exposure of OTC derivatives that are not cleared, the agencies expect that the proposed rule will not result in community banks being required to post initial margin. 

Community banks that do engage in OTC derivatives that are not cleared are likely 

already posting variation margin in the normal course of business, or in amounts 

too small to fall within the scope of the rule. As a result, the margin rule likely 

will have little, if any, impact on the vast majority of community banks. 

Resolution of Systemically Important Financial Institutions 

Resolution Plans—‘‘Living Wills’’ 

Under the framework of the Dodd-Frank Act, bankruptcy is the preferred option 

in the event of a SIFI’s failure. To make this objective achievable, Title I of the 

Dodd-Frank Act requires that all BHCs with total consolidated assets of $50 billion 

or more, and nonbank financial companies that the Financial Stability Oversight 

Council (FSOC) determines could pose a threat to the financial stability of the 

United States, prepare resolution plans, or ‘‘living wills,’’ to demonstrate how the 

company could be resolved in a rapid and orderly manner under the Bankruptcy 

Code in the event of the company’s financial distress or failure. The living will process is an important new tool to enhance the resolvability of large financial institutions through the bankruptcy process. 

In 2011, the FDIC and the FRB jointly issued a final rule (the 165(d) rule) implementing the resolution plan requirements of Section 165(d) of the Dodd-Frank Act. 

The 165(d) rule provided for staggered annual submission deadlines for resolution 

plans based on the size and complexity of the companies. Eleven of the largest, most 

complex institutions (collectively referred to as ‘‘first wave filers’’) submitted initial 

plans in 2012 and revised plans in 2013. 

During 2013, the remaining 120 institutions submitted their initial resolution 

plans under the 165(d) rule. The FSOC also designated three nonbank financial institutions for Federal Reserve supervision that year. In July 2014, 13 firms that previously had submitted at least one resolution plan submitted revised resolution 

plans, and the 3 nonbank financial companies designated by the FSOC submitted 

their initial resolution plans. The Federal Reserve and the FDIC granted requests 

for extensions to two firms whose second resolution plan submissions would have 

been due July 1. Those plans are now due to the agencies by October 1, 2014. The 

51 

2 12 CFR Part 243 and 12 CFR Part 381. 

remaining 116 firms are expected to submit their second submission revised resolution plans in December 2014. 

Following the review of the initial resolution plans submitted in 2012, the Federal 

Reserve and the FDIC issued joint guidance in April 2013 to provide clarification 

and direction for developing 2013 resolution plan submissions. The Federal Reserve 

and the FDIC identified an initial set of obstacles to a rapid and orderly resolution 

that covered companies were expected to address in the plans. The five obstacles 

identified in the guidance—multiple competing insolvencies, potential lack of global 

cooperation, operational interconnectedness, counterparty actions, and funding and 

liquidity—represent the key impediments to an orderly resolution. The 2013 plans 

should have included the actions or steps the companies have taken or propose to 

take to remediate or otherwise mitigate each obstacle and a timeline for any proposed actions. The agencies also extended the deadline for submitting revised plans 

from July 1, 2013, to October 1, 2013, to give the firms additional time to develop 

resolution plan submissions that addressed the agencies’ instructions. 

Section 165(d) of the Dodd-Frank Act and the jointly issued implementing regulation 2 require the FDIC and the Federal Reserve to review the 165(d) plans. If the 

agencies jointly determine that a plan is not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the FDIC and the Federal Reserve must notify the filer of the areas in which the plan is deficient. The filer must 

resubmit a revised plan that addresses the deficiencies within 90 days (or other 

specified timeframe). 

The FDIC and the Federal Reserve have completed their reviews of the 2013 resolution plans submitted to the agencies by the 11 bank holding companies that submitted their revised resolution plans in October 2013. On August 5, 2014, the agencies issued letters to each of these first wave filers detailing the specific shortcomings of each firm’s plan and the requirements for the 2015 submission. 

While the shortcomings of the plans varied across the first wave firms, the agencies have identified several common features of the plans’ shortcomings, including: 

(1) assumptions that the agencies regard as unrealistic or inadequately supported, 

such as assumptions about the likely behavior of customers, counterparties, investors, central clearing facilities, and regulators; and (2) the failure to make, or even 

to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for orderly resolution. The agencies will require that 

the annual plans submitted by the first wave filers on July 1, 2015, demonstrate 

that those firms are making significant progress to address all the shortcomings 

identified in the letters, and are taking actions to improve their resolvability under 

the U.S. Bankruptcy Code. These actions include: 

• establishing a rational and less complex legal structure which would take into 

account the best alignment of legal entities and business lines to improve the 

firm’s resolvability; 

• developing a holding company structure that supports resolvability, including 

maintaining sufficient longer term debt; 

• amending, on an industrywide and firm-specific basis, financial contracts to provide for a stay of certain early termination rights of counterparties triggered by 

insolvency proceedings; 

• ensuring the continuity of shared services that support critical operations and 

core business lines throughout the resolution process; and 

• demonstrating operational capabilities for resolution preparedness, such as the 

ability to produce reliable information in a timely manner. 

Agency staff will work with each of the first wave filers to discuss required improvements in its resolution plan and the efforts, both proposed and in progress, to 

facilitate each firm’s preferred resolution strategy. The agencies are also committed 

to finding an appropriate balance between transparency and confidentiality of proprietary and supervisory information in the resolution plans. As such, the agencies 

will be working with these firms to explore ways to enhance public transparency of 

future plan submissions. 

Based upon its review of submissions by first wave filers, the FDIC Board of Directors determined, pursuant to section 165(d) of the Dodd-Frank Act, that the plans 

submitted by the first wave filers are not credible and do not facilitate an orderly 

resolution under the U.S. Bankruptcy Code. The FDIC and the Federal Reserve 

agreed that in the event that a first wave filer has not, by July 1, 2015, submitted 

a plan responsive to the shortcomings identified in the letter sent to that firm, the 

52 

agencies expect to use their authority under section 165(d) to determine that a resolution plan does not meet the requirements of the Dodd-Frank Act. 

Improvements to Bankruptcy 

At the December 2013 meeting of the FDIC’s Systemic Resolution Advisory Committee, the FDIC heard how the existing bankruptcy process could be improved to 

better apply to SIFIs. The current provisions of the U.S. Bankruptcy Code do not 

expressly take into account certain features of SIFIs that distinguish these firms 

from other entities that are typically resolvable under bankruptcy without posing 

risk to the U.S. financial system. Issues such as the authority to impose a stay on 

qualified financial contracts and the ability to move part of a bankrupt firm into 

a bridge entity in an expeditious and efficient fashion are left unaddressed in current law. It also is unclear whether traditional debtor-in-possession financing, which 

is available under bankruptcy, would be sufficient to address the significant liquidity needs arising from the failure of a SIFI. A further challenge in a U.S. bankruptcy proceeding would be how it could foster global cooperation with foreign authorities, courts, creditors, or other pertinent parties, including U.S. financial regulatory officials, to ensure that their interests will be protected. 

Additionally, a number of scholars, policy analysts, and public officials have made 

helpful proposals for changes to the U.S. Bankruptcy Code that would facilitate the 

resolution of a SIFI in bankruptcy. The FDIC has been reaching out to those in the 

bankruptcy community to discuss ways to enhance the U.S. Bankruptcy Code to facilitate an orderly failure of a SIFI. In addition, the FDIC has been working with 

foreign authorities to encourage the International Swaps and Derivatives Association (ISDA) to modify its standard-form contracts to facilitate resolution in bankruptcy. The FDIC supports these efforts and is prepared to work with Congress on 

modifications to the U.S. Bankruptcy Code for the treatment of SIFIs in bankruptcy. 

Implementation of Title II 

Congress also recognized that there may be circumstances in which the resolution 

of a SIFI under the U.S. Bankruptcy Code would have serious adverse effects on 

financial stability in the U.S. Accordingly, in Title II of the Dodd-Frank Act, Congress provided the FDIC with orderly liquidation authority to resolve a failing SIFI 

as a last resort in the event that resolution under the U.S. Bankruptcy Code would 

result in systemic disruption of the financial system. This Orderly Liquidation Authority serves as a backstop to protect against the risk of systemic disruption to the 

U.S. financial system and allows for resolution in a manner that results in shareholders losing their investment, creditors taking a loss and management responsible 

for the failure being replaced, resulting in an orderly unwinding of the firm without 

cost to U.S. taxpayers. 

In my February testimony before this Committee, I described how the FDIC is 

developing a strategic approach, referred to as Single Point of Entry (SPOE) strategy, to carry out its Orderly Liquidation Authority for resolving a SIFI in the event 

it is determined that a firm cannot be resolved under bankruptcy without posing 

a risk to the U.S. financial system. Under the SPOE strategy, the FDIC would be 

appointed receiver of the top-tier parent holding company of the financial group following the company’s failure and the completion of the recommendation, determination, and expedited judicial review process set forth in Title II of the Act. For the 

SPOE strategy to be successful, it is critical that the top-tier holding company maintain a sufficient amount of unsecured debt that would be available to provide capital 

to manage the orderly unwinding of the failed firm. In a resolution, the holding company’s debt would be used to absorb losses and keep the operating subsidiaries open 

and operating until an orderly wind-down could be achieved. 

In support of the SPOE strategy, the Federal Reserve, in consultation with the 

FDIC, is considering the merits of a regulatory requirement that the largest, most 

complex U.S. banking firms maintain a minimum amount of unsecured debt at the 

holding company level, in addition to the regulatory capital those companies already 

are required to maintain. Such a requirement would ensure that there is sufficient 

debt at the holding company level to absorb losses at the failed firm. 

Cross-Border Issues 

Advance planning and cross-border coordination for the resolution of globally active SIFIs (G–SIFIs) will be essential to minimizing disruptions to global financial 

markets. Recognizing that G–SIFIs create complex international legal and operational concerns, the FDIC continues to reach out to foreign regulators to establish 

frameworks for effective cross-border cooperation. 

As part of our bilateral efforts, the FDIC and the Bank of England, in conjunction 

with the prudential regulators in our respective jurisdictions, have been developing 

contingency plans for the failure of a G–SIFI that has operations in the United 

53 

States and the United Kingdom. Of the 28 G–SIFIs identified by the Financial Stability Board (FSB) in the G20 countries, four are headquartered in the United Kingdom, and eight in the United States. Moreover, more than 70 percent of the reported foreign activities of the eight U.S. G–SIFIs originate in the United Kingdom. 

The magnitude of the cross-border financial relationships and local activity of G– 

SIFIs in the United States and the United Kingdom makes the U.S.–UK bilateral 

relationship by far the most significant with regard to the resolution of G–SIFIs. 

Therefore, our two countries have a strong mutual interest in ensuring that the failure of such an institution could be resolved at no cost to taxpayers and without placing the financial system at risk. 

The FDIC and UK authorities are continuing to work together to address the 

cross-border issues raised in the December 2012 joint paper on resolution strategies 

and the December 2013 tabletop exercise between staffs at the FDIC, the Bank of 

England (including the Prudential Regulation Authority), the Federal Reserve, and 

the Federal Reserve Bank of New York. This work is intended to identify actions 

that could be taken by each regulator to implement the SPOE resolution strategy 

in the event of a resolution. 

The FDIC also has continued to coordinate with representatives from other European authorities to discuss issues of mutual interest, including the resolution of European G–SIFIs and ways in which we can harmonize receivership actions. The 

FDIC and the European Commission (E.C.) continue to work collaboratively through 

a joint Working Group composed of senior executives from the FDIC and the E.C., 

focusing on both resolution and deposit insurance issues. The Working Group meets 

twice a year, in addition to less formal meetings and exchanges of detailees. In 

2014, the Working Group convened in May, and there has been ongoing collaboration at the staff level. The FDIC and the E.C. have had in-depth discussions regarding the FDIC’s experience with resolution as well as the FDIC’s SPOE strategy. 

The E.U. recently adopted important legislation related to the resolution of global 

SIFIs, such as the E.U.-wide Credit Institution and Investment Firm Recovery and 

Resolution Directive, amendments that further harmonize deposit guarantee 

schemes E.U.-wide, and a Single Resolution Mechanism for Euro-area Member 

States and others that opt-in. The E.U. is now working to implement that legislation 

through secondary legislation, in the form of guidelines and standards, and by establishing the organizational capacity necessary to support the work of the Single 

Resolution Board under the Single Resolution Mechanism. FDIC and E.C. staffs 

continue to collaborate in exchanging information related to this implementation 

work. In June 2014, at the request of the E.C., the FDIC conducted a 2-day seminar 

on resolutions for resolution authorities and a broad audience of E.C. staff involved 

in resolutions-related matters. 

The FDIC continues to foster relationships with other jurisdictions that regulate 

G–SIFIs, including Switzerland, Germany, France and Japan. So far in 2014, the 

FDIC has had significant principal and staff-level engagements with these countries 

to discuss cross-border issues and potential impediments that would affect the resolution of a G–SIFI. We will continue this work during the remainder of 2014 and 

in 2015 and plan to host tabletop exercises with staff from these authorities. We 

also held preliminary discussions on developing joint resolution strategy papers, 

similar to the one with the United Kingdom, as well as possible exchanges of 

detailees. 

In a significant demonstration of cross-border cooperation on resolution issues, the 

FDIC signed a November 2013 joint letter with the Bank of England, the Swiss Financial Market Supervisory Authority and the German Federal Financial Supervisory Authority to ISDA. This letter encouraged ISDA to develop provisions in derivatives contracts that would provide for short-term suspension of early termination rights and other remedies in the event of a G–SIFI resolution. The authorities are now providing comments on proposed draft ISDA protocols that would contractually implement these provisions during a resolution under bankruptcy or 

under a special resolution regime. The adoption of the provisions would allow derivatives contracts to remain in effect throughout the resolution process under a 

number of potential resolution strategies. The FDIC believes that the development 

of a contractual solution has the potential to remove a key impediment to cross-border resolution. 

We anticipate continuation of our international coordination and outreach and 

will continue to work to resolve impediments to an orderly resolution of a G–SIFI. 

Risk Retention 

On August 28, 2013, the FDIC approved an NPR issued jointly with five other 

Federal agencies to implement the credit risk retention requirement in Section 941 

of the Dodd-Frank Act. The proposed rule seeks to ensure that securitization sponVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00057 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
54 

sors have appropriate incentives to monitor and ensure the underwriting and quality of assets being securitized. The proposed rule generally requires that the sponsor 

of any asset-backed security (ABS) retain an economic interest equal to at least 5 

percent of the aggregate credit risk of the collateral. This was the second proposal 

under Section 941; the first was issued in April 2011. 

The FDIC reviewed approximately 240 comments on the August 2013 NPR. Many 

comments addressed the proposed definition of a ‘‘qualified residential mortgage’’ 

(QRM), which is a mortgage that is statutorily exempt from risk retention requirements under the Dodd-Frank Act. The NPR proposed to align the definition of QRM 

with the definition of ‘‘qualified mortgage’’ (QM) adopted by the Consumer Financial 

Protection Bureau (CFPB) in 2013. The NPR also included a request for public comment on an alternative QRM definition that would add certain underwriting standards to the existing QM definition. The August 2013 proposal also sets forth criteria 

for securitizations of commercial real estate loans, commercial loans, and automobile 

loans that meet specific conservative credit quality standards to be exempt from risk 

retention requirements. 

The issuing agencies have reviewed the comments, met with interested groups to 

discuss their concerns and have given careful consideration to all the issues raised. 

The agencies have made significant progress toward finalizing the rule and expect 

to complete the rule in the near term. 

Volcker Rule Implementation 

In adopting the Volcker Rule, the agencies recognized that clear and consistent 

application of the final rule across all banking entities would be extremely important. To help ensure this consistency, the five agencies formed an interagency 

Volcker Rule Implementation Working Group. The Working Group has been meeting on a weekly basis and has been able to make meaningful progress on coordinating implementation. The Working Group has been able to agree on a number of 

interpretive issues and has published several Frequently Asked Questions. In addition, the Working Group has been able to successfully develop a standardized 

metrics reporting template, which has been provided to and tested by the industry. 

In addition, the Working Group is developing a collaborative supervisory approach 

by the agencies. 

Community Banks 

Focus of Research 

Since 2011, the FDIC has been engaged in a sustained research effort to better 

understand the issues related to community banks—those institutions that provide 

traditional, relationship-based banking services in their local communities. Our initial findings were presented in a comprehensive study published in December 2012. 

The study covered topics such as structural change, geography, financial performance, lending strategies and capital formation, and it highlighted the critical importance of community banks to our economy and our banking system. While the study 

found that community banks account for about 14 percent of the banking assets in 

the U.S., they also account for around 45 percent of all the small loans to businesses 

and farms made by all banks in the U.S. In addition, the study found that, of the 

more than 3,100 U.S. counties, nearly 20 percent (more than 600 counties)—including small towns, rural communities and urban neighborhoods—would have no physical banking presence if not for the community banks operating there. 

The study also showed that community banks’ core business model—defined 

around careful relationship lending, funded by stable core deposits, and focused on 

the local geographic community that the bank knows well—performed comparatively 

well during the recent banking crisis. Among the more than 500 banks that have 

failed since 2007, the highest rates of failure were observed among noncommunity 

banks and among community banks that departed from the traditional model and 

tried to grow with risky assets often funded by volatile brokered deposits. 

Our community bank research agenda remains active. Since the beginning of the 

year, FDIC analysts have published new papers dealing with consolidation among 

community banks, the effects of long-term rural depopulation on community banks, 

and the efforts of Minority Depository Institutions to provide essential banking services in the communities they serve. 

We have also instituted a new section in the FDIC Quarterly Banking Profile, or 

QBP, that focuses specifically on community banks. Although some 93 percent of 

FDIC-insured institutions met our community bank definition in the first quarter, 

they hold a relatively small portion of industry assets; as a result, larger bank 

trends tend to obscure community bank trends. This new quarterly report on the 

structure, activities and performance of community banks should help smaller institutions compare their results with those of other community banks as well as those 

55 

of larger institutions. Introducing this regular quarterly report is one example of the 

FDICs commitment to maintain an active program of research and analysis on community banking issues in the years to come. 

Subchapter S 

The Basel III capital rules introduce a capital conservation buffer for all banks 

(separate from the supplementary leverage ratio buffer applicable to the largest and 

most systemically important BHCs and their insured banks). If a bank’s risk-based 

capital ratios fall below specified thresholds, dividends and discretionary bonus payments become subject to limits. The buffer is meant to conserve capital in banks 

whose capital ratios are close to the minimums and encourage banks to remain wellcapitalized. 

In July 2014, the FDIC issued guidance clarifying how it will evaluate requests 

by S corporation banks to make dividend payments that would otherwise be prohibited under the capital conservation buffer. S corporation banks have expressed concern about the capital conservation buffer because of a unique tax issue their shareholders face. Federal income taxes of S corporation banks are paid by their investors. If an S corporation bank has income, but is limited or prohibited from paying 

dividends, its shareholders may have to pay taxes on their pass-through share of 

the S corporation’s income from their own resources. Relatively few S corporation 

banks are likely to be affected by this issue, and in any case not for several years. 

The buffer is phased-in starting in 2016 and is not fully in place until 2019. 

As described in the guidance, if an S corporation bank faces this tax issue, the 

Basel III capital rules allow it (like any other bank) to request an exception from 

the dividend restriction that the buffer would otherwise impose. The primary regulator can approve such a request if consistent with safety and soundness. Absent 

significant safety and soundness concerns about the requesting bank, the FDIC expects to approve on a timely basis exception requests by well-rated S corporations 

to pay dividends of up to 40 percent of net income to shareholders to cover taxes 

on their pass-through share of the bank’s earnings. 

Cybersecurity 

In its role as supervisor of State-chartered financial institutions that are not 

members of the Federal Reserve System, the FDIC works with other bank regulators to analyze emerging cyberthreats, bank security breaches, and other technology incidents. An important initiative of the FFIEC is a project to assess the 

level of cybersecurity readiness at banks, technology service providers and our own 

supervisory policies. The agencies plan to review any identified gaps to enhance supervisory policies to address cyberthreats. 

Recognizing that addressing cyber risks can be especially challenging for community banks, the FDIC has taken a number of actions in addition to those taken by 

the FFIEC to further improve awareness of cyber risks and encourage practices to 

protect against threats. In April, the FDIC issued a press release urging financial 

institutions to utilize available cyber resources to identify and help mitigate potential threats. During the first quarter of 2014, the FDIC distributed a package to all 

FDIC supervised banks that included a variety of tools to assist them in developing 

cyber readiness. As part of this kit, the FDIC developed a ‘‘Cyber Challenge’’ resource for community banks to use in assessing their preparedness for a cyber-related incident, and videos and simulation exercises were made available on 

www.FDIC.gov and mailed to all FDIC-supervised banks. The Cyber Challenge is 

intended to assist banks in beginning a discussion of the potential impact of IT disruptions on important banking functions. In April, the FDIC also reissued three documents on technology outsourcing that contain practical ideas for community banks 

to consider when they engage in technology outsourcing. The documents are: Effective Practices for Selecting a Service Provider; Tools To Manage Technology Providers’ Performance Risk: Service Level Agreements; and Techniques for Managing 

Multiple Service Providers. 

In addition to the FDIC’s operations and technology examination program, the 

FDIC monitors cybersecurity issues in the banking industry on a regular basis 

through on-site examinations, regulatory reports, and intelligence reports. The 

FDIC also works with a number of groups, including the Finance and Banking Information Infrastructure Committee, the Financial Services Sector Coordinating 

Council for Critical Infrastructure Protection and Homeland Security, the Financial 

Services Information Sharing and Analysis Center, other regulatory agencies and 

law enforcement to share information on emerging issues. 

56 

Conclusion 

Thank you for the opportunity to share with the Committee the work that the 

FDIC has been doing to address systemic risk in the aftermath of the financial crisis. I would be glad to respond to your questions. 

57 

58 

59 

60 

* Statement Required by 12 U.S.C. §250: The views expressed herein are those of the Office 

of the Comptroller of the Currency and do not necessarily represent the views of the President. 1 All data are as of June 30, 2014. 

PREPARED STATEMENT OF THOMAS J. CURRY 

COMPTROLLER OF THE CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY

SEPTEMBER 9, 2014 

Chairman Johnson, Ranking Member Crapo, and Members of the Committee, 

thank you for the opportunity to update you on steps the Office of the Comptroller 

of the Currency (OCC) has taken to enhance the effectiveness of our supervision and 

the status of our efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or Act).* The OCC is the primary regulator 

of nearly 1,650 national banks and Federal savings associations with approximately 

$10.5 trillion in assets, which represents 68 percent of all bank and thrift assets 

insured by the Federal Deposit Insurance Corporation (FDIC). 1 OCC-supervised 

banks and thrifts hold the majority of FDIC-insured deposits and range from small, 

community banks with assets of less than $100 million to some of the largest and 

most complex financial institutions. 

Our Nation’s economic and financial condition has steadily improved since the financial crisis, and the strength and health of our Federal banking system reflect 

this progress. As a bank supervisor, I take comfort in these improvements. I am 

keenly aware, however, that we need to remain vigilant, and I am instituting new 

measures to ensure we do so. Specifically, the OCC is recalibrating the way we supervise large, complex financial institutions based on the lessons we have learned 

since the financial crisis. Importantly, we are strengthening our capacity to take a 

broad, horizontal view across the institutions we regulate to identify emerging 

trends and red flags, while enhancing our traditional hands-on supervision of individual institutions. In addition, we are requiring our largest institutions to improve 

risk management and corporate governance. 

In my testimony today, I will address recent OCC initiatives that are central to 

the effective and vigilant oversight of national banks and Federal savings associations. Additionally, in response to the Committee’s letter of invitation, I will discuss 

the OCC’s progress in issuing and implementing the rules required by the DoddFrank Act, as well as the OCC’s efforts to coordinate our supervision with other domestic and international regulators. Finally, my testimony will touch on emerging 

issues related to cybersecurity. 

I. State of the National Banking and Federal Thrift System 

The condition of the national banks and Federal savings associations that the 

OCC supervises (collectively referred to here as ‘‘banks’’) has steadily improved over 

the past 4 years, as the economy has slowly recovered from the severe 2008–2009 

credit crisis and recession. Banks have increased their total lending volume during 

this period, although this increase is at a pace below the long-term average rate of 

growth. Total credit growth has been subdued, primarily due to an extended contraction in residential mortgage activity, with only recent signs of emerging loan 

growth in this area. Private residential mortgage securitization has yet to recover. 

Although housing credit has continued to struggle, other areas of loan growth 

have shown more resilience. For example, commercial and industrial loan growth 

has averaged 10 percent per year during the past 4 years, triple its average pace 

in the decade before the financial crisis. Auto sales and lending also have rebounded 

from the lows of the recession and are fast approaching precrisis levels. Credit quality has significantly improved. Charge-off rates for all major loan categories are at 

or below the 25-year average and, as a result, the Federal banking system’s total 

loan charge-off rate is now 0.6 percent, 40 percent below the 25-year average of 1 

percent. The ratio of loan loss reserves to total loans, a measure of a bank’s expectation of future loan losses, has returned to its 1984–2006 average of below 2 percent, 

after peaking at 4 percent in 2010. That said, concerns have begun to emerge related to subprime auto lending outside the banking system and to loan terms more 

generally. Leveraged lending also has grown rapidly, and the OCC, along with the 

other Federal banking agencies, issued guidance aimed at preventing overheating 

in this area. 

Given the gradual recovery in lending and improved credit performance, the profitability of the Federal banking system has steadily improved, from a 7 percent return on equity in 2010 to approximately 10 percent today. However, the return on 

assets is approximately 1.1 percent, and profitability levels remain subdued relative 

to the precrisis period. This is due in part to a continued low level of loans to total 

61 

2http://www.occ.gov/news-issuances/news-releases/2013/nr-occ-2013-184.html 

assets and the narrow lending margins that result from persistently low interest 

rates, as well as elevated expenses tied to enhanced compliance and ongoing litigation costs. Even so, the proportion of unprofitable banks is at 8.9 percent, just above 

the 8 percent average in the decade prior to the crisis and well down from a peak 

of nearly one-in-three at the height of the crisis. 

The number of troubled institutions supervised by the OCC (CAMELS 4 or 5 

rated) has decreased significantly, from a high of 196 in December 2010, to 77 in 

June of this year. Bank balance sheets also reflect stronger capital and improved 

liquidity. Tier 1 common equity stands at nearly 13 percent of risk-weighted assets, 

up from a low of 9 percent in the fall of 2008. The current capital leverage ratio 

is now at 9.3 percent, 40 percent above the ratio in 2008. Liquid assets have 

achieved a 30-year high of 15 percent of total assets. 

II. Enhancing Supervision 

The financial crisis underscored the critical role of supervision in ensuring a safe 

and sound global banking system as well as the need to change supervisory approaches that may not have kept pace with developments in the industry. Key lessons from both the crisis and the international supervisory peer review study that 

we commissioned prompted the OCC to reassess and revise our supervisory approach for all banks, particularly larger banks. Below, I describe OCC initiatives in 

this area that will transform how we supervise both larger institutions and the 

small institutions whose vitality is critical to so many communities across our country. 

A. New Supervisory Initiatives 

In 2013, I asked a team of international regulators (referred to here as the ‘‘peer 

review team’’) to provide the OCC with a candid and independent assessment of our 

supervision of midsize and large banks. The scope of the assessment was broad: it 

included how we go about the business of supervision; our agency culture and approach to risk identification; and any gaps in our supervisory approach or systems. 

While the peer review team complimented many areas of OCC supervision, it also 

identified areas where the OCC can improve: enhancing systemic risk monitoring 

and the processes that support supervisory responses; improving the consistency of 

supervisory practices within and across business lines; and strengthening the standards we use to supervise. In the months since the peer review team’s report, 2 the 

OCC has taken steps to improve our supervisory processes and execute plans based 

on the report’s findings that include a number of transformational improvements, 

which I describe below. 

Remaking the Large Bank Lead Expert Program 

We are expanding and restructuring the organization, functions, and responsibilities of our Large Bank Lead Expert Program in which an expert, independent of 

the dedicated examination staff, is assigned to each key risk area. This expansion 

will allow us to compare the operations of the institutions we regulate and improve 

our ability to identify systemic risk. It will also enhance the quality control of our 

exam processes and enable us to allocate our resources more effectively. In addition, 

we are making a number of changes to our dedicated examiner program and implementing a rotation policy to enhance the skills and broaden the perspectives of our 

examination teams. 

Enhancing Risk Monitoring 

The OCC’s supervisory program includes our National Risk Committee (NRC), 

which monitors the condition of the Federal banking system and emerging threats 

to the system’s safety and soundness. The NRC meets quarterly and issues guidance 

to examiners providing important perspectives on industry trends and highlighting 

issues requiring supervisory attention. This information allows the OCC to react 

more quickly to emerging risks and trends and to allocate our resources in a manner that matches the challenges we are likely to face going forward. 

In addition, using midyear and year-end data, the NRC publishes the Semiannual 

Risk Perspective report, which informs the development of our supervisory strategies and processes. We make this report available to the public. The broad dissemination of this information is part of our continuing efforts to provide greater transparency to both the public and industry regarding the issues to which we are devoting increased supervisory attention. In June 2014, the report also began outlining 

our key supervisory priorities for the next twelve months both for large bank supervision and for midsize and community bank supervision. 

62 

Other analytical groups that focus on specific risk areas, such as retail and commercial credit and conditions across our districts, support the work of the NRC. We 

recently augmented the existing risk committees with a Large Bank Supervision 

Risk Committee (LBSRC). The LBSRC will further enhance our ability to identify 

and respond quickly to emerging risk issues across large, complex institutions, ensure consistency in our supervisory activities, and assist the NRC in its risk monitoring activities. 

Improving Management Information Systems and Data Analytics 

The OCC has unique and secure access to substantial and comprehensive banking 

system data, and it is imperative that we have strong data analytics. Our goal is 

to transition to a shared services environment across functions within the agency 

to improve the ability of our supervisory staff to use this data and enhance the integrity and consistency of our data analytics. These changes will improve the consistency, reliability, and efficiency of our supervision of the institutions that we 

oversee. 

Formalizing an Enterprise Risk Management Framework 

The OCC sets a high bar for the institutions we supervise, and we must ask no 

less of ourselves. To this end, we are developing and formalizing an enterprise risk 

management framework for the OCC, including a risk appetite statement, to better 

define, measure, and control the risks that we accept in pursuit of our mission, vision, and strategic goals. A working group will soon conduct an initial 

enterprisewide risk assessment and inventory existing risk management practices. 

B. Heightened Standards for Large Banks 

Due to their size, activities, and implications for the U.S. financial system, large 

institutions require more rigorous regulation and supervision than less systemically 

significant institutions. Since the crisis, we have applied heightened standards to 

large institutions. These standards address comprehensive and effective risk management; the need for an engaged board of directors that exercises independent 

judgment; the need for a robust audit function; the importance of talent development, recruitment, and succession planning; and a compensation structure that does 

not encourage inappropriate risk taking. 

Last week, we issued final guidelines refining and formalizing these standards 

and making them enforceable. These standards provide important additional supervisory tools to examiners and focus bank management and boards of directors on 

strengthening their institutions’ risk management practices and governance. The 

standards are generally applicable to insured national banks, insured Federal savings associations, and insured Federal branches of foreign banks with average total 

consolidated assets of $50 billion or greater (referred to in this subsection as 

‘‘banks’’). 

The final guidelines set forth minimum standards for the design and implementation of a bank’s risk governance framework and provide minimum standards for the 

board’s oversight of the framework. The standards make clear that the framework 

should address all risks to a bank’s earnings, capital, and liquidity that arise from 

the bank’s activities. 

The standards also set out roles and responsibilities for the organizational units 

that are fundamental to the design and implementation of the risk governance 

framework. These units, often referred to as a bank’s three lines of defense, are 

front line business units, independent risk management, and internal audit. The 

standards state that, together, these units should establish an appropriate system 

to control risk taking. The standards also provide that banks should develop a risk 

appetite statement that articulates the aggregate level and types of risk a bank is 

willing to assume to achieve its strategic objectives, consistent with applicable capital, liquidity, and other regulatory requirements. 

In addition, the final guidelines contain standards for boards of directors regarding oversight of the design and implementation of a bank’s risk governance framework. They note that it is vitally important for each director to be engaged in order 

to understand the risks that his or her institution is taking and to ensure that those 

risks are well-managed. Directors should be in a position to present a credible challenge to bank management with the goal of preserving the sanctity of the bank’s 

charter. That is, a bank should not be treated merely as a booking entity for a holding company. The Federal bank charter is a special corporate franchise that provides a gateway to Federal deposit insurance and access to the discount window. 

Accordingly, management and independent directors must see that the bank operates in a safe and sound manner. 

We issued the final standards as a new appendix to Part 30 of our regulations. 

Part 30 codifies an enforcement process set out in the Federal Deposit Insurance 

63 

Act that authorizes the OCC to prescribe operational and managerial standards. If 

a bank fails to satisfy a standard, the OCC may require it to submit a compliance 

plan detailing how it will correct the deficiencies and how long it will take. The OCC 

can issue an enforceable order if the bank fails to submit an acceptable compliance 

plan or fails in any material way to implement an OCC-approved plan. 

Higher supervisory standards for the large banks we oversee, such as those in the 

final guidelines, along with bank management’s implementation of these standards, 

are consistent with the Dodd-Frank Act’s broad objective of strengthening the stability of the financial system. We believe that this increased focus on strong risk 

management and corporate governance will help banks maintain the balance sheet 

improvements achieved since the financial crisis and make them better able to withstand the impact of future crises. 

C. Supervision of Community Banks 

The OCC is the supervisor of approximately 1,400 institutions with assets under $1 billion, of which approximately 870 have less than $250 million in assets. These 

small institutions play a vital role in our country’s financial system by providing essential products and services to our communities and businesses, including credit 

that is critical to economic growth and job creation. 

The OCC is a resource to these community banks through our more than 60 offices throughout the United States. Our examiners are part of the communities in 

which they work and are empowered to make most supervisory decisions at the local 

level. In addition, the entire agency works to support these examiners and small 

banks and provides them with easy access to licensing specialists, lawyers, compliance and information technology specialists, and a variety of other subject matter 

experts. 

Small banks face unique challenges, and the OCC has been sensitive to this in 

our implementation of the Dodd-Frank Act and in our approach to supervising these 

institutions. Throughout the rulemaking process, the agency has sought and listened to comments and concerns from community banks. We have heard—and we 

agree—that a one-size-fits-all approach to bank supervision is not appropriate. Accordingly, we tailor our supervisory programs to the risk and complexity of a bank’s 

activities and have separate lines of business for community and midsize banks and 

large banks. When developing regulations, the OCC works to avoid unnecessary regulatory and compliance burden on small banks. 

Our commitment to this principle is evident in many of the rules we have issued. 

For example, the lending limits rule we issued under the Dodd-Frank Act provides 

a simpler option that small banks may use for measuring the credit exposure of derivative and securities financing transactions. The final domestic capital rules, 

issued on an interagency basis, also accommodate concerns of small banks with respect to the treatment of trust preferred securities (TruPS), accumulated other comprehensive income, and residential mortgages. Finally, with our interagency counterparts, we revised the treatment of certain collateralized debt obligations (CDOs) 

backed primarily by TruPS under the Volcker Rule largely to address concerns 

raised by community banks. 

The OCC, along with the other Federal banking agencies, is also engaged in a review of regulatory burden pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA). This statute requires the OCC, as well as 

the FDIC and Board of Governors of the Federal Reserve System (FRB), to seek 

public comment at least once every 10 years to identify outdated, unnecessary, or 

unduly burdensome regulations. The EGRPRA review provides the public with an 

opportunity to recommend to the agencies how to reduce burden through targeted 

regulatory changes. 

In connection with the EGRPRA process, the agencies published a Federal Register notice this past June asking for comment on three categories of rules. The comment period on this first notice ended 1 week ago, and the agencies are reviewing 

the comments received. Over the next 2 years, the agencies will issue three more 

Federal Register notices that will invite public comment on the remaining rules. In 

each notice, we will specifically ask the public, including small institutions, to identify ways to reduce unnecessary burden associated with our regulations. 

The OCC also has taken steps to communicate more effectively with the small 

banks we supervise. Certain provisions of the Dodd-Frank Act apply to institutions 

of all sizes, but many apply only to larger banks. Therefore, in each bulletin transmitting a new regulation or supervisory guidance to our banks, we include both a 

‘‘highlights section’’ that succinctly summarizes the major provisions of the issuance 

and an easy-to-see box written in plain English that allows community banks to assess quickly whether the issuance applies to them. We have also developed other 

methods for distilling complex requirements, such as summaries and guides that 

64 

3The Commodity Futures Trading Commission (CFTC) issued a separate rule adopting the 

same common rule text and a substantially similar preamble. 

highlight aspects of rules that are relevant to small institutions. We have received 

positive feedback on these communication tools, and we will continue to work to 

make the regulatory process manageable for small banks. 

III. Dodd-Frank Act: Regulatory Milestones Achieved 

Congress enacted the Dodd-Frank Act to address regulatory gaps, create a stronger financial system, and address systemic issues that contributed to, or that accentuated and amplified the effects of, the financial crisis. To achieve these objectives, 

the Act provided the Federal financial regulators, including the OCC, with new tools 

to address risk and to mitigate future financial crises. 

The implementation of the Dodd-Frank Act presented challenges on an unprecedented scale, as many of these new tools required, among other things, the Federal 

financial regulators to write or revise a number of highly complex regulations. In 

the 4 years since the Act became law, the OCC has worked tirelessly to fulfill this 

mandate. I am pleased to report that the OCC has completed all rules that we have 

independent authority to issue. Furthermore, the OCC has finalized many of the 

regulations that the Dodd-Frank Act required the OCC to issue jointly or on a coordinated basis with other Federal financial regulators. For those rulemakings that 

remain, we have made good progress and, in many cases, we have seen meaningful 

improvements in industry practices in anticipation of the finalized rules. Below, I 

will discuss the completed rulemakings followed by a description of the rulemakings 

that are in-process. 

A. Finalized Rules 

OCC/OTS Integration 

The Dodd-Frank Act transferred to the OCC all the functions of the Office of 

Thrift Supervision (OTS) relating to Federal savings associations, as well as the responsibility for the examination, supervision, and regulation of Federal savings associations. We have previously reported on the successful transfer of these functions, 

including the integration into the OCC of former OTS employees and systems and 

the development of an aggressive cross-credentialing program that qualifies examiners to lead examinations of both national banks and Federal savings associations. 

We are committed to continuing to improve and refine our new responsibilities. 

For example, we are undertaking a comprehensive, multiphase review of our regulations and those of the former OTS to reduce regulatory burden and duplication, promote fairness in supervision, and create efficiencies for both types of institutions. 

We have begun this process and, in June of this year, we issued a proposal to integrate national bank and Federal saving association rules relating to corporate activities and transactions. 

In addition, as we have gained experience in our supervision of Federal savings 

associations, I have come to recognize that the current legal framework limits the 

ability of these institutions to adapt their business strategies to changing economic 

and business environments unless they change their charter or business plans. More 

specifically, Federal savings associations that want to move from a mortgage lending 

business model to providing a mix of business loans and consumer credit would need 

to change charters. I believe that the thrift charter should be flexible enough to accommodate either strategy. 

When I was a regulator in Massachusetts, we made State bank and thrift powers 

and investment authorities, as well as supervisory requirements, the same or comparable regardless of charters, and we allowed the institutions to exercise those 

powers while retaining their own corporate structure. Congress may wish to consider authorizing a similar system at the Federal level. This flexibility will improve 

the ability of thrifts to meet the financial needs of their communities. 

The ‘‘Volcker Rule’’ 

On December 10, 2013, the OCC, jointly with the FDIC, FRB, and the Securities 

and Exchange Commission (SEC), adopted final regulations implementing the requirements of section 619, also known as the ‘‘Volcker Rule’’. 3 Section 619 prohibits 

a banking entity from engaging in short-term proprietary trading of financial instruments and from owning, sponsoring, or having certain relationships with hedge 

funds or private equity funds (referred to here and in the final regulations as ‘‘covered funds’’). Notwithstanding these prohibitions, section 619 permits certain financial activities, including market making, underwriting, risk-mitigating hedging, 

trading in Government obligations, and organizing and offering a covered fund. 

65 

In accordance with the statute, the final regulations prohibit banking entities 

from engaging in impermissible proprietary trading and strictly limit their ability 

to invest in covered funds. At the same time, the regulations are designed to preserve market liquidity and allow banks to continue to provide important client-oriented services. As discussed later in this testimony, the OCC and the other agencies 

are currently working together to implement this rulemaking. 

The agencies followed this rulemaking with an interagency interim final rule to 

permit banking entities to retain interests in certain CDOs backed primarily by 

TruPS. We issued this interim rule because of, and in response to, concerns expressed primarily by small institutions that they would otherwise have to divest instruments that the Dodd-Frank Act expressly allows for capital-raising purposes. 

Annual Stress Tests 

This OCC-only rule, issued on October 9, 2012, implements section 165(i)(2) of the Act by requiring banks with average total consolidated assets of $10 billion or greater to conduct annual ‘‘stress tests.’’ The rule, which is consistent with and comparable to the stress test rules issued by the other Federal banking agencies, establishes methods for conducting stress tests, requiring that the tests be based on at 

least three different economic scenarios (baseline, adverse, and severely adverse). 

The rule also sets forth the form and content for reporting the test results and requires banks to publish a summary of the results. In addition, the rule divides 

banks into two categories, based on asset size, so that those with total consolidated 

assets between $10 and $50 billion and those with assets over $50 billion are subject 

to different test requirements, as well as reporting and disclosure deadlines. 

Lending Limits 

The OCC issued a final rule on June 25, 2013, implementing section 610 of the 

Act, which amended the national bank statutory lending limit at 12 U.S.C. 84. The 

rule revises the lending limits applicable to banks to include credit exposures arising from derivative transactions, as well as repurchase agreements, reverse repurchase agreements, securities lending transactions, and securities borrowing transactions. 

Appraisals for Higher-Priced Mortgage Loans 

On January 18, 2013, the OCC participated in the issuance of an interagency rule 

concerning appraisals for ‘‘higher-priced mortgage loans,’’ which are loans secured 

by a consumer’s home with interest rates above certain thresholds. The rule requires that creditors for higher-priced loans obtain appraisals that meet certain 

standards, notify loan applicants of the purpose of the appraisal, and give applicants 

for certain higher-priced mortgages a copy of the appraisal before advancing credit. 

In addition, if the seller acquired the property for a lower price during the 6 months 

before the sale and the price difference exceeds a certain threshold, a creditor must 

obtain a second appraisal at no cost to the consumer. This requirement for higherpriced home-purchase mortgage loans seeks to address fraudulent property flipping 

by ensuring that the property value increase was legitimate. 

Collins Amendment 

The OCC participated with the FDIC and FRB in issuing an interagency rule on 

June 11, 2011, that established a floor for the risk-based capital requirements applicable to the largest, internationally active banking organizations. This rule amended 

the advanced risk-based capital adequacy standards (the ‘‘advanced approaches 

rules’’) consistent with section 171(b) of the Act, known as the ‘‘Collins Amendment’’. 

Under the rule, a banking organization that has received approval to use the advanced approaches rules is required to meet the higher of the minimum requirements under the general risk-based capital rules or the minimum requirements 

under the advanced approaches rules. 

Alternatives to External Credit Ratings 

On June 13, 2012, the OCC published a rule implementing sections 939 and 939A 

of the Act. This rule removes references to external credit ratings from the OCC’s 

noncapital regulations, including its regulation that sets forth the types of investment securities that banks may purchase, sell, deal in, underwrite, and hold. Banks 

must conduct their own analysis of whether a security is investment grade. In addition, the OCC, together with the other Federal banking agencies, removed all references to external credit ratings from their risk-based capital rules when we finalized the enhanced capital rule on October 11, 2013 (discussed below). For example, 

for securitization positions, the enhanced capital rule replaced a ratings-based approach with a non-ratings-based supervisory formula for determining risk-based 

capital requirements. 

66 

B. Rules In-Process 

Swaps Margin Rule 

The OCC, jointly with the FDIC, FRB, Federal Housing Finance Agency (FHFA), 

and Farm Credit Administration, published a proposal in 2011 to implement sections 731 and 764 of the Act by requiring covered swap entities to collect margin 

for their noncleared swaps and noncleared security-based swaps. Subsequently, the 

OCC, FDIC, and FRB participated in international efforts to coordinate the implementation of margin requirements among the G20 Nations. Following extensive 

public review and comment, the Basel Committee on Bank Supervision (Basel Committee) and the International Organization of Securities Commissions finalized an 

international framework in September of last year. 

After considering the international framework and the comments we received on 

the U.S. proposal, the agencies decided to repropose the U.S. swaps margin rule. 

I am happy to report that last week I signed an interagency reproposal that imposes 

minimum initial margin and variation requirements for certain noncleared swaps 

and security-based swaps. The reproposal specifically seeks to avoid unnecessarily 

burdening both nonfinancial entities that use swap contracts to hedge commercial 

costs and smaller financial companies whose activities do not pose a risk to the financial system. The rule would reduce risk, increase transparency, and promote 

market integrity within the financial system by addressing the weaknesses in the 

regulation and structure of the swaps markets that the financial crisis revealed. The 

comment period on this reproposal is open for 60 days but, as previously noted in 

the OCC’s Quarterly Report on Bank Trading and Derivatives Activities, we have 

already seen improvements in the overall collateralization rates for industry derivative exposures. 

Credit Risk Retention 

The OCC participated in the issuance of an interagency proposal in 2011 that established asset-backed securities requirements designed to motivate sponsors of 

securitization transactions to exercise due diligence regarding the quality of the 

loans they securitize. Under this proposal, a securitizer would have to retain a material economic interest in the credit risk of any asset that it transferred, sold, or 

conveyed to a third party. The agencies received over 10,000 comments on the proposal and concluded that the rulemaking would benefit from a second round of public review and comment. 

In September 2013, the interagency group issued a reproposal. Although the reproposal includes significant changes from the original, its focus is the same—to ensure that sponsors are held accountable for the performance of the assets they 

securitize. The OCC and the other participating agencies expect to approve the final 

rule in the near future. 

Incentive-Based Compensation Arrangements 

The OCC, together with the FRB, FDIC, OTS, National Credit Union Administration, SEC, and FHFA, published a proposal on April 14, 2011, designed to ensure 

that certain financial institutions with more than $1 billion in assets structure their 

incentive compensation arrangements: (1) to balance risk and financial rewards; (2) 

to be compatible with effective controls and risk management; and (3) to be supported by strong corporate governance. Specifically, the proposal, which would implement section 956 of the Act, would require these institutions to report incentivebased compensation arrangements and prohibit arrangements that either provide 

excessive compensation or could expose an institution to inappropriate risks that 

could lead to material financial loss. In light of the thousands of comments that the 

agencies received on the proposal, as well as significant industry and international 

developments related to incentive-based compensation, the agencies continue to 

work on the rule. The completion of this rule is an OCC priority because of the impact that poorly structured incentive compensation can have on risk-taking behaviors and the overall safety and soundness of an institution. Finalizing this rule will 

reinforce and complement the risk management principles and heightened standards that we are implementing. 

Retail Foreign Exchange Transactions 

On July 14, 2011, the OCC issued a final retail foreign exchange transactions rule 

for OCC-regulated entities that engage in off-exchange transactions in foreign currency with retail customers, implementing section 742(c)(2) of the Act. The rule contains a variety of consumer protections, including margin requirements, required 

disclosures, and business conduct standards, on foreign exchange options, futures, 

and futures-like transactions with certain retail customers. To promote regulatory 

comparability, the OCC worked closely with the CFTC, SEC, FDIC, and FRB in deVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00070 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
67 

4This category of institutions is defined as those with $250 billion or more in total consolidated assets or $10 billion or more in foreign financial exposure. 

veloping this rule. On October 12, 2012, the OCC issued a proposal to amend this 

final rule in light of related CFTC and SEC rules, and we continue to work on finalizing this proposal. 

Appraisal Management Companies 

In April 2014, the OCC joined in the issuance of an interagency proposal to implement section 1473 of the Act, which sets forth minimum requirements for State registration and supervision of appraisal management companies (AMCs). (AMCs serve 

as intermediaries between appraisers and lenders and provide appraisal management services). The proposal: (1) provides that AMC-coordinated appraisals must 

adhere to applicable quality control standards; (2) facilitates State oversight of 

AMCs; and (3) ensures that States report to the Federal Financial Institutions Examination Council’s (FFIEC) Appraisal Subcommittee the information needed to administer a national AMC registry. The agencies plan to issue a final rule in the near 

term. 

Source of Strength 

The OCC, FRB, and FDIC continue to work on an interagency basis to draft a 

proposal to implement section 616(d) of the Act to require bank and savings and 

loan holding companies, as well as other companies that control depository institutions, to serve as a ‘‘source of strength’’ for their subsidiary depository institutions. 

As we saw during the crisis, too often banks served as a source of strength for 

nonbank subsidiaries of their holding companies. This rulemaking will complement 

actions we have taken elsewhere to preserve the federally insured bank’s financial 

health. 

IV. Other Significant OCC Rulemaking Projects 

The OCC, together with the FRB and FDIC, has proposed or finalized a number 

of other significant rules over the past 4 years. Many of these rules, although not 

mandated by the Dodd-Frank Act, share the same broad objectives and address 

many of the same concerns as the Act. Several of these rules result from international initiatives by groups such as the Basel Committee and, consistent with the 

Dodd-Frank Act, are intended to strengthen global capital and liquidity requirements and promote a more resilient banking sector. I describe these rules below. 

Enhanced Liquidity Standards 

On September 3, 2014, the OCC, FDIC, and FRB approved a final rule to implement the Basel Committee’s liquidity coverage ratio in the United States. These 

standards address banking organizations’ maintenance of sufficient liquidity during 

periods of acute short-term financial distress. Under the rule, large, internationally 

active banking organizations 4 are required to hold an amount of high quality liquid 

assets to cover 100 percent of their total net cash outflows over a prospective 30 

calendar-day period. 

The agencies are also working with the Basel Committee to develop a net stable 

funding ratio, which is intended to complement the liquidity funding ratio by enhancing long-term structural funding. It is expected that these liquidity standards, 

once fully implemented, will accompany the existing liquidity risk guidance and enhanced liquidity standards (issued by the FRB in consultation with the OCC and 

the FDIC) that are part of the heightened prudential standards required by section 

165 of the Dodd-Frank Act. 

Enhanced Capital Rule 

Last year, the OCC, FDIC, and FRB issued a rule that comprehensively revises 

U.S. capital standards. Most revisions, including the narrowing of instruments that 

count as regulatory capital, will be phased in over several years. For large, internationally active banking organizations, this phase-in has already begun. For all 

other banks, the phase-in will begin in 2015. 

The Basel Committee’s efforts to revise the international capital framework 

shared many of the goals of the Dodd-Frank Act and addressed many of the same 

issues. For example, both the agencies’ enhanced capital rule and the Dodd-Frank 

Act focus increased attention on efforts to address the excessive interconnectedness 

of financial sector exposures and to create incentives for the use of central clearing 

houses for over-the-counter derivatives. This capital rule and the Dodd-Frank Act 

require an improvement in the quality and consistency of regulatory capital by narrowing the instruments that count as regulatory capital. Furthermore, the enhanced 

capital rule establishes conservative, stringent capital standards, especially for large 

68 

banking organizations, by increasing overall risk-based capital requirements and refining the methodologies for determining risk-weighted assets to better capture risk. 

Supplementary Leverage Ratio 

Regulatory capital standards in the U.S. have long included both risk-based capital and leverage ratio requirements. The Basel Committee’s revisions to the international capital framework introduced a new leverage ratio requirement for large, 

internationally active banking organizations. The Federal banking agencies’ supplementary leverage ratio implements this additional and stricter leverage requirement. Unlike the more broadly applicable leverage ratio, this supplementary leverage ratio adds off-balance sheet exposures into the measure of total leverage exposure (the denominator of the leverage ratio). The supplementary leverage ratio is 

a more demanding standard because large banking organizations often have significant off-balance sheet exposures arising from different types of commitments, derivatives, and other activities. 

Earlier this year, to further strengthen the resilience of the banking sector, the 

Federal banking agencies finalized a rule that enhances the supplementary leverage 

ratio requirement for the largest, most systemically important U.S. banking organizations (those with $700 billion or more in total consolidated assets or $10 trillion 

or more in assets under custody). Under this rule, these banking organizations will 

be required to maintain even more Tier 1 capital for every dollar of exposure in 

order to be deemed ‘‘well capitalized.’’ 

Last week, the OCC and other Federal banking agencies approved a final rule 

that further strengthens the supplementary leverage ratio by more appropriately 

capturing a banking organization’s potential exposures. In particular, the revisions 

contained in this final rule will better capture leverage embedded in a bank’s buying 

and selling of credit protection through credit derivatives. This should further improve our assessment of leverage at the largest banks that are the most involved 

in the credit derivatives business. 

V. Coordination With Domestic and International Regulators 

The Committee has also asked us to report on the OCC’s efforts to better coordinate with other domestic and international regulators. The OCC, FDIC, and FRB 

have a long history of cooperative and productive relationships, through a combination of formal agreements, informal working groups, and the FFIEC. For example, 

although the OCC, FDIC, and FRB each has its own infrastructure, focus, and responsibilities, we work together to foster a coordinated and cohesive supervisory approach that minimizes overlaps and avoids supervisory gaps. This allows each agency to deploy its resources effectively and leverage supervisory work products. It also 

allows for the timely communication of supervisory risks, concerns, priorities, and 

systemic information, while reducing the supervisory burden on our institutions and 

the agencies. In addition, I am very pleased to report that the OCC and SEC recently signed a Memorandum of Understanding to facilitate sharing and coordination between our two agencies. 

We have extended this network to include collaboration with the Bureau of Consumer Financial Protection (CFPB) and State banking regulators. For example, we 

have protocols in place to share information with the CFPB, and we work together 

to schedule exams and coordinate other supervisory activities. In addition, the OCC 

is engaged in the Financial Stability Oversight Council, which the Dodd-Frank Act 

established to help identify and respond to emerging risks across the financial system. Together, these relationships allow agencies to share and compare insights and 

expertise and to reduce duplication. 

Implementation of the Volcker Rule is another important area where we are 

working together with other agencies to coordinate our supervisory strategies and 

our interpretive approaches. An informal, interagency staff-level working group 

meets regularly to discuss interpretive issues common to all of the agencies with a 

goal of developing and publishing uniform answers to frequently asked questions. 

The agencies published the first set of ‘‘Frequently Asked Questions’’ on their respective Web sites on June 10, 2014. In addition, the agencies are discussing how 

the collaborative approach to supervision in use among the banking agencies could 

be expanded to include the SEC and the CFTC for purposes of Volcker compliance 

supervision. I strongly support a supervisory approach that promotes orderly, coherent supervision by the agencies involved in implementing the Volcker Rule, and I 

look forward to our ongoing cooperation toward that end. 

The interconnectedness of the global financial system has also increased the importance of effective international supervisory coordination and collaboration. As 

members of the Basel Committee, the OCC and the other U.S. Federal banking 

agencies played a critical role in developing international standards incorporating 

69 

many lessons learned since the financial crisis, such as those reflected in the agencies’ enhanced capital rule. In addition, OCC staff serves on numerous Basel Committee working groups and chairs its Supervision and Implementation Group (SIG). 

The SIG has overseen the Basel Committee’s recent work disseminating good practices on stress testing and business model analysis, as well as updating principles 

for bank governance, risk data aggregation, and the management of supervisory colleges. 

The OCC, along with the FDIC and FRB, also regularly enters into arrangements 

with foreign regulators that broadly govern information access and sharing. The 

purpose of these arrangements, which include Memoranda of Understanding, statements of cooperation, and exchanges of letters, is to assist each regulator in obtaining the information necessary to carry out its respective supervisory responsibilities. 

They address issues including cooperation during the licensing process, the supervision of ongoing activities, and the handling of problem banks. 

The OCC also plays an important role in international discussions concerning 

cross-border resolutions including through the Financial Stability Board’s Cross-Border Crisis Management Group and the Legal Experts Group of the Resolutions 

Steering Group. In addition, the OCC participates in such discussions in firm-specific Crisis Management Groups and Supervisory Colleges and on a bilateral basis 

with prudential supervisors. For example, we have been working with the FDIC, 

FRB, SEC, and numerous foreign jurisdictions to develop agreements to facilitate 

coordination in future crises that affect significant, cross-border financial institutions. 

VI. Emerging Issues: Cybersecurity 

While it is essential that we learn lessons from history, it is unlikely that the 

challenges of tomorrow will take the same form as those of the past. The now regular and wide-scale reports of cyberattacks underscore the importance of cybersecurity and preparedness. It is clear that some of these attacks use increasingly sophisticated malware and tactics. With this in mind, I want to share with you what the 

OCC and our colleagues in the banking regulatory community are doing to address 

one of the most pressing concerns facing the financial services industry today—the 

operational risks posed by cyberattacks. There are few issues more important to me, 

to the OCC, and to our country’s economic and national security than shoring up 

the industry’s and our own defenses against cyberthreats. 

In June 2013, the FFIEC, which I currently chair, announced the creation of the 

Cybersecurity and Critical Infrastructure Working Group (CCIWG). This group coordinates with intelligence, law enforcement, the Department of Homeland Security, 

and industry officials to provide member agencies with accurate and timely threat 

information. Within its first year, this working group released joint statements on 

the risks associated with ‘‘distributed denial of service’’ attacks, automated teller 

machine ‘‘cash-outs,’’ and the wide-scale ‘‘Heartbleed’’ vulnerability. They held an industry webinar for over 5,000 community bankers and conducted a cybersecurity assessment of over 500 community institutions. The information from this assessment 

will help FFIEC members identify and prioritize actions that can enhance the effectiveness of cybersecurity-related guidance to community financial institutions. 

The CCIWG is also working to identify gaps in the regulators’ examination procedures and examiner training to further strengthen the banking industry’s cybersecurity readiness and its ability to address the evolving and increasing cybersecurity 

threats. The OCC will continue to work with the institutions we supervise, our Federal financial regulatory colleagues, and others within Federal, State, and local governments as we address this ongoing threat to our financial system. 

Conclusion 

Thank you again for the opportunity to appear before you and to update the Committee on the OCC’s continued efforts to implement the Dodd-Frank Act and other 

initiatives at the agency. 

PREPARED STATEMENT OF RICHARD CORDRAY 

ADIRECTOR, CONSUMER FINANCIAL PROTECTION BUREAU

SEPTEMBER 9, 2014 

Chairman Johnson, Ranking Member Crapo, and Members of the Committee, 

thank you for the opportunity to testify today about the implementation of the 

Dodd-Frank Act. We appreciate your oversight and leadership as we all work to 

strengthen our financial system and to ensure that it serves both consumers and 

the long-term foundations of the American economy. 

70 

As you know, the Consumer Financial Protection Bureau is the Nation’s first Federal agency whose sole focus is protecting consumers in the financial marketplace. 

The effects of the financial crisis—with millions of lost jobs, millions of lost homes, 

and tremendous declines in household wealth amounting to trillions of dollars—remain vivid in our collective experience. Although the damage done to individuals 

and communities was substantial, our country is finally recovering. 

In passing the Dodd-Frank Act, Congress vested in this new Bureau the responsibility to stand on the side of consumers and to help restore their trust in the financial marketplace. Over the past 3 years, we have made considerable progress in fulfilling our rulemaking, supervisory, and enforcement responsibilities to protect people all across this country. 

Our initial focus, as directed by Congress, was to address deep problems in the 

mortgage market that helped precipitate the financial crisis. We began by issuing 

a series of mortgage rules that took effect earlier this year. They require creditors 

to make reasonable, good faith assessments that borrowers are able to repay their 

loans; address pervasive problems in mortgage servicing that caused many homeowners to end up in foreclosure; regulate compensation practices for loan originators; and address various other practices that contributed to the housing crisis and 

ensuing financial meltdown. We have spent much of the last 20 months working intensively with industry, housing counselors, and other stakeholders to ensure that 

these rules are implemented smoothly according to the timelines established by 

Congress. 

Last fall, we also issued another mortgage rule to accomplish a goal long urged 

in the Congress, which was to consolidate Federal mortgage disclosures under various laws. The new ‘‘Know Before You Owe’’ mortgage forms are streamlined and 

simplified to help consumers understand their options, choose the deal that is best 

for them, and avoid costly surprises at the closing table. We conducted extensive 

testing of the new forms before issuing a proposal and later to validate the results. 

The testing showed that consumers at very different levels of experience were able 

to understand the new forms better than the current forms. This rule takes effect 

about a year from now, and we again are working intensively to help industry implement the rule and to prepare educational materials that help consumers understand and use the new forms. 

This summer, we also issued a proposed rule to implement changes Congress 

made to the Home Mortgage Disclosure Act. The point is to improve the quality of 

data available to monitor compliance with fair lending laws, public and private investment to meet housing needs, and general developments in the mortgage market. 

As with the redesign of the mortgage disclosure forms, we believe this rulemaking 

presents an opportunity to reduce unwarranted regulatory burdens. So we are looking closely at how to clarify existing requirements and streamline the processes and 

infrastructure for reporting this data. We have conducted detailed discussions with 

a group of small creditors to focus on their particular concerns, and we are now 

seeking broad public comment from all stakeholders on the proposed rule through 

the end of October. 

As each of these initiatives proceeds, we are working diligently to monitor the effects of our rules on the mortgage market; make clarifications and adjustments to 

our rules where warranted; provide compliance guides, webinars, and other tools to 

facilitate the implementation process; and work closely with our fellow agencies to 

support their own regulatory initiatives. We are intent on making sure that these 

statutory and regulatory provisions achieve their intended goals. Right now, for instance, we are pursuing further research to determine how best to define the scope 

of statutory provisions for small creditors that operate predominantly in ‘‘rural or 

underserved’’ areas in order to promote access to credit in those areas. 

We are also intensifying our focus on nonmortgage markets to address other 

pressing consumer financial protection issues. For example, we adopted a rule specified by Congress that fashioned the first comprehensive Federal consumer protections for international money transfers, often called remittances. We have also 

issued a series of rules defining the parameters of the Bureau’s supervision authority over larger participants in certain financial markets, which enables us to impose 

supervisory oversight over their operations and activities. More of those rules are 

on their way. We are well into the process of developing proposed rules in several 

other areas, including prepaid cards, debt collection, and payday lending. And we 

are conducting intensive research on overdraft services and various other topics to 

determine what kind of rulemaking activity may be warranted in those areas. 

Another key task for the Bureau has been to build effective supervision and enforcement programs to ensure compliance with Federal consumer financial laws. 

This work is critical to protect consumers, yet at the same time it is designed to 

create fair markets through evenhanded oversight. For the first time ever, this new 

71 

Federal agency has authority to supervise not only the larger banks but also a broad 

range of nonbank financial companies, including mortgage lenders and servicers, 

payday lenders, student loan originators and servicers, debt collectors, and credit reporting companies. As we have built and refined our supervision program, we have 

devised a system of risk-based prioritization to make the best use of our examination resources. This prioritization includes an assessment of potential consumer risk 

along with factors such as product market size, the entity’s market share, the potential for consumer harm, and field and market intelligence that includes other factors 

such as management quality, prior regulatory history, and consumer complaints. 

We strive to conduct effective examinations while minimizing unnecessary burden 

on supervised entities. Examinations typically involve work done both off site and 

on site, scoped to focus on areas posing the highest potential risks to consumers. 

We have made it a priority to coordinate the timing and substance of examination 

activities with our Federal and State regulatory partners. By these methods, our supervision program is helping to drive a cultural change within financial institutions 

that places more emphasis on compliance with the law and treating customers fairly. When examinations reveal legal violations, we require appropriate corrective action, including financial restitution to consumers. We are also insistent that institutions must have compliance management systems to prevent violations and ensure 

appropriate self-monitoring, correction, and remediation where violations have occurred. This work has strengthened compliance management at the large banks and 

caused many large nonbank firms to implement compliance management systems 

for the first time. Reinforcement of these expectations is helping to level the playing 

field for competitors across entire markets, regardless of charter or corporate form. 

Our enforcement team is responsible for investigating possible violations of Federal consumer financial laws and enforcing the law through administrative and judicial proceedings. Consistent enforcement of the laws under our jurisdiction benefits 

consumers, honest businesses, and the economy as a whole. To date, our enforcement actions amount to $4.7 billion in relief for roughly 15 million consumers who 

were harmed by illegal practices. 

Let me give just a few recent examples. Along with officials in 49 States, we took 

action against the Nation’s largest nonbank mortgage loan servicer for misconduct 

at every stage of the mortgage servicing process. A Federal court consent order requires the company to provide $2 billion in principal reduction to underwater borrowers and to refund $125 million to nearly 185,000 borrowers who had already 

been foreclosed upon. We also partnered with 13 State attorneys general to obtain 

$92 million in debt relief for about 17,000 servicemembers and others harmed by 

a company’s predatory lending scheme involving inflated prices for electronics where 

the actual annual percentage rate charged exceeded 100 percent more than six 

times the rate that was disclosed to servicemembers and other consumers. 

We worked with the Department of Justice on two significant matters. First, we 

secured an order from a Federal district court in Pennsylvania requiring a bank to 

pay $35 million to African American and Hispanic borrowers who were charged 

higher prices on mortgage loans than nonminority borrowers. Second, we ordered 

one of the largest indirect auto lenders to pay $80 million in damages to 235,000 

Hispanic, African American, and Asian and Pacific Islander borrowers because of 

discriminatory practices in ‘‘marking up’’ interest rates on auto loans to rates higher 

than those charged to similarly situated white borrowers. The $80 million refund 

to consumers and $18 million civil penalty stand as the largest amount of relief that 

the Federal Government has ever secured in a case of auto loan discrimination. 

We also took action against two of the Nation’s largest payday lenders for violations of the law. In one of the actions, we secured complete consumer refunds of up 

to $14 million and a $5 million civil penalty from a company for robo-signing court 

documents related to debt collection lawsuits, illegally overcharging servicemembers 

in violation of the Military Lending Act, and destroying records in advance of our 

examination. In the other matter, we determined after an investigation that the 

company used illegal debt collection tactics—including harassment and false threats 

of lawsuits or criminal prosecution—to bully overdue borrowers into taking out new 

payday loans with expensive fees despite their demonstrated inability to repay their 

existing loans. The company will pay $10 million in restitution and penalties. In 

both matters, injunctive relief has been imposed to prevent such misconduct from 

recurring in the future. 

At the heart of our mission is the premise that consumers deserve to have someone stand on their side and make sure they are treated fairly in the financial marketplace. Since the day we opened our doors and received our first few hundred consumer complaints, we have now handled nearly 440,000 complaints and secured 

both monetary and nonmonetary relief on behalf of tens of thousands of individual 

consumers, including many people in each of your States. 

72 

1The views expressed in this testimony are those of the Chair of the Securities and Exchange 

Commission and do not necessarily represent the views of the full Commission. 

Consumers should also have the tools and information they need to navigate financial choices. We have developed consumer resources such as the ‘‘Ask CFPB’’ feature on our Web site, which allows consumers to find answers to more than a thousand common financial questions and has been visited by more than 3.3 million 

unique visitors. We developed ‘‘Know Before You Owe’’ tools to make the costs and 

risk of financial products more clear. We also worked with the Department of Education to develop the ‘‘Financial Aid Shopping Sheet’’, which has now been adopted 

by more than 2,000 colleges and universities to help students make apples-to-apples 

comparisons of college costs. We constantly engage in extensive outreach efforts, and 

our Office of Servicemember Affairs, led by Holly Petraeus, has visited 91 military 

installations and units to hear concerns and share information with 

servicemembers. 

All of our work has benefited by the engagement of millions of Americans, and 

our constructive dialogue with financial institutions, including community banks 

and credit unions in regular meetings all around the country. My outstanding colleagues at the Consumer Bureau, as well as the leaders of our fellow agencies represented on this panel, are strongly dedicated to a shared vision of a healthy consumer financial marketplace and we continue to work very well together in pursuit 

of that goal. 

Thank you and I look forward to your questions. 

PREPARED STATEMENT OF MARY JO WHITE 

CHAIR, SECURITIES AND EXCHANGE COMMISSION

SEPTEMBER 9, 2014 

Chairman Johnson, Ranking Member Crapo, and Members of the Committee, 

thank you for inviting me to testify about the Securities and Exchange Commission’s (‘‘SEC’’ or ‘‘Commission’’) ongoing implementation of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’ or ‘‘Act’’) to reduce 

systemic risks, enhance transparency and better protect investors, as well as other 

steps taken to improve financial stability, close regulatory gaps, and better coordinate with domestic and international regulators. 1

The Dodd-Frank Act gave the SEC significant new responsibilities, requiring the 

agency to undertake the largest and most complex rulemaking agenda in its history. 

The Act includes some 90 provisions that require SEC rulemaking and more than 

20 other provisions that require studies or reports. In addition, the Act and the financial crisis focused the SEC’s efforts more directly on enhancing financial stability 

and the reduction of systemic risk. 

The SEC has made substantial progress implementing this agenda, even as we 

have continued our core responsibilities of pursuing securities violations, reviewing 

public company disclosures and financial statements, inspecting the activities of regulated entities, and maintaining fair and efficient markets, including enhancements 

to our equity market structure. 

Since I became SEC Chair in April of 2013, the Commission has focused on eight 

key areas addressed by the Dodd-Frank Act: credit rating agencies; asset-backed securities; municipal advisors; asset management, including regulation of private fund 

advisers; over-the-counter derivatives; clearance and settlement; proprietary activities by financial institutions; and executive compensation. In furtherance of those 

regulatory objectives, the Commission has, to date, implemented new restrictions on 

the proprietary activities of financial institutions through the Volcker Rule, created 

a wholly new regulatory framework for municipal advisors, and advanced significant 

new standards for the clearing agencies that stand at the center of our financial system. We also have finalized critical Dodd-Frank Act rules intended to strengthen 

the integrity of credit ratings, reducing conflicts of interest in ratings and improving 

their transparency. We have adopted significantly enhanced disclosures for assetbacked securitizations and completed structural and operational reforms to address 

risks of investor runs in money market funds. We have pushed forward new rules 

for previously unregulated derivatives and begun implementing additional executive 

compensation disclosures. And we have put in place strong new controls on brokerdealers that hold customer assets, reduced reliance on credit ratings, and barred 

bad actors from private securities offerings. Since April 2013, the SEC has proposed 

or adopted nearly 20 significant Dodd-Frank Act rules, in addition to adopting structural reforms for money market funds, which were highlighted as a systemic vulnerVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00076 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
73 

2See Release No. 33-9175, ‘‘Disclosure for Asset-Backed Securities Required by Section 943 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act’’ (January 20, 2011), 

http://www.sec.gov/rules/final/2011/33-9175.pdf. In addition, pursuant to Section 939B of the 

Act, the Commission issued an amendment to Regulation FD to remove the specific exemption 

from the rule for disclosures made to NRSROs and credit rating agencies for the purpose of determining or monitoring credit ratings. See Release No. 33-9146, ‘‘Removal from Regulation FD 

of the Exemption for Credit Rating Agencies’’ (September 29, 2010), http://www.sec.gov/rules/ 

final/2010/33-9146.pdf. 3See Release No. 34-72936, ‘‘Nationally Recognized Statistical Rating Organizations’’ (August 

27, 2014), http://www.sec.gov/rules/final/2014/34-72936.pdf. 4 Credit Rating Standardization Study (September 2012), http://www.sec.gov/news/studies/ 

2012/939hlcreditlratinglstandardization.pdf. 5 Report to Congress on Assigned Credit Ratings (December 2012), http://www.sec.gov/news/ 

studies/2012/assigned-credit-ratings-study.pdf. 6 Report to Congress on Credit Rating Agency Independence Study (November 2013), http:// 

www.sec.gov/news/studies/2013/credit-rating-agency-independence-study-2013.pdf. 

ability in the financial crisis. Attached as Appendix A is a detailed summary of the 

agency’s required Dodd-Frank Act rulemaking, which reflects that the Commission 

has proposed or adopted rules with respect to approximately 90 percent of all of the 

provisions of the Dodd-Frank Act that mandate Commission rulemaking. 

We have worked closely with our fellow financial regulators to ensure that our 

financial regulatory system works together to protect against risks, both by promoting financial stability and supporting a sensible and integrated financial regulatory framework that works effectively for market participants. The Financial Stability Oversight Council (FSOC) established by the Dodd-Frank Act, in which I participate as a member, also serves an important role in this effort. 

While the SEC has made significant progress, more remains to be done on both 

our Dodd-Frank Act and Jumpstart Our Business Startups (JOBS) Act rulemakings, 

and we must continue our work with intensity. As we do so, we must be deliberate 

as we consider and prioritize our remaining mandates and deploy our broadened 

regulatory authority, supported by robust economic analysis. Progress will ultimately be measured based on whether we have implemented rules that create a 

strong and effective regulatory framework and stand the test of time under intense 

scrutiny in rapidly changing financial markets. Our responsibility is much greater 

than simply ‘‘checking the box’’ and declaring the job done. We must be focused on 

fundamental and lasting reform. 

As requested by the Committee, my testimony today will provide an overview of 

the Commission’s Dodd-Frank Act implementation and discuss those rules that are 

yet to be completed. 

Credit Ratings 

The Dodd-Frank Act requires the Commission to undertake a number of 

rulemakings related to nationally recognized statistical rating organizations 

(NRSROs). The Commission began the process of implementing these mandates 

with the adoption of a rule in January 2011 2 requiring NRSROs to provide a description of the representations, warranties, and enforcement mechanisms available 

to investors in an offering of asset-backed securities, including how they differ from 

those of similar offerings. Last month, the Commission completed its required rulemaking for NRSROs by adopting rules requiring NRSROs to, among other things: 

(1) report on internal controls; (2) protect against potential conflicts of interest; (3) 

establish professional standards for credit analysts; (4) publicly provide—along with 

the publication of a credit rating—disclosure about the credit rating and the methodology used to determine it; and (5) enhance their public disclosures about the performance of their credit ratings. 3 These rules create an extensive framework of robust reforms and will significantly strengthen the governance of NRSROs. The reforms will also significantly enhance the transparency of NRSRO activities and 

thereby promote greater scrutiny and accountability of NRSROs. Together, this 

package of reforms should improve the overall quality of NRSRO credit ratings and 

protect against the reemergence of practices that contributed to the recent financial 

crisis. 

The Dodd-Frank Act also mandated three studies relating to credit rating agencies: (1) a study on the feasibility and desirability of standardizing credit rating terminology, which was published in September 2012; 4 (2) a study on alternative compensation models for rating structured finance products, which was published in December 2012; 5 and (3) a study on NRSRO independence, which was published in 

November 2013. 6 In response to the study on alternative compensation models for 

rating structured finance products, the Commission held a public roundtable in May 

2013 to invite discussion regarding, among other things, the courses of action discussed in the report. The staff has considered the various viewpoints presented durVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00077 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
74 

7 2013 Summary Report of Commission Staff’s Examinations of Each Nationally Recognized 

Statistical Rating Organization (December 2013), http://www.sec.gov/news/studies/2013/ 

nrsro-summary-report-2013.pdf. 8See Release No. 34-60789, ‘‘References to Ratings of Nationally Recognized Statistical Rating 

Organizations’’, (October 5, 2009) (pre- Dodd-Frank Act adopting amendments to remove references to credit ratings in certain Commission rules) http://www.sec.gov/rules/final/2009/34- 

60789.pdf; Release No. 33-9245, ‘‘Security Ratings’’, (July 27, 2011) (post- Dodd-Frank Act adopting amendments to remove references to credit ratings in certain Commission rules) http:// 

www.sec.gov/rules/final/2011/33-9245.pdf; Release No. 33-9506, ‘‘Removal of Certain References to Credit Ratings Under the Investment Company Act’’, (December 27, 2013) (postDodd-Frank Act adopting amendments to remove references to credit ratings in certain Commission rules), http://www.sec.gov/rules/final/2013/33-9506.pdf; Release No. 34-71194, ‘‘Removal 

of Certain References to Credit Ratings Under the Securities Exchange Act of 1934’’, (December 

27, 2013) (post- Dodd-Frank Act adopting amendments to remove references to credit ratings 

in certain Commission rules), http://www.sec.gov/rules/final/2013/34-71194.pdf. 9See Release No. 34-72936, ‘‘Nationally Recognized Statistical Rating Organizations’’ (August 

27, 2014), http://www.sec.gov/rules/final/2014/34-72936.pdf. 10See Release No. 33-9175, ‘‘Disclosure for Asset-Backed Securities Required by Section 943 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act’’ (January 20, 2011), 

http://www.sec.gov/rules/final/2011/33-9175.pdf. 11See Release No. 33-9176, ‘‘Issuer Review of Assets in Offerings of Asset-Backed Securities’’ 

(January 20, 2011), http://www.sec.gov/rules/final/2011/33-9176.pdf. 12See Release No. 34-65148, ‘‘Suspension of the Duty To File Reports for Classes of AssetBacked Securities Under Section 15(d) of the Securities Exchange Act of 1934’’ (August 17, 

2011), http://www.sec.gov/rules/final/2011/34-65148.pdf. 13See Release No. 33-9638, ‘‘Asset-Backed Securities Disclosure and Registration’’ (August 27, 

2014), http://www.sec.gov/rules/final/2014/33-9638.pdf. 

ing discussion at the roundtable, as well as in the related public comment letters, 

and is discussing potential approaches with the Commission. 

As required by the Dodd-Frank Act, the Commission established an Office of 

Credit Ratings (OCR) charged with administering the rules of the Commission with 

respect to NRSROs, promoting accuracy in credit ratings issued by NRSROs, and 

helping to ensure that credit ratings are not unduly influenced by conflicts of interest and that NRSROs provide greater disclosure to investors. As required by the 

Dodd-Frank Act, OCR conducts examinations of each NRSRO at least annually and 

the Commission makes available to the public an annual report summarizing the 

essential exam findings. The third annual report of the staff’s examinations was 

published in December 2013. 7

The Dodd-Frank Act also requires the SEC, to the extent applicable, to review its 

regulations that require use of credit ratings as an assessment of the creditworthiness of a security, remove these references, and replace them with appropriate 

standards of creditworthiness. The Commission has adopted final amendments that 

remove references to credit ratings from most of its rules and forms that contained 

such references, including rules adopted in December 2013 removing references to 

credit ratings in certain provisions applicable to investment companies and brokerdealers, 8 and in August 2014 new requirements to replace the credit rating references in shelf eligibility criteria for asset-backed security offerings with new shelf 

eligibility criteria. 9

Asset-Backed Securities 

The Commission has completed implementing several significant provisions of the 

Dodd-Frank Act related to asset-backed securities (ABS), and I have focused the 

staff and Commission on finalizing the remaining mandates. Within a year of the 

enactment of the Act, the Commission adopted rules to implement Sections 943 and 

945 of the Act. The rules implementing Section 943 require ABS issuers to disclose 

the history of repurchase requests received and repurchases made relating to their 

outstanding ABS. 10 The rules implementing Section 945 require an asset-backed 

issuer in offerings registered under the Securities Act of 1933 (Securities Act) to perform a review of the assets underlying the ABS that must be designed and effected 

to provide reasonable assurance that the prospectus disclosure about the assets is 

accurate in all material respects and disclose the nature of such review. 11 Shortly 

after the 1-year anniversary of the Act, the Commission adopted rules in connection 

with Section 942(a) of the Act, which eliminated the automatic suspension of the 

duty to file reports under Section 15(d) of the Exchange Act for ABS issuers and 

granted the Commission authority to issue rules providing for the suspension or termination of this duty to file reports. 12

Just last month, the Commission adopted expansive new requirements for enhanced disclosures for ABS, including requiring standardized asset-level data for 

certain asset classes. 13 For those asset classes, the new requirements implement 

Section 942(b) of the Act, which directed the Commission to adopt regulations to reVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00078 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
75 

14See Release No. 34-64148, ‘‘Credit Risk Retention’’ (March 30, 2011), http://www.sec.gov/ 

rules/proposed/2011/34-64148.pdf. Section 941 of the Act generally requires the Commission, 

the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and, in the case of the securitization of any ‘‘residential mortgage asset,’’ 

the Federal Housing Finance Agency and Department of Housing and Urban Development, to 

jointly prescribe regulations that require a securitizer to retain not less than 5 percent of the 

credit risk of any asset that the securitizer, through the issuance of an ABS, transfers, sells, 

or conveys to a third party. It also provides that the jointly prescribed regulations must prohibit 

a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that 

the securitizer is required to retain. See 15 U.S.C. §78o-11(c)(1)(A). 15See Release No. 33-34-70277, ‘‘Credit Risk Retention’’ (August 28, 2013), http:// 

www.sec.gov/rules/proposed/2013/34-70277.pdf. 16See Release No. 34-65355, ‘‘Prohibition Against Conflicts of Interest in Certain 

Securitizations’’ (September 19, 2011), http://www.sec.gov/rules/proposed/2011/34-65355.pdf. 17 In September 2010, the Commission adopted, and subsequently extended, an interim final 

rule establishing a temporary means for municipal advisors to satisfy the registration requirement. See Release No. 34-62824, ‘‘Temporary Registration of Municipal Advisors’’, (September 

1, 2010), http://www.sec.gov/rules/interim/2010/34-62824.pdf. The Commission received over 

1,200 confirmed registrations of municipal advisors pursuant to this temporary rule. 18See ‘‘Registration of Municipal Advisors’’, Release No. 34-70462 (September 20, 2013), 

http://www.sec.gov/rules/final/2013/34-70462.pdf. See also ‘‘Registration of Municipal Advisors Frequently Asked Questions’’ (issued on January 10, 2014, and last updated on May 19, 

2014), http://www.sec.gov/info/municipal/mun-advisors-faqs.pdf. The staff in the Office of Municipal Securities provided this interpretive guidance to address certain questions that arose 

from municipal market participants relating to the implementation of the final rules. 

quire asset-level information to the extent necessary for investors to independently 

perform due diligence. The final rules require that prospectuses and ongoing reports 

of securities backed by assets related to real estate or automobiles, or backed by 

debt securities, contain detailed asset-level information about each of the assets in 

the pool. The Commission continues to consider whether asset-level disclosure would 

be useful to investors across other asset classes. The rules also provide investors 

with more time to consider transaction-specific information, including information 

about the pool assets. These measures should better protect investors in these markets by providing important data and other information that will allow investors to 

conduct diligence on asset-backed securities that is independent of a credit rating 

agency. Although not mandated by the Dodd-Frank Act, the staff continues to monitor the private placement securitization markets to determine whether they should 

recommend advancing similar measures for those markets. 

In addition, the Commission is working with other Federal regulators to jointly 

develop risk retention rules, as required by Section 941 of the Act. These rules will 

address the appropriate amount, form, and duration of required risk retention for 

securitizers of ABS. In March 2011, the Commission joined its fellow regulators in 

proposing rules to implement Section 941 14 and, after careful consideration of the 

many comments received, in August 2013 reproposed these rules with several significant modifications. 15 Together with the other agencies, we have made significant 

progress toward developing a final rule and we are nearing the final stages of that 

rulemaking. 

In September 2011, the Commission proposed a rule to implement Section 621 of 

the Act, which prohibits entities that create and distribute ABS from engaging in 

transactions that involve or result in material conflicts of interest with respect to 

the investors in such ABS. 16 The proposed rule would prohibit underwriters and 

other ‘‘securitization participants’’ from engaging in such transactions with respect 

to both nonsynthetic and synthetic asset-backed securities, whether in a registered 

or unregistered offering. The proposal is not intended to prohibit legitimate 

securitization activities, and the Commission asked questions in the release to help 

strike an appropriate balance. The proposal generated substantial comment that included requests for significant alterations to the proposed rule, which the staff is 

carefully considering in preparing its recommendation for consideration by the Commission. 

Municipal Securities 

The Dodd-Frank Act imposed a new requirement that ‘‘municipal advisors’’ register with the SEC. This registration requirement applies to persons who provide 

advice to municipal entities or obligated persons on municipal financial products or 

the issuance of municipal securities, or who solicit municipal entities or obligated 

persons. 17 In September 2013, the Commission adopted final rules for municipal advisor registration. 18 The new registration requirements and regulatory standards 

aim to address problems observed with the conduct of some municipal advisors, including failure to place the duty of loyalty to their municipal entity client ahead of 

76 

19See Release No. 34-71288, ‘‘Registration of Municipal Advisors’’; Temporary Stay of Final 

Rule, (January 13, 2014), http://www.sec.gov/rules/final/2014/34-71288.pdf. 20The final rules require municipal advisors to register with the SEC by completing a Form 

MA and to provide information regarding natural persons associated with the municipal advisor 

and engaged in municipal advisory activities on such municipal advisor’s behalf by completing 

a Form MA-I for each such natural person. 21To search by a municipal advisor company’s name, see http://www.sec.gov/edgar/ 

searchedgar/companysearch.html. 22See ‘‘Industry Letter for the Municipal Advisor Examination Initiative’’ (August 19, 2014), 

available at: http://www.sec.gov/about/offices/ocie/muni-advisor-letter-081914.pdf. 23See Section 979 of the Dodd-Frank Act. 24See recommendations in the ‘‘Commission’s Report on the Municipal Securities Market’’ 

(July 31, 2012), http://www.sec.gov/news/studies/2012/munireport073112.pdf. 25See Release No. IA-3221, ‘‘Rules Implementing Amendments to the Investment Advisers 

Act of 1940’’ (June 22, 2011), http://www.sec.gov/rules/final/2011/ia-3221.pdf. 26 Id. 

their own interests, undisclosed conflicts of interest, advice rendered by financial advisors without adequate training or qualifications, and ‘‘pay to play’’ practices. 

Municipal advisors were required to comply with the final rules as of July 1, 

2014, 19 and to register with the SEC using the final registration forms during a 

4-month phased-in compliance period, which began on July 1, 2014. 20 Except for 

certain personally identifiable information, the SEC municipal advisor registration 

information is available to the public through the SEC’s Electronic Data Gathering, 

Analysis, and Retrieval (EDGAR) system Web site. 21

In addition, Commission staff in August of this year launched an examination initiative to conduct focused, risk-based examinations of municipal advisors. 22 These 

examinations will be specifically focused and shorter in duration than typical examinations. The initiative is designed both to provide targeted outreach to inform new 

municipal advisor registrants of their obligations as registered entities and to permit the Commission to examine a significant percentage of new municipal advisor 

registrants. Additionally, Commission staff will oversee the Financial Industry Regulatory Authority (FINRA) staff in its examinations of municipal advisors that are 

also FINRA members. 

The Dodd-Frank Act also required the Commission to establish an Office of Municipal Securities (OMS), reporting directly to the Chair, to administer the rules 

pertaining to broker-dealers, municipal advisors, investors and issuers of municipal 

securities, and to coordinate with the Municipal Securities Rulemaking Board 

(MSRB) on rulemaking and enforcement actions. 23 During its first 2 years of operations, OMS devoted its attention primarily to finalizing and implementing the municipal advisor registration rules, including providing interpretive guidance to market participants and participating in the review of municipal advisor registrations. 

Over the next year, OMS expects to continue to devote significant attention to implementing these final rules, to review a considerable number of rule filings by the 

MSRB related to municipal advisor regulation, and to coordinate with SEC examination staff in their examinations of municipal advisors. In addition, OMS also continues to monitor current issues in the municipal securities market (such as pension 

disclosure, accounting, and municipal bankruptcy issues) and to assist in considering further recommendations to the Commision with respect to disclosure, market 

structure, and price transparency in the municipal securities markets. 24

Private Fund Adviser Registration and Reporting 

Title IV of the Dodd-Frank Act directed the Commission to implement a number 

of provisions designed to enhance the oversight of private fund advisers, including 

registration of advisers to hedge funds and other private funds that were previously 

exempt from SEC registration. These provisions enable regulators to have a more 

comprehensive view of private funds and the investment advisers managing those 

assets. 

The SEC’s implementation of required rulemaking under Title IV is complete. In 

June 2011, the Commission adopted rules requiring advisers to hedge funds and 

other private funds to register by March 2012, addressing what had once been a sizable gap in regulators’ ability to monitor for systemic risk and potential misconduct. 25 As a result of the Dodd-Frank Act and the SEC’s new rules, the number 

of SEC-registered private fund advisers has increased by more than 50 percent to 

4,322 advisers. Even after accounting for the shift of mid-sized advisers to State registration pursuant to the Dodd-Frank Act, 26 the total amount of assets managed by 

SEC-registered advisers has increased significantly from $43.8 trillion in April 2011 

to $62.3 trillion in August 2014, while the total number of SEC-registered advisers 

has remained relatively unchanged from 11,505 to 11,405. 

77 

27See Release No. IA-3308, ‘‘Reporting by Investment Advisers to Private Funds and Certain 

Commodity Pool Operators and Commodity Trading Advisors on Form PF’’; Joint Final Rule 

(October 21, 2011), http://www.sec.gov/rules/final/2011/ia-3308.pdf. 28See ‘‘Annual Staff Report Regarding the Use of Data Collected from Private Fund Systemic 

Risk Reports’’ (August 15, 2014), http://www.sec.gov/reportspubs/special-studies/im-privatefund-annual-report-081514.pdf. 29See ‘‘IM Guidance Update 2014-08, Private Funds and the Application of the Custody Rule 

to Special Purpose Vehicles and Escrows’’ (June 2014), http://www.sec.gov/investment/im-guidance-2014-07.pdf. 30 Id. 31See ‘‘IM Guidance Update 2013-04, Privately Offered Securities under the Investment Advisers Act Custody Rule’’ (August 2013), http://www.sec.gov/divisions/investment/guidance/ 

im-guidance-2013-04.pdf. 32See ‘‘SEC No-Action Letter, Managed Funds Association’’ (February 6, 2014), http:// 

www.sec.gov/divisions/investment/noaction/2014/managed-funds-association-020614.htm. 33See ‘‘IM Guidance Update 2013-10, Status of Certain Private Fund Investors as Qualified 

Clients’’ (November 2013), http://www.sec.gov/divisions/investment/guidance/im-guidance2013-10.pdf. 34See ‘‘IM Guidance Update, Guidance on the Exemption for Advisers to Venture Capital 

Funds’’ (December 2013), http://www.sec.gov/divisions/investment/guidance/im-guidance2013-13.pdf. 

For private fund advisers required to be registered with the Commission, pursuant to the Dodd-Frank Act the Commission adopted confidential systemic risk reporting requirements on Form PF in October 2011 to assist the FSOC in systemic 

risk oversight. 27 As required by the Act, Form PF was designed in consultation with 

FSOC, and the data filed on Form PF has been made available to the Office of Financial Research within the Department of the Treasury. 

To date, approximately 2,700 investment advisers have filed Form PF reporting 

information on approximately 8,000 hedge funds, 70 liquidity funds, and 7,000 private equity funds. During the past year, the Commission’s staff has focused its efforts on utilizing Form PF data in examinations and investigations of private fund 

advisers, using Form PF data in the Commission’s risk monitoring activities, providing additional guidance to filers, and working with other Federal regulators and 

international organizations regarding issues relating to private fund advisers. As required by the Dodd-Frank Act, Commission staff transmitted an annual report to 

Congress this past August on these uses. 28

During the past 2 years, Commission staff reviewed the Advisers Act and its rules 

and provided guidance regarding their application to private fund advisers, including guidance to clarify: the application of the custody rule when advisers to audited 

private funds utilize special purpose vehicles; 29 how the custody rule applies to escrows utilized by private fund advisers upon the sale of a portfolio company; 30 when 

an adviser to an audited private fund may itself maintain custody of private stock 

certificates instead of holding them at a third-party custodian; 31 the definition of 

‘‘knowledgeable employees’’ for purposes of the Investment Company Act; 32 when 

certain private fund investors are ‘‘qualified clients’’ under the Advisers Act; 33 and 

the application of the venture capital exemption in certain common scenarios. 34

In addition, I anticipate that in October 2014, Commission staff will conclude a 

2-year initiative to conduct focused, risk-based exams of newly registered private 

fund advisers. These ‘‘presence’’ examinations have been shorter in duration and 

more streamlined than typical examinations, and have been designed both to engage 

with the new registrants to inform them of their obligations as registered entities 

and to permit the Commission to examine a higher percentage of new registrants. 

The initiative has included outreach, as well as examinations that have focused on 

five critical areas: (1) marketing; (2) portfolio management; (3) conflicts of interest; 

(4) safety of client assets; and (5) valuation. As of early September 2014, staff had 

completed approximately 340 examinations of newly registered private fund advisers, and over 40 additional examinations are underway. 

Over-the-Counter Derivatives 

The Dodd-Frank Act established a new oversight regime for the over-the-counter 

derivatives marketplace. Title VII of the Act requires the Commission to regulate 

‘‘security-based swaps’’ and to write rules that address, among other things: mandatory clearing and the end-user exemption; trade reporting and trade execution; the 

operation of clearing agencies, trade data repositories, and trade execution facilities; 

capital, margin, and segregation requirements and business conduct standards for 

dealers and major market participants; and public transparency for transactional information. Such rules are intended to achieve a number of goals, including: 

• Facilitating the centralized clearing of security-based swaps, whenever possible 

and appropriate, with the intent of reducing counterparty and systemic risk; 

78 

35See ‘‘Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major 

Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based 

Swap Dealers’’, Release No. 34-71958 (April 17, 2014), http://www.sec.gov/rules/proposed/ 

2014/34-71958.pdf. 36See ‘‘Standards for Covered Clearing Agencies’’, Release No. 34-71699 (March 12, 2014), 

http://www.sec.gov/rules/proposed/2014/34-71699.pdf. 37See Release No. 34-72474, ‘‘Application of ‘Security-Based Swap Dealer’ and ‘Major Security-Based Swap Participant’ Definitions to Cross-Border Security-Based Swap Activities’’ (June 

25, 2014), http://www.sec.gov/rules/final/2014/34-72472.pdf. 38See Release No. 34-69490, ‘‘Cross-Border Security-Based Swap Activities; Re-Proposal of 

Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based 

Swap Dealers and Major Security-Based Swap Participants’’ (May 1, 2013), http://sec.gov/ 

rules/proposed/2012/34-68071.pdf. 39See Release No. 34-63346, ‘‘Regulation SBSR—Reporting and Dissemination of SecurityBased Swap Information’’ (November 19, 2010), http://www.sec.gov/rules/proposed/2010/34- 

63346.pdf; and Release No. 34-63347, ‘‘Security-Based Swap Data Repository Registration, Duties, and Core Principles’’ (November 19, 2010), http://www.sec.gov/rules/proposed/2010/34- 

63347.pdf. In 2013, the Commission reproposed Regulation SBSR. See Release No. 34-69490, 

‘‘Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain 

Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants’’ (May 1, 2013), http://www.sec.gov/rules/proposed/2013/34- 

69490.pdf; and Release No. 34-69491. 40See Release No. 34-65543, ‘‘Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants’’ (October 12, 2011), http://www.sec.gov/rules/proposed/2011/34- 

65543.pdf; Release No. 34-68071, ‘‘Capital, Margin, and Segregation Requirements for SecurityBased Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for 

Broker-Dealers’’ (October 18, 2012), http://www.sec.gov/rules/proposed/2012/34-68071.pdf; Release No. 34-64766, ‘‘Business Conduct Standards for Security-Based Swaps Dealers and Major 

Security-Based Swap Participants’’ (June 29, 2011), http://www.sec.gov/rules/proposed/2011/ 

34-64766.pdf; and Release No. 34-63727, ‘‘Trade Acknowledgment and Verification on Security- 

• Increasing transparency for market participants and regulators in their efforts 

to monitor the market and, as appropriate, address risks to financial stability; 

• Increasing security-based swap transaction disclosure; 

• Reducing counterparty and systemic risk through capital, margin and segregation requirements for nonbank dealers and major market participants; and 

• Addressing potential conflict of interest issues relating to security-based swaps. 

Since I testified before this Committee last February, the Commission has proposed rules relating to books and records 35 and proposed rules to enhance the oversight of clearing agencies deemed to be systemically important or that are involved 

in complex transactions, such as security-based swaps. 36 With these steps, the Commission has now proposed all the core rules required by Title VII of the Dodd-Frank 

Act. 

Most recently, in June of this year, the Commission adopted the critical, initial 

set of cross-border rules and guidance, focusing on the swap dealer and major swap 

participant definitions. 37 The rules and guidance explain when a cross-border transaction must be counted toward the requirement to register as a security-based swap 

dealer or major security-based swap participant. The rules also address the scope 

of the SEC’s cross-border antifraud authority. In addition, the Commission adopted 

a procedural rule regarding the submission of ‘‘substituted compliance’’ requests. 

This rule represents a major step in the Commission’s efforts to establish a framework to address circumstances in which market participants may be subject to more 

than one set of comparable regulations across different jurisdictions. 

These rules and guidance focus on a central aspect of the Commission’s May 2013 

comprehensive proposal regarding the application of Title VII to cross-border security-based swap transactions. 38 The cross-border application of other substantive requirements of Title VII will be addressed in subsequent releases, resulting in final 

rules in a particular substantive area that apply to the full range of security-based 

swap transactions, not just purely domestic ones. I believe that this integrated approach will reduce undue costs and provide a more orderly implementation process 

for both regulators and market participants. In addition, the Commission previously 

adopted a number of key definitional and procedural rules, provided a ‘‘roadmap’’ 

for the further implementation of its Title VII rulemaking, and took other actions 

to provide legal certainty to market participants during the implementation process. 

Commission staff also continues to work intensively on recommendations for final 

rules required by Title VII that have been proposed but not yet adopted. These final 

rules will address regulatory reporting and post-trade public transparency; 39 security-based swap dealer and major security-based swap participant requirements, including business conduct and financial responsibility requirements; 40 mandatory 

79 

Based Swap Transactions’’ (January 14, 2011), http://www.sec.gov/rules/proposed/2011/34- 

63727.pdf. 41See Release No. 34-63556, ‘‘End-User Exception of Mandatory Clearing of Security-Based 

Swaps’’ (December 15, 2010), http://www.sec.gov/rules/proposed/2010/34-63556.pdf; Release 

No. 34-63107, ‘‘Ownership Limitations and Governance Requirements for Security-Based Swap 

Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges With Respect to Security-Based Swaps under Regulation MC’’ (October 14, 2010), 

http://www.sec.gov/rules/proposed/2010/34-63107.pdf; and ‘‘Registration and Regulation of Security-Based Swap Execution Facilities’’ (February 2, 2011), http://www.sec.gov/rules/proposed/2011/34-63825.pdf. 42See Release No. 34-63236, ‘‘Prohibition Against Fraud, Manipulation, and Deception in 

Connection With Security-Based Swaps’’ (November 3, 2010), http://www.sec.gov/rules/proposed/2010/34-63236.pdf. 43Section 803(6) of the Dodd-Frank Act defines a financial market utility as ‘‘any person that 

manages or operates a multilateral system for the purpose of transferring, clearing, or settling 

payments, securities, or other financial transactions among financial institutions or between financial institutions and the person.’’ 44See Release No. 34-69284, ‘‘Amendment to Rule Filing Requirements for Dually-Registered 

Clearing Agencies’’ (April 3, 2013), http://www.sec.gov/rules/final/2014/34-69284.pdf. 45See Release No. 34-68080, ‘‘Clearing Agency Standards’’ (October 22, 2012), http:// 

www.sec.gov/rules/final/2012/34-68080.pdf. 46See Release No. 34-71699, ‘‘Standards for Covered Clearing Agencies’’ (March 12, 2014), 

http://www.sec.gov/rules/proposed/2014/34-71699.pdf. 

clearing, the end-user exemption and trade execution, and the regulation of clearing 

agencies and security-based swap execution facilities; 41 and enforcement and market integrity, including swap-specific antifraud measures. 42 In addition, I expect 

that the Commission will soon consider the application of mandatory clearing requirements to single-name credit default swaps, starting with those that were first 

cleared prior to the enactment of the Dodd-Frank Act. 

In March 2012, the Commission adopted rules providing exemptions under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture 

Act of 1939 for security-based swaps transactions involving certain clearing agencies 

satisfying certain conditions. See Release No. 33-9308, ‘‘Exemptions for SecurityBased Swaps Issued by Certain Clearing Agencies’’ (March 30, 2012), http:// 

www.sec.gov/rules/final/2012/33-9308.pdf. 

Clearing Agencies 

Title VIII of the Dodd-Frank Act provides for increased regulation of financial 

market utilities 43 (FMUs) and financial institutions that engage in payment, clearing, and settlement activities designated as systemically important. The purpose of 

Title VIII is to mitigate systemic risk in the financial system and promote financial 

stability. In addition, Title VII of the Dodd-Frank Act requires, among other things, 

that an entity acting as a clearing agency with respect to security-based swaps register with the Commission and that the Commission adopt rules with respect to 

clearing agencies that clear security-based swaps. 

Registration of Security-Based Swap Clearing Agencies 

There are now three clearing agencies registered with the Commission to clear security-based swaps, and Commission staff maintains regular channels of communication with those clearing agencies regarding their operations. In 2013, the Commission also amended its established rule filing procedures to accommodate the special circumstances of clearing agencies registered with both the Commission and the 

Commodity Futures Trading Commission (CFTC) to help ensure that the new regulatory regime for security-based swaps operates as intended and without undue burdens on dually registered security-based swap clearing agencies. 44

Clearing Agency Standards 

To further the objectives of Title VIII and promote the integrity of clearing agency 

operations and governance, the Commission adopted rules in October 2012 requiring 

all registered clearing agencies to maintain certain standards with respect to risk 

management and certain operational matters. 45 The rules also contain specific requirements for clearing agencies that perform central counterparty services, such as 

provisions governing credit exposures and the financial resources of the clearing 

agency, and establish record keeping and financial disclosure requirements for all 

registered clearing agencies. 

In March of this year, the Commission proposed a series of additional clearing 

agency standards. 46 The proposed rules would establish a new category of ‘‘covered 

clearing agency’’ subject to enhanced standards. The comment period on the proVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00083 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
80 

47 Clearing agencies that have been designated systemically important are Chicago Mercantile 

Exchange, Inc., The Depository Trust Company, Fixed Income Clearing Corporation, ICE Clear 

Credit LLC, National Securities Clearing Corporation, and The Options Clearing Corporation. 48See Section 805(a)(2) of the Dodd-Frank Act. Commission staff also worked jointly with the 

staffs of the CFTC and the Board to submit a report required under the Dodd-Frank Act to Congress in July 2011 discussing recommendations regarding risk management supervision of clearing entities that are DFMUs. See also ‘‘Risk Management Supervision of Designated Clearing 

Entities’’, Report by the Commission, Board and CFTC to the Senate Committees on Banking, 

Housing, and Urban Affairs and Agriculture pursuant to Section 813 of Title VIII of the DoddFrank Act (July 2011), http://www.sec.gov/news/studies/2011/813study.pdf. 49See Section 806(e)(4) of the Dodd-Frank Act. 50See Release No. 34-67286, ‘‘Process for Submissions for Review of Security-Based Swaps for 

Mandatory Clearing and Notice Filing Requirements for Clearing Agencies’’; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations (June 28, 

2012), http://www.sec.gov/rules/final/2012/34-67286.pdf. 51 Advance notices are published on the Commission Web site at http://www.sec.gov/rules/ 

sro.shtml. 52See Release No. BHCA-1, ‘‘Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds’’ (December 

10, 2013), http://www.sec.gov/rules/final/2013/bhca-1.pdf. The CFTC (CFTC) adopted the 

same rule on the same date. See http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/federalregister121013.pdf. On January 14, 2014, the Commission, together with the 

Federal banking agencies and the CFTC, approved a companion interim final rule that permits 

banking entities to retain interests in certain collateralized debt obligations backed primarily 

by trust preferred securities. See Release No. BHCA-2, ‘‘Treatment of Certain Collateralized 

Debt Obligations Backed Primarily by Trust Preferred Securities With Regard to Prohibitions 

and Restrictions on Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds’’ (January 17, 2014), http://www.sec.gov/rules/interim/2014/bhca-2.pdf. 

posal closed in May 2014, and Commission staff is preparing a recommendation to 

the Commission for final rules. 

The proposed rules benefited from consultations between the Commission staff 

and staffs of the CFTC and the Board of Governors of the Federal Reserve System 

(the ‘‘Board’’), and are designed to further strengthen the Commission’s oversight of 

securities clearing agencies and promote consistency in the regulation of clearing organizations generally, thereby helping to ensure that clearing agency regulation reduces systemic risk in the financial markets. 

Systemically Important Clearing Agencies 

Under Title VIII, FSOC is authorized to designate an FMU as systemically important if the failure or a disruption to the functioning of the FMU could create or increase the risk of significant liquidity or credit problems spreading among financial 

institutions or markets and thereby threaten the stability of the U.S. financial system. SEC staff participates in the interagency committee established by FSOC to 

develop a framework for the designation of systemically important FMUs. In July 

2012, FSOC designated six clearing agencies registered with the Commission as systemically important FMUs under Title VIII. 47

Title VIII also provides a framework for an enhanced supervisory regime for designated FMUs, including oversight in consultation with the Board and FSOC. The 

Commission is expected to consider regulations containing risk management standards for the designated FMUs it supervises, taking into consideration relevant international standards and existing prudential requirements for such FMUs. 48 The 

Commission also is required to examine such FMUs annually, and to consider certain advance notices identifying changes to its rules, procedures, or operations that 

could materially affect the nature or level of risks presented by the FMU in consultation with the Board. 49

In June 2012, the Commission adopted rules that establish procedures for how it 

will address advance notices of significant rule filings from the FMUs, 50 and it has 

since considered a significant number of such notices. 51 Commission staff also has 

completed the second series of annual examinations of the designated FMUs for 

which it acts as supervisory agency and recently initiated the third series of annual 

examinations. 

Volcker Rule 

On December 10, 2013, the Commission joined the Board, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) 

(collectively, the ‘‘Federal banking agencies’’), and the CFTC in adopting the same 

rule under the Bank Holding Company Act to implement Section 619 of the DoddFrank Act, known as the ‘‘Volcker Rule’’. 52

Consistent with Section 619, the final rule generally restricts ‘‘banking entities’’— 

including bank-affiliated, SEC-registered broker-dealers, security-based swap dealVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00084 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
81 

53See Release No. 33-9178, ‘‘Shareholder Approval of Executive Compensation and Golden 

Parachute Compensation’’ (January 25, 2011), http://www.sec.gov/rules/final/2011/33- 

9178.pdf. 54See Release No. 34-63123, ‘‘Reporting of Proxy Votes on Executive Compensation and Other 

Matters’’ (October 18, 2010), http://www.sec.gov/rules/proposed/2010/34-63123.pdf. 55See Release No. 33-9330, ‘‘Listing Standards for Compensation Committees’’ (June 20, 

2012), http://www.sec.gov/rules/final/2012/33-9330.pdf. 

ers, and investment advisers—from engaging in proprietary trading, sponsoring 

hedge funds and private equity funds, or investing in such funds. 

As with any regulatory initiative of this scope and complexity, the final rule demands close attention to the nature and pace of implementation, particularly with 

respect to smaller banking entities. The Dodd-Frank Act provides a period for banking entities to bring their activities and investments into conformance with Section 

619 that is scheduled to end on July 21, 2015. During the conformance period, the 

largest trading firms must begin to record and report certain quantitative measurements. The first of these data submissions were received on September 2. Staged 

implementation of metrics reporting and enhanced compliance standards will continue after the end of the conformance period based on size and activity thresholds. 

Among other benefits, this incremental approach will allow the agencies to review 

the data collection and revise or tailor its application, as appropriate. 

Currently, the regulatory agencies and banking entities are closely focused on implementation of the final rule. The collaborative relationships among the agencies 

that developed during the rulemaking process are carrying forward and are supporting closely coordinated staff guidance and action. The interagency working 

group meets regularly to discuss implementation issues including, among other 

things, coordinated responses to interpretive questions, technical issues related to 

the collection of metrics data, and approaches to supervising and examining banking 

entities. In response to banking entities’ interpretive questions on the final rule, the 

staffs of the agencies have published coordinated responses to frequently asked 

questions on various aspects of the rule. As banking entities seek to comply with 

the final rule and request additional guidance, I expect the interagency group to 

continue working together in this manner, as well as in the coordination of examinations for compliance with the final rule. 

Corporate Governance and Executive Compensation 

The Dodd-Frank Act includes a number of corporate governance and executive 

compensation provisions that require Commission rulemaking. Among others, such 

rulemakings include: 

• Say on Pay. In accordance with Section 951 of the Act, in January 2011, the 

Commission adopted rules that require public companies subject to the Federal 

proxy rules to provide shareholder advisory say-on-pay, say-on-frequency and 

‘‘golden parachute’’ votes on executive compensation. 53 The Commission also 

proposed rules to implement the Section 951 requirement that institutional investment managers report their votes on these matters at least annually. 54

Staff is working on draft final rules for this remaining part of Section 951 for 

the Commission’s consideration in the near term. 

• Compensation Committee and Adviser Requirements. In June 2012, the Commission adopted rules to implement Section 952 of the Act, which requires the 

Commission, by rule, to direct the national securities exchanges and national 

securities associations to prohibit the listing of any equity security of an issuer 

that does not comply with new compensation committee and compensation adviser requirements. 55 To conform their rules to the new requirements, national 

securities exchanges that have rules providing for the listing of equity securities 

82 

56See Release No. 34-68022 (October 9, 2012), http://www.sec.gov/rules/sro/bats/2012/34- 

68022.pdf (BATS Exchange, Inc.); Release No. 34-68020 (October 9, 2012), http://www.sec.gov/ 

rules/sro/cboe/2012/34-68020.pdf (Chicago Board of Options Exchange, Inc.); Release No. 34- 

68033 (October 10, 2012), http://www.sec.gov/rules/sro/chx/2012/34-68033.pdf (Chicago Stock 

Exchange, Inc.); Release No. 34-68013 (October 9, 2012), http://www.sec.gov/rules/sro/nasdaq/ 

2012/34-68013.pdf (Nasdaq Stock Market LLC); Release No. 34-68018 (October 9, 2012), http:// 

www.sec.gov/rules/sro/bx/2012/34-68018.pdf (Nasdaq OMX BX, Inc.); Release No. 34-68039 

(October 11, 2012), http://www.sec.gov/rules/sro/nsx/2012/34-68039.pdf (National Stock Exchange, Inc.); Release No. 34-68011 (October 9, 2012), http://www.sec.gov/rules/sro/nyse/ 

2012/34-68011.pdf (New York Stock Exchange LLC); Release No. 34-68006 (October 9, 2012), 

http://www.sec.gov/rules/sro/nysearca/2012/34-68006.pdf (NYSEArca LLC); Release No. 34- 

68007 (October 9, 2012), http://www.sec.gov/rules/sro/nysemkt/2012/34-68007.pdf (NYSE 

MKT LLC). 57See Release No. 34-68643 (January 11, 2013), http://www.sec.gov/rules/sro/bats/2013/34- 

68643.pdf (BATS Exchange, Inc.); Release No. 34-68642 (January 11, 2013), http:// 

www.sec.gov/rules/sro/cboe/2013/34-68642.pdf (Chicago Board of Options Exchange, Inc.); Release No. 34-68653 (January 14, 2013), http://www.sec.gov/rules/sro/chx/2013/34-68653.pdf 

(Chicago Stock Exchange, Inc.); Release No. 34-68640 (January 11, 2013), http://www.sec.gov/ 

rules/sro/nasdaq/2013/34-68640.pdf (Nasdaq Stock Market LLC); Release No. 34-68641 (January 11, 2012), http://www.sec.gov/rules/sro/bx/2013/34-68641.pdf (Nasdaq OMX BX, Inc.); Release No. 34-68662 (January 15, 2012), http://www.sec.gov/rules/sro/nsx/2013/34-68662.pdf 

(National Stock Exchange, Inc.); Release No. 34-68635 (January 11, 2013), http://www.sec.gov/ 

rules/sro/nyse/2013/34-68635.pdf (New York Stock Exchange LLC); Release No. 34-68638 

(January 11, 2013), http://www.sec.gov/rules/sro/nysearca/2013/34-68638.pdf (NYSEArca 

LLC); Release No. 34-68637 (January 11, 2013), http://www.sec.gov/rules/sro/nysemkt/2013/ 

34-68637.pdf (NYSE MKT LLC). 58See Release No. 33-9452, ‘‘Pay Ratio Disclosure’’ (September 18, 2013), http://www.sec.gov/ 

rules/proposed/2013/33-9452.pdf. 59See Release No. 34-64140, ‘‘Incentive-Based Compensation Arrangements’’, (March 29, 

2011), http://www.sec.gov/rules/proposed/2011/34-64140.pdf. 60See Release No. 34-64140, ‘‘Incentive-Based Compensation Arrangements’’, (March 29, 

2011), http://www.sec.gov/rules/proposed/2011/34-64140.pdf. 61See Section 954 of the Dodd-Frank Act. 62See Section 953(a) of the Dodd-Frank Act. 63See Section 955 of the Dodd-Frank Act. 

filed proposed rule changes with the Commission. 56 The Commission issued 

final orders approving the proposed rule changes in January 2013. 57

• Pay Ratio Disclosure. As required by Section 953(b) of the Act, in September 

2013, the Commission proposed rules that would amend existing executive compensation rules to require public companies to disclose the ratio of the compensation of a company’s chief executive officer to the median compensation of 

its employees. 58 The Commission has received over 128,000 comment letters on 

the proposal, including more than 1,000 unique comment letters. The staff is 

carefully considering those comments and is preparing recommendations for the 

Commission for a final rule. 

• Incentive-Based Compensation Arrangements. Section 956 of the Dodd-Frank 

Act requires the Commission, along with multiple other financial regulators, to 

jointly adopt regulations or guidelines governing the incentive-based compensation arrangements of certain financial institutions, including broker-dealers and 

investment advisers with $1 billion or more of assets. Working with the other 

regulators, in March 2011, the Commission published for public comment a proposed rule that would address such arrangements. 59 The Commission has received a significant number of comment letters on the proposed rule, and I have 

asked the Commission staff to work with their fellow regulators to develop a 

recommendation to finalize rules to implement this provision. 

• Prohibition on Broker Voting of Uninstructed Shares. Section 957 of the Act requires the rules of each national securities exchange to be amended to prohibit 

brokers from voting uninstructed shares in director elections (other than 

uncontested elections of directors of registered investment companies), executive 

compensation matters, or any other significant matter, as determined by the 

Commission by rule. The Commission has approved changes to the rules with 

regard to director elections and executive compensation matters for all of the 

national securities exchanges, and these rules are all now effective. 60

The Commission also is required by the Act to adopt several additional rules related to corporate governance and executive compensation, including rules mandating new listing standards relating to specified ‘‘clawback’’ policies, 61 and new disclosure requirements about executive compensation and company performance, 62

and employee and director hedging. 63 The staff currently is developing recommendations for the Commission concerning the implementation of these proviVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00086 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
83 

64See Release No. 43-0073, ‘‘Broker-Dealer Reports’’ (August 21, 2013), http://www.gpo.gov/ 

fdsys/pkg/FR-2013-08-21/pdf/2013-18738.pdf. 65 Annual Report on the Dodd-Frank Whistleblower Program Fiscal Year 2013 (November 

2013), http://www.sec.gov/about/offices/owb/annual-report-2013.pdf. 66See ‘‘In the Matter of Claim for Award’’, SEC Release No. 34-70554 (September 30, 2013), 

http://www.sec.gov/rules/other/2013/34-70554.pdf, and ‘‘SEC Awards More Than $14 Million 

to Whistleblower’’, SEC Release No. 2013-209 (October 1, 2013), http://www.sec.gov/News/ 

PressRelease/Detail/PressRelease/1370539854258. 67See ‘‘In the Matter of Claim for Award’’, SEC Release No. 34-72727 (July 31, 2014), http:// 

www.sec.gov/rules/other/2014/34-72727.pdf, and ‘‘SEC Announces Award for Whistleblower 

Who Reported Fraud to SEC After Company Failed To Address Issue Internally’’, SEC Release 

No. 2014-154 (July 31, 2014), http://www.sec.gov/News/PressRelease/Detail/PressRelease/ 

1370542578457. 68See ‘‘SEC Charges Hedge Fund With Conducting Conflicted Transactions and Retaliating 

Against Whistleblower’’, SEC Release No. 2014-118 (June 16, 2014), http://www.sec.gov/News/ 

PressRelease/Detail/PressRelease/1370542096307. 69See ‘‘Study on Investment Advisers and Broker-Dealers’’ (January 2011), http:// 

www.sec.gov/news/studies/2011/913studyfinal.pdf; see also ‘‘Statement by SEC Commissioners 

Kathleen L. Casey and Troy A. Paredes Regarding Study on Investment Advisers and BrokerDealers’’ (January 21, 2011), http://www.sec.gov/news/speech/2011/spch012211klctap.htm. 

sions of the Act, which I expect to be taken up by the Commission in the near future. 

Broker-Dealer Audit Requirements 

The Dodd-Frank Act provided the Public Company Accounting Oversight Board 

(PCAOB) with explicit authority, among other things, to establish, subject to Commission approval, auditing standards for broker-dealer audits filed with the Commission. In August 2013, the Commission amended the broker-dealer financial reporting rule to require that broker-dealer audits be conducted in accordance with 

PCAOB standards and to more broadly provide additional safeguards with respect 

to broker-dealer custody of customer securities and funds. 64

Whistleblower Program 

Pursuant to Section 922 of the Dodd-Frank Act, the SEC established a whistleblower program to pay awards to eligible whistleblowers who voluntarily provide the 

agency with original information about a violation of the Federal securities laws 

that leads to a successful SEC enforcement action in which over $1 million in sanctions is ordered. As detailed in the SEC’s Office of the Whistleblower third annual 

report to Congress, 65 during FY2013 the Commission received 3,238 tips from whistleblowers in the United States and 55 other countries. The high quality information 

we have received from whistleblowers has allowed our investigative staff to work 

more efficiently and better utilize agency resources. Last fall, the Commission made 

its largest whistleblower award to date, awarding over $14 million to a whistleblower whose information led to an SEC enforcement action that recovered substantial investor funds, 66 and this July we awarded more than $400,000 to a whistleblower who reported a fraud to the SEC after the company failed to address the 

issue internally. 67 We expect future awards to further increase the visibility and effectiveness of this important enforcement initiative. 

In addition, the Dodd-Frank Act expanded whistleblower protections by empowering the Commission to bring enforcement actions against employers that retaliate 

against whistleblowers. Earlier this year, we exercised this authority for the first 

time when we penalized a firm and its principal for retaliating against a whistleblower who reported potential securities violations to the SEC. 68

Investment Advisers and Broker-Dealers’ Standards of Conduct 

Section 913 of the Dodd-Frank Act granted the Commission broad authority to impose a uniform standard of conduct for broker-dealers and investment advisers 

when providing personalized investment advice about securities to retail customers. 

The question of whether and, if so, how to use this authority is very important to 

investors and the Commission. 

In January 2011, the Commission submitted to Congress a staff study required 

by Section 913 (the ‘‘IA/BD Study’’), which addressed the obligations of investment 

advisers and broker-dealers when providing personalized investment advice about 

securities to retail customers, and recommended, among other things, that the Commission exercise the discretionary rulemaking authority provided by Section 913. 69

In March 2013, the Commission issued a public Request for Data and Other Information (Request) relating to the provision of retail investment advice and regulatory 

alternatives, which sought data to assist the Commission in determining whether 

84 

70See ‘‘Request for Data and Other Information: Duties of Brokers, Dealers, and Investment 

Advisers’’ (March 1, 2013), http://www.sec.gov/rules/other/2013/34-69013.pdf. 71See Release No. 33-9286, ‘‘Mine Safety Disclosure’’ (December 21, 2011), http:// 

www.sec.gov/rules/final/2011/33-9286.pdf. 72See Release No. 34-67716, ‘‘Conflict Minerals’’ (August 22, 2012), http://www.sec.gov/ 

rules/final/2012/34-67716.pdf and ‘‘Disclosure of Payments by Resource Extraction Issuers’’ 

(August 22, 2012), http://www.sec.gov/rules/final/2012/34-67717.pdf. 73See ‘‘American Petroleum Institute, et al. v. Securities and Exchange Commission and 

Oxfam America Inc.’’, No. 12-1668 (D.D.C. July 2, 2013). 74See ‘‘National Association of Manufacturers, et al. v. Securities and Exchange Commission, 

et al.’’, No. 13-5252 (D.C. Cir. April 14, 2014). 

to engage in rulemaking, and if so, what the nature of that rulemaking ought to 

be. 70

In order to more fully inform the Commission’s decision on this matter, I directed 

the staff to evaluate all of the potential options available to the Commission, including a uniform fiduciary standard for broker-dealers and investment advisers when 

providing personalized investment advice to retail customers. As part of its evaluation, the staff has been giving serious consideration to, among other things, the IA/ 

BD Study’s recommendations, the views of investors and other interested market 

participants, potential economic and market impacts, and the information we received in response to the Request. I have asked the staff to make its evaluation of 

options a high priority. 

In addition to considering the potential options available to the Commission, Commission staff continues to provide regulatory expertise to Department of Labor staff 

as they consider potential changes to the definition of ‘‘fiduciary’’ under the Employee Retirement Income Security Act (ERISA). The staff and I are committed to 

continuing these conversations with the Department of Labor, both to provide technical assistance and information with respect to the Commission’s regulatory approach and to discuss the practical effect on retail investors, and investor choice, 

of their potential amendments to the definition of ‘‘fiduciary’’ for purposes of ERISA. 

Specialized Disclosure Provisions 

Title XV of the Act contains specialized disclosure provisions related to conflict 

minerals, coal or other mine safety, and payments by resource extraction issuers to 

foreign or U.S. Government entities. In December 2011, the Commission adopted 

final rules for the mine safety provision. 71 In August 2012, the Commission adopted 

final rules for the disclosures relating to conflict minerals and payments by resource 

extraction issuers. 72

A lawsuit was filed challenging the resource extraction issuer rules, and in July 

2013, the U.S. District Court for the District of Columbia vacated the rules. 73 Since 

the court’s decision, members of the Commission and the staff have met with interested parties and are considering comments submitted by stakeholders in order to 

formulate a recommendation for revised rules for the Commission’s consideration. 

A lawsuit (NAM vs. SEC) also was filed challenging the conflict minerals rule, 

and in April 2014, the U.S. Court of Appeals for the D.C. Circuit upheld the rule 

against all challenges made under the Administrative Procedure Act and the Exchange Act, but held that a portion of the rule violated the First Amendment. 74 Following the Court of Appeals decision in NAM, Commission staff issued a statement 

on April 29, 2014, that provides detailed guidance regarding compliance with those 

portions of the rule that were upheld, pending any further action by the Commission 

or the courts. On May 2, 2014, the Commission ordered a stay of the effective date 

for compliance with those portions of Rule 13p-1 and Form SD subject to the constitutional holding of the Court of Appeals. On May 29, 2014, the Commission filed 

a petition asking the Court of Appeals to hold the case for potential panel rehearing 

or rehearing en banc once the Court of Appeals issued a decision in another First 

Amendment case then pending before the en banc Court (American Meat Institute 

v. USDA). The intervenor in the NAM case, Amnesty International, also filed a petition for rehearing or rehearing en banc of the First Amendment portion of the panel 

opinion. The Court issued its en banc decision in American Meat Institute on July 

29, 2014. On August 28, 2014, the Court ordered the appellants to file a response 

to both the SEC’s and Amnesty International’s petitions for rehearing en banc in 

NAM by September 12, 2014. 

Exempt Offerings 

In December 2011, the Commission adopted rule amendments to implement Section 413(a) of the Act, which requires the Commission to exclude the value of an 

individual’s primary residence when determining if that individual’s net worth exVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00088 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
85 

75See Release No. 33-9287, ‘‘Net Worth Standard for Accredited Investors’’ (December 21, 

2011) and (March 23, 2012), http://www.sec.gov/rules/final/2011/33-9287.pdf and http:// 

www.sec.gov/rules/final/2012/33-9287a.pdf (technical amendment). 76See Release No. 33-9214, ‘‘Disqualification of Felons and Other ‘Bad Actors’ from Rule 506 

Offerings’’ (July 10, 2013), http://www.sec.gov/rules/final/2013/33-9414.pdf. 77See Release No. 34-70731, ‘‘Proposed Interagency Policy Statement Proposing Joint Standards for Assessing the Diversity Policies and Practices of the Entities Regulated by the Agencies 

and Request for Comment’’ (October 23, 2013) https://www.sec.gov/rules/policy/2013/34- 

70731.pdf. 78See ‘‘Public Comment on the Proposed Interagency Policy Statement Establishing Joint 

Standards for Assessing the Diversity Policies of Practices of Entities Regulated by the Agencies’’, (December 19, 2013) https://www.sec.gov/rules/policy/2013/comments-joint-standardsdiversity.shtml. 79See Release No. 34-69359, ‘‘Identity Theft Red Flags Rules’’ (April 10, 2013), https:// 

www.sec.gov/rules/final/2013/34-69359.pdf. See also 17 CFR Part 248, Subpart C. 

ceeds the $1 million threshold required for ‘‘accredited investor’’ status. 75 The staff 

also currently is conducting a review of the accredited investor definition, as mandated by Section 413(b)(2)(A) of the Act. 

In July 2013, the Commission implemented Section 926 of the Act by adopting 

final rules that disqualify securities offerings involving certain ‘‘felons and other 

‘bad actors’ ’’ from relying on the safe harbor from Securities Act registration provided by Rule 506 of Regulation D. 76

Office of Minority and Women Inclusion 

In July 2011, pursuant to Section 342 of the Dodd Frank Act, the SEC formally 

established its Office of Minority and Women Inclusion (OMWI). OMWI is responsible for matters related to diversity in management, employment, and business activities at the SEC. This includes developing standards for equal employment opportunity and diversity of the workforce and senior management of the SEC, the increased participation of minority-owned and women-owned businesses in the SEC’s 

programs and contracts, and assessing the diversity policies and practices of entities 

regulated by the SEC. 

To improve diversity in our workforce and in SEC contracts, OMWI has deployed 

an outreach strategy where the SEC participates in minority- and women-focused 

career fairs, conferences, and business matchmaking events to attract diverse suppliers and job seekers to the SEC. As a result of its outreach efforts, as of FY2014 

Q3, 31.9 percent of the total contract dollars awarded by the SEC were awarded to 

minority and women contractors, up from 28.7 percent awarded in FY2013. As of 

FY2014 Q3, 35.8 percent of new hires were minorities and 40.7 percent were 

women, up from 33.5 percent minorities and 40.3 percent women hired in FY2013. 

OMWI and the Commission are committed to continuing to work proactively to increase the participation of minority-owned and women-owned businesses in our programs and contracting opportunities and to encourage diversity and inclusion in our 

workforce. 

OMWI also continues to make progress on the development of standards and policies relating to regulated entities and contracting. On October 23, 2013, pursuant 

to Section 342(b)(2)(C) of the Act, the SEC, along with the OCC, the Board, the 

FDIC, the National Credit Union Administration, and the Consumer Financial Protection Bureau, issued an interagency policy statement proposing joint standards for 

assessing the diversity policies and practices of the entities they regulate. 77 The 

standards are intended to promote transparency and awareness of diversity policies 

and practices within federally regulated financial institutions. The public comment 

period for the policy statement ended on February 7, 2014, 78 and after careful review and consideration of the more than 200 comment letters received, the OMWI 

Directors are currently drafting the final interagency policy statement. I anticipate 

that the final interagency policy statement will be circulated within the agencies for 

review and formal approval over the next few months. 

Customer Data Protection—Identity Theft Red Flags and Financial Privacy 

Rules 

In April 2013, to implement Section 1088 of the Dodd-Frank Act, the SEC and 

the CFTC jointly adopted Regulation S–ID. 79 Regulation S–ID requires certain regulated financial institutions such as broker-dealers and registered investment advisers to adopt and implement identity theft programs. Specifically, the regulation requires covered firms to implement policies and procedures designed to: 

• identify relevant types of identity theft red flags; 

• detect the occurrence of those red flags; 

• respond appropriately to the detected red flags; and 

86 

80 Regulation S–P requires broker-dealers, investment companies, and registered investment 

advisers to adopt and implement written policies and procedures to safeguard customer records 

and information. See Release 34-42974, ‘‘Privacy of Consumer Financial Information’’ (Regulation S–P) (June 22, 2000), https://www.sec.gov/rules/final/34-42974.htm. See also 17 CFR Part 

248, Subpart A. 

• periodically update the identity theft program. 

Regulation S–ID’s requirements complement the SEC’s other rules for protecting 

customer data. 80

SEC Resources 

The SEC collects transaction fees that offset the annual appropriation to the SEC. 

Accordingly, regardless of the amount appropriated to the SEC, our funding level 

will not take resources from other agencies, nor will it have an impact on the Nation’s budget deficit. Yet, since FY2012, the SEC has not received a significant increase in resources to permit the agency to bring on the additional staff needed to 

adequately carry out our mission. 

Our budgetary needs have, of course, been increased by the responsibilities added 

by the Dodd-Frank and JOBS Acts, but our significant budgetary gap and needs 

would remain had those extensive additional responsibilities not been added. There 

is an immediate and pressing need for significant additional resources to permit the 

SEC to increase its examination coverage of registered investment advisers so as to 

better protect investors and our markets. While the SEC makes increasingly effective and efficient use of its limited resources, we nevertheless were in a position to 

only examine 9 percent of registered investment advisers in fiscal year 2013. In 

2004, the SEC had 19 examiners per trillion dollars in investment adviser assets 

under management. Today, we have only eight. Additional resources are vital to increase exam coverage over investment advisers and other key areas, and also to bolster our core investigative, litigation, and analytical enforcement functions. It is also 

a high priority for us to continue the agency’s investments in the technologies needed to keep pace with today’s high-tech, high-speed markets. 

With respect to our new responsibilities, we need additional staff experts to focus 

on enforcement, examinations, and regulatory oversight. We must strengthen our 

ability to take in, organize, and analyze data on the new markets and entities under 

the agency’s jurisdiction. The new responsibilities cannot be handled appropriately 

with the agency’s existing resource levels without undermining the agency’s other 

core duties, particularly as we turn from rule writing to implementation and enforcement of those rules. 

Also critical will be the SEC’s continued use of the Reserve Fund, established 

under the Dodd-Frank Act. The SEC dedicated the Reserve Fund to critical IT upgrades, and, if funding permits, plans to continue investing in areas such as data 

analysis, EDGAR and sec.gov modernization, enforcement and examinations support, and business process improvements. 

If the SEC does not receive sufficient additional resources, the agency will be unable to fully build out its technology and hire the industry experts and other staff 

needed to oversee and police our areas of responsibility, especially in light of the 

expanding size and complexity of our overall regulatory space. Our Nation’s markets 

are the safest and most dynamic in the world, but without sufficient resources, it 

will become increasingly difficult for our talented professionals to detect, pursue, 

and prosecute violations of our securities laws as the size, speed, and complexity of 

the markets grow around us. 

Conclusion 

The Commission has made tremendous progress implementing the extensive 

rulemakings and other initiatives mandated by the Dodd-Frank Act to strengthen 

regulation and our financial system. As the Commission strives to complete the remaining work, I look forward to working with this Committee and others in the financial marketplace to adopt rules that protect investors, maintain fair, orderly and 

efficient markets, and facilitate capital formation—as we also undertake the necessary measures to enhance financial stability and limit potential systemic risks. 

Thank you for your support of the SEC’s mission and for inviting me to share our 

progress with you. I look forward to answering your questions. 

87 

88 

89 

90 

91 

92 

93 

94 

95 

PREPARED STATEMENT OF TIMOTHY G. MASSAD 

CHAIR, COMMODITY FUTURES TRADING COMMISSION

SEPTEMBER 9, 2014 

Thank you Chairman Johnson, Ranking Member Crapo, and Members of the 

Committee. I am pleased to testify before you today on behalf of the Commission. 

This is my first official hearing as Chairman of the CFTC. It is truly an honor to 

serve as Chairman at this important time. 

I met and spoke with several Members of this Committee during the confirmation 

process, and I appreciated hearing your thoughts and suggestions during that time. 

I look forward to this Committee’s input going forward. 

During the last 5 years, we have made substantial progress in recovering from 

the worst financial crisis since the Great Depression. The Dodd-Frank Act was a 

comprehensive response, and much has been accomplished in implementing it. The 

CFTC has largely completed the rulemaking stage of Dodd-Frank implementation. 

However, much work remains to finish the job Congress has given us. 

I look forward to working together with you, as well as my colleagues at the 

CFTC and others around the globe to ensure that our futures, swaps and options 

markets remain the most efficient and competitive in the world, and to protect the 

integrity of the markets. 

The Significance of Derivatives Market Oversight 

Very few Americans participate directly in the derivatives markets. Yet these 

markets profoundly affect the prices we all pay for food, energy, and most other 

goods and services we buy each day. They enable farmers to lock in a price for their 

crops, utility companies or airlines to hedge the costs of fuel, and auto companies 

or soda bottlers to know what aluminum will cost. They enable exporters to manage 

fluctuations in foreign currencies, and businesses of all types to lock in their borrowing costs. In the simplest terms, derivatives enable market participants to manage risk. 

In normal times, these markets create substantial, but largely unseen, benefits for 

American families. During the financial crisis, however, they created just the opposite. It was during the financial crisis that many Americans first heard the word 

derivatives. That was because over-the-counter swaps—a large, unregulated part of 

these otherwise strong markets—accelerated and intensified the crisis like gasoline 

poured on a fire. The Government was then required to take actions that today still 

stagger the imagination: for example, largely because of excessive swap risk, the 

Government committed $182 billion to prevent the collapse of a single company— 

AIG—because its failure at that time, in those circumstances, could have caused our 

economy to fall into another Great Depression. 

It is hard for most Americans to fathom how this could have happened. While derivatives were just one of many things that caused or contributed to the crisis, the 

structure of some of these products created significant risk in an economic downturn. In addition, the extensive, bilateral transactions between our largest banks 

and other institutions meant that trouble at one institution could cascade quickly 

through the financial system like a waterfall. And, the opaque nature of this market 

meant that regulators did not know what was going on or who was at risk. 

Responding to the Crisis—Enactment and Implementation of the DoddFrank Act 

The lessons of this tragedy were not lost on the leaders of the United States and 

the G20 Nations. They committed to bring the over-the-counter swaps market out 

of the shadows. They agreed to do four basic things: require regulatory oversight 

of the major market players; require clearing of standardized transactions through 

regulated clearinghouses known as central counterparties or CCPs; require more 

transparent trading of standardized transactions; and require regular reporting so 

that we have an accurate picture of what is going on in this market. 

In the United States, these commitments were set forth in Title VII of the DoddFrank Act. Responsibility for implementing these commitments was given primarily 

to the CFTC. I would like to review where we stand in implementing the regulatory 

framework passed by Congress to bring the over-the-counter swaps market out of 

the shadows. 

Oversight 

The first of the major directives Congress gave to the CFTC was to create a 

framework for the registration and regulation of swap dealers and major swap participants. The agency has done so. As of August 2014, there are 104 swap dealers 

and two major swap participants provisionally registered with the CFTC. 

96 

We have adopted rules requiring strong risk management. We will also be making 

periodic examinations to assess risk and compliance. The new framework requires 

registered swap dealers and major swap participants to comply with various business conduct requirements. 

These include strong standards for documentation and confirmation of transactions, as well as dispute resolution processes. They include requirements to reduce 

risk of multiple transactions through what is known as portfolio reconciliation and 

portfolio compression. In addition, swap dealers are required to make sure their 

counterparties are eligible to enter into swaps, and to make appropriate disclosures 

to those counterparties of risks and conflicts of interest. 

As directed by Congress, we have worked with the SEC, other U.S. regulators, 

and our international counterparts to establish this framework. We will continue to 

work with them to achieve as much consistency as possible. We will also look to 

make sure these rules work to achieve their objectives, and fine-tune them as needed where they do not. 

Clearing 

A second commitment of Dodd-Frank was to require clearing of standardized 

transactions at central counterparties. The use of CCPs in financial markets is commonplace and has been around for over 100 years. The idea is simple: if many participants are trading standardized products on a regular basis, the tangled, hidden 

Web created by thousands of private two-way trades can be replaced with a more 

transparent and orderly structure, like the spokes of a wheel, with the CCP at the 

center interacting with other market participants. The CCP monitors the overall 

risk and positions of each participant. 

Clearing does not eliminate the risk that a counterparty to a trade will default, 

but it provides us various means to mitigate that risk. As the value of positions 

change, margin can be collected efficiently to ensure counterparties are able to fulfill 

their obligations to each other. And if a counterparty does default, there are tools 

available to transfer or unwind positions and protect other market participants. To 

work well, active, ongoing oversight is critical. We must be vigilant to ensure that 

CCPs are operated safely and deliver the benefits they are designed to provide. 

The CFTC was the first of the G20 Nations’ regulators to implement clearing 

mandates. We have required clearing for interest rate swaps (IRS) denominated in 

U.S. dollars, Euros, Pounds and Yen, as well as credit default swaps (CDS) on certain North American and European indices. Based on CFTC analysis of data reported to swap data repositories, as of August 2014, measured by notional value, 

60 percent of all outstanding transactions were cleared. This is compared to estimates by the International Swaps and Derivatives Association (ISDA) of only 16 

percent in December 2007. With regard to index CDS, most new transactions are 

being cleared—85 percent of notional value during the month of August. 

Our rules for clearing swaps were patterned after the successful regulatory framework we have had in place for many years in the futures market. We do not require 

that clearing take place in the United States, even if the swap is in U.S. dollars 

and between U.S. persons. But we do require that clearing occurs through registered 

CCPs that meet certain standards—a comprehensive set of core principles that ensures each clearinghouse is appropriately managing the risk of its members, and 

monitoring its members for compliance with important rules. 

Fourteen CCPs are registered with the CFTC as derivatives clearing organizations (DCOs) either for swaps, futures, or both. Five of those are organized outside 

of the United States, including three in Europe which have been registered since 

2001 (LCH.Clearnet Ltd.); 2010 (ICE Clear Europe Ltd); and 2013 (LCH.Clearnet 

SA). In some cases, a majority of the trades cleared on these European-based DCOs 

are for U.S. persons. 

At the same time, the CFTC has specifically exempted most commercial end users 

from the clearing mandate. We have been sensitive to Congress’s directive that 

these entities, which were not responsible for the crisis and rely on derivatives primarily to hedge commercial risks, should not bear undue burdens in accessing these 

markets to hedge their risk. 

Of course, central clearing by itself is not a panacea. CCPs do not eliminate the 

risks inherent in the swaps market. We must therefore be vigilant. We must do all 

we can to ensure that CCPs have financial resources, risk management systems, 

settlement procedures, and all the necessary standards and safeguards consistent 

with the core principles to operate in a fair, transparent and efficient manner. We 

must also make sure that CCP contingency planning is sufficient. 

97 

Trading 

The third area for reform under Dodd-Frank was to require more transparent 

trading of standardized products. In the Dodd-Frank Act, Congress provided that 

certain swaps must be traded on a swap execution facility (SEF) or another regulated exchange. The Dodd Frank Act defined a SEF as ‘‘a trading system or platform 

in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants.’’ The trading requirement was designed to facilitate a more open, transparent and competitive marketplace, benefiting commercial end users seeking to lock in a price or hedge risk. 

The CFTC finalized its rules for SEFs in June 2013. Twenty-two SEFs have temporarily registered with the CFTC, and two applications are pending. These SEFs 

are diverse, but each will be required to operate in accordance with the same core 

principles. These core principles provide a framework that includes obligations to establish and enforce rules, as well as policies and procedures that enable transparent 

and efficient trading. SEFs must make trading information publicly available, put 

into place system safeguards, and maintain financial, operational, and managerial 

resources to discharge their responsibilities. 

Trading on SEFs began in October of last year. Beginning February 2014, specified interest rate swaps and credit default swaps must be traded on a SEF or another regulated exchange. Notional value executed on SEFs has generally been in 

excess of $1.5 trillion weekly. 

It is important to remember that trading of swaps on SEFs is still in its infancy. 

SEFs are still developing best practices under the new regulatory regime. The new 

technologies that SEF trading requires are likewise being refined. Additionally, 

other jurisdictions have not yet implemented trading mandates, which has slowed 

the development of cross-border platforms. There will be issues as SEF trading continues to mature. We will need to work through these to achieve fully the goals of 

efficiency and transparency SEFs are meant to provide. 

Data Reporting 

The fourth Dodd-Frank reform commitment was to require ongoing reporting of 

swap activity. Having rules that require oversight, clearing, and transparent trading 

is not enough. We must have an accurate, ongoing picture of what is going on in 

the marketplace to achieve greater transparency and to address potential systemic 

risk. 

Title VII of the Dodd-Frank Act assigns the responsibility for collecting and maintaining swap data to swap data repositories (SDRs), a new type of entity necessitated by these reforms. All swaps, whether cleared or uncleared, must be reported 

to SDRs. There are currently four SDRs that are provisionally registered with the 

CFTC. 

The collection and public dissemination of swap data by SDRs helps regulators 

and the public. It provides regulators with information that can facilitate informed 

oversight and surveillance of the market and implementation of our statutory responsibilities. Dissemination, especially in real-time, also provides the public with 

information that can contribute to price discovery and market efficiency. 

While we have accomplished a lot, much work remains. The task of collecting and 

analyzing data concerning this marketplace requires intensely collaborative and 

technical work by industry and the agency’s staff. Going forward, it must continue 

to be one of our chief priorities. 

There are three general areas of activity. We must have data reporting rules and 

standards that are specific and clear, and that are harmonized as much as possible 

across jurisdictions. The CFTC is leading the international effort in this area. It is 

an enormous task that will take time. We must also make sure the SDRs collect, 

maintain, and publicly disseminate data in the manner that supports effective market oversight and transparency. Finally, market participants must live up to their 

reporting obligations. Ultimately, they bear the responsibility to make sure that the 

data is accurate and reported promptly. 

Our Agenda Going Forward 

The progress I have outlined reflects the fact that the CFTC has finished almost 

all of the rules required by Congress in the Dodd-Frank Act to regulate the overthe-counter swaps market. This was a difficult task, and required tremendous effort 

and commitment. My predecessor, Gary Gensler, deserves substantial credit for 

leading the agency in implementing these reforms so quickly. All of the Commissioners contributed valuable insight and deserve our thanks. But no group deserves 

more credit than the hardworking professional staff of the agency. It was an extraordinary effort. I want to publicly acknowledge and thank them for their contributions. 

98 

The next phase requires no less effort. I want to highlight several areas going forward that are critical to realizing the benefits Congress had in mind when it adopted this new framework and to minimizing any unintended consequences. 

Finishing and Fine-Tuning Dodd-Frank Regulations 

First, as markets develop and we gain experience with the new Dodd-Frank regulations, I anticipate we will, from time to time, make some adjustments and 

changes. This is to be expected in the case of a reform effort as significant as this 

one. These are markets that grew to be global in nature without any regulation, and 

the effort to bring them out of the shadows is a substantial change. It is particularly 

difficult to anticipate with certainty how market participants will respond and how 

markets will evolve. At this juncture, I do not believe wholesale changes are needed, 

but some clarifications and improvements are likely to be considered. 

In fine-tuning existing rules, and in finishing the remaining rules that Congress 

has required us to implement, we must make sure that commercial businesses like 

farmers, ranchers, manufacturers, and other companies can continue to use these 

markets effectively. Congress rightly recognized that these entities stand in a different position compared to financial firms. We must make sure the new rules do 

not cause inappropriate burdens or unintended consequences for them. We hope to 

act on a new proposed rule for margin for uncleared swaps in the near future. On 

position limits, we have asked for and received substantial public comment, including through roundtables and face-to-face meetings. This input has been very helpful 

enabling us to calibrate the rules to achieve the goals of reducing risk and improving the market without imposing unnecessary burdens or causing unintended consequences. 

Cross-Border Regulation of the Swaps Market 

A second key area is working with our international counterparts to build a 

strong global regulatory framework. To succeed in accomplishing the goals set out 

in the G20 commitments and embodied in the Dodd-Frank Act, global regulators 

must work together to harmonize their rules and supervision to the greatest extent 

possible. Fundamentally, this is because the markets that the CFTC is charged to 

regulate are truly global. What happens in New York, Chicago, or Kansas City is 

inextricably interconnected with events in London, Hong Kong and Tokyo. The lessons of the financial crisis remind us how easy it is for risks embedded in overseas 

derivatives transactions to flow back into the United States. And Congress directed 

us to address the fact that activities abroad can result in importation of risk into 

the United States. 

This is a challenging task. Although the G20 Nations have agreed on basic principles for regulating over-the-counter derivatives, there can be many differences in 

the details. While many sectors of the financial industry are global in nature, applicable laws and rules typically are not. For example, no one would expect that the 

laws which govern the selling of securities, or the securing of bank loans, should 

be exactly the same in all the G20 Nations. While our goal should be harmonization, 

we must remember that regulation occurs through individual jurisdictions, each informed by its own legal traditions and regulatory philosophies. 

Our challenge is to achieve as consistent a framework as possible while not lowering our standards simply to reach agreement, thus triggering a ‘‘race to the bottom.’’ We must also minimize opportunities for regulatory arbitrage, where business 

moves to locales where the rules are weaker or not yet in place. 

The CFTC’s adoption of regulations for systemically important CCPs is a useful 

model for success. Our rules were designed to meet the international standards for 

the risk management of systemically important CCPs, as evidenced by the Principles for Financial Market Infrastructures (PFMIs) published by the Bank of International Settlement’s Committee on Payment and Settlement Systems and the 

Technical Committee of the International Organization of Securities Commissions, 

to which the Commission was a key contributor. 

Since the day I joined the CFTC, I have been focused on cross-border issues. In 

my first month in office I went to Europe twice to meet with my fellow regulators, 

and I have been engaged in ongoing dialogue with them. 

Robust Compliance and Enforcement 

A third major area is having robust compliance and enforcement activities. It is 

not enough to have rules on the books. We must be sure that market participants 

comply with the rules and fulfill their obligations. That is why, for example, several 

weeks ago we fined a large swap dealer for failing to abide by our data reporting 

rules. 

A strong compliance and enforcement function is vital to maintaining public confidence in our markets. This is critical to the participation of the many Americans 

99 

who depend on the futures and swaps markets—whether they are farmers, oil producers or exporters. And even though most Americans do not participate directly in 

the futures and swaps markets, our enforcement efforts can help rebuild and maintain public confidence and trust in our financial markets. 

We must aggressively pursue wrongdoers, big or small, and vigorously fulfill our 

responsibility to enforce the regulations governing these markets. Our pursuit of 

those who have manipulated benchmarks like LIBOR, a key global benchmark underlying a wide variety of financial products and transactions, is a prime example 

of this principle in practice. So is our successful litigation against Parnon Energy 

and Arcadia, two energy companies that systematically manipulated crude oil markets to realize illicit profits. 

Dodd-Frank provided the Commission with a number of new statutory tools to ensure the integrity of our markets, and we have moved aggressively to incorporate 

these tools into our enforcement efforts. Our new antimanipulation authority gives 

us enhanced ability to go after fraud-based manipulation of our markets. We have 

put that authority to good use in a host of cases and investigations, including actions against Hunter Wise and a number of smaller firms for perpetrating precious 

metals scams. Congress also gave us new authority to attack specific practices that 

unscrupulous market participants use to distort the markets, such as ‘‘spoofing,’’ 

where a party enters a bid or offer with the intent to move the market price, but 

not to consummate a transaction. We used this new antispoofing provision to successfully prosecute Panther Energy for its spoofing practices in our energy markets. 

Going forward, protecting market integrity will continue to be one of our key priorities. Market participants should understand that we will use all the tools at our 

disposal to do so. 

Information Technology and Data Management 

It is also vital that the CFTC have up to date information technology systems. 

Handling massive amounts of swaps data and effective market oversight both depend on the agency having up-to-date technology resources, and the staff—including 

analysts and economists, as well as IT and data management professionals—to 

make use of them. The financial markets today are driven by sophisticated use of 

technology, and the CFTC cannot effectively oversee these markets unless it can 

keep up. 

Cybersecurity is a related area where we must remain vigilant. As required by 

Congress, we have implemented new requirements related to exchanges’ cybersecurity and system safeguard programs. The CFTC conducts periodic examinations that 

include review of cybersecurity programs put in place by key market participants, 

and there is much more we would like to do in this area. Going forward, the Commission’s examination expertise will need to be expanded to keep up with emerging 

risks in information security, especially in the area of cybersecurity. 

Resources and Budget 

All of these tasks represent the significant increases in responsibility that came 

with Dodd Frank. They require resources. But the CFTC does not have the resources to fulfill these tasks as well as all the responsibilities it had—and still has— 

prior to the passage of Dodd Frank. The CFTC is lucky to have a dedicated and 

resourceful professional staff. Although I have been at the agency a relatively short 

time, I am already impressed by how much this small group is able to accomplish. 

Still, as good as they are, the reality of our current budget is evident. 

I recognize that there are many important priorities that Congress must consider 

in the budgeting process. I appreciate the importance of being as efficient as possible. I have also encouraged our staff to be creative in thinking about how we can 

best use our limited resources to accomplish our responsibilities. We will keep the 

Teddy Roosevelt adage in mind, that we will do what we can, with what we have, 

where we are. 

But I hope to work with members of Congress to address our budget constraints. 

Our current financial resources limit our ability to fulfill our responsibilities in a 

way that most Americans would expect. The simple fact is that Congress’s mandate 

to oversee the swaps market in addition to the futures and options markets requires 

significant resources beyond those the agency has previously been allocated. Without additional resources, our markets cannot be as well supervised; participants 

cannot be as well protected; market transparency and efficiency cannot be as fully 

achieved. 

Specifically, in the absence of additional resources, the CFTC will be limited in 

its ability to: 

• Perform adequate examinations of market intermediaries, including systemically important DCOs and the approximately 100 swap dealers that have regVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00103 Fmt 6621 Sfmt 6621 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
100 

istered with the Commission under the new regulatory framework required by 

Dodd-Frank. 

• Use swaps data to address risk in a marketplace that has become largely automated, and to develop a meaningful regulatory program that is required to promote price transparency and market integrity. 

• Conduct effective daily surveillance to identify the buildup of risks in the financial system, including for example, review of CFTC registrant activity reports 

submitted by Commodity Pool Operators and banking entities, as well as to 

monitor compliance with rules regarding prohibitions and restrictions on proprietary trading. 

• Investigate and prosecute major cases involving threats to market integrity and 

customer harm and strengthen enforcement activities targeted at disruptive 

trading practices and other misconduct of registered entities such as precious 

metals schemes and other forms of market manipulation. 

Conclusion 

A few core principles must motivate our work in implementing Dodd-Frank. The 

first is that we must never forget the cost to American families of the financial crisis, and we must do all we can to address the causes of that crisis in a responsible 

way. The second is that the United States has the best financial markets in the 

world. They are the strongest, most dynamic, most innovative, most competitive and 

transparent. They have been a significant engine of our economic growth and prosperity. Our work should strengthen our markets and enhance those qualities. We 

must be careful not to create unnecessary burdens on the dynamic and innovative 

capacity of our markets. I believe the CFTC’s work can accomplish these objectives. 

We have made important progress but there is still much to do. I look forward to 

working with the Members of this Committee and my fellow regulators on these 

challenges. 

Thank you again for inviting me today. I look forward to your questions. 

101 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN JOHNSON FROM DANIEL K. TARULLO 

Q.1. Since the Volcker Rule was finalized last December, what has 

the Fed done with other regulators to coordinate its interpretation 

and enforcement, and how has the Interagency Working Group facilitated these efforts? 

A.1. In pursuit of our goals for a consistent application of the 

Volcker Rule across banking entities, the Federal Reserve continues to work with the Office of the Comptroller of the Currency, 

Federal Deposit Insurance Corporation, Securities and Exchange 

Commission, and Commodity Futures Trade Commission (the 

Agencies). Staffs of the Agencies meet regularly to address key implementation and supervisory issues as they arise. An interagency 

group that includes staff from the Agencies reviews and discusses 

all substantive questions received. Two subcommittees of the interagency group have been established. One is developing a framework for coordinating examinations among the Agencies. The other 

addresses issues related to the required submission of metrics 

which certain of the largest firms began reporting in September. 

External guidance will be handled through agency-issued frequently asked questions (FAQs) and other forms of guidance as 

needed. Nine FAQs have been published to date that clarify particular provisions of the final rule, including the submission of 

metrics, expectations during the conformance period, the application of certain covered funds restrictions, and clarification regarding the annual CEO attestation. 

Staffs of the Agencies also continue to meet with and collect 

questions from banking entities under their respective jurisdictions, and banking entities may submit questions regarding matters of interest raised by the Volcker Rule to the Agencies. Staffs 

of the Agencies expect to continue to coordinate responding to matters that are of common interest in public statements, including 

through public responses to FAQs and in public guidance. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM DANIEL K. TARULLO 

Q.1. On September 3, the FRB, FDIC, and OCC issued final liquidity rules for large banks that will require more than 30 U.S. banks 

to add a combined $100 billion more in liquid assets than they currently hold. A Fed economist said that the rule ‘‘will to some extent 

make credit a bit more costly.’’ Has the FRB conducted a detailed 

analysis to determine exactly how much more costly credit will become as a consequence of this rule for both small businesses and 

individual consumers? If yes, please provide that analysis and the 

ensuing result. If not, please explain why the FRB did not undertake such analysis. 

A.1. The economist who provided the referenced quote explained 

that the liquidity coverage ratio (LCR) could make lending incrementally more costly in the sense that the LCR standard would 

cause banks to hold more liquid balance sheets than without the 

LCR requirement. He also noted, however, that the increased liquidity will also make financial crises less likely to occur and less 

severe if they do. As we saw in 2007 to 2009, financial crises result 

102 

1The protocol and additional information regarding the protocol is available on ISDA’s Web 

site at http://www2.isda.org/functional-areas/protocol-management/protocol/20. 2 Ibid. 

in a sharp decline in credit availability and an increase in its cost, 

and viewed over time and on average, credit availability may increase and credit may be less costly as a result of the LCR. Indeed, 

that was a conclusion of the study on the likely impact of the LCR 

and new capital requirements, which was conducted by the Bank 

for International Settlements (with participation from Board economists) and released in August, 2010. 1

Over the past several years, Federal Reserve Board (Board) staff 

has observed a material improvement in the liquidity position of 

banks, with limited impact to the overall market because banks 

tended to take low-cost measures to improve their liquidity positions. For example, banks have improved collateral management 

and decreased the size of commitments to better reflect customer 

needs, two measures which incur minimal cost. Banks have also 

taken other actions such as improving the mix of liabilities to include more stable funding like retail deposits, which also has had 

limited impact on their cost of funding. We anticipate that banks 

will continue to take these and similar low-cost measures to improve their liquidity positions and eliminate the estimated shortfall. 

Q.2. In your testimony you mention that global regulators are 

working on an ISDA protocol resolving the insolvency of a SIFI. 

Under such protocol, would U.S. market participants be potentially 

asked to waive their rights to protections afforded under U.S. law, 

such as netting and termination rights? 

A.2. On November 12, 2014, the International Swaps and Derivatives Association (ISDA) issued for adoption by companies the 

ISDA 2014 Resolution Stay Protocol. 2 The protocol amends the 

ISDA Master Agreement between parties adhering to the protocol 

to provide for a suspension of early termination rights and other 

remedies upon the commencement of certain resolution proceedings. These contractual amendments align with the provisions 

of the Federal Deposit Insurance Act and Title II of the DoddFrank Wall Street Reform and Consumer Protection Act concerning 

stays of early termination rights in qualified financial contracts, 

but would apply those provisions to derivatives transaction 

counterparties that are not otherwise subject to U.S. law. Thus, the 

ISDA protocol will better effectuate U.S. law in the event of the 

resolution of a U.S. company operating cross-borders. Furthermore, 

the protocol amendments would create similar stays applicable to 

derivatives transactions if the parent or other affiliate of the adhering counterparty has entered into an orderly resolution proceeding 

under the U.S. Bankruptcy Code. The protocol would not affect the 

application of U.S. law to contracts in the United States or those 

involving U.S. parties, nor would it impact the jurisdiction of U.S. 

courts and Federal regulators. 

Q.3. The issue of FSOC accountability and transparency is one that 

I have raised numerous times. Given the magnitude of the regulatory burden and other costs imposed by a SIFI designation, it is 

103 

imperative that the designation process be as transparent and objective as possible. 

Do you object to the public disclosure of your individual votes, including an explanation of why you support or oppose such designation? 

A.3. I am not a member of the Financial Stability Oversight Council (FSOC), so I do not have a vote in the body. 

Q.4. Will you commit to pushing for greater accountability and 

transparency reforms for FSOC? Specifically, will you commit to 

push the FSOC to allow more interaction with companies involved 

in the designation process, greater public disclosure of what occurs 

in FSOC principal and deputy meetings, publish for notice and 

comment any OFR report used for evaluating industries and companies, and publish for notice and comment data analysis used to 

determine SIFI designations? If you do not agree with these proposed reforms, what transparency and accountability reforms 

would you be willing to support? 

A.4. On February 4, the FSOC approved a set of procedures for the 

designation process that are intended to supplement its rule and 

guidance. The changes are intended to bring more transparency to 

the process and provide companies that have passed the initial 

thresholds for consideration with the opportunity to engage with 

FSOC staff and the staff of member agencies at an early point in 

the process. As FSOC considers other potential changes to the process, the FSOC will need to balance the need for greater transparency with the need to protect information that is supervisory, 

proprietary, or otherwise confidential in nature. Public disclosure of 

such information could harm firms. Accordingly, the FSOC is careful to protect such information in providing a public basis statement that makes clear the basis for designation. The FSOC will 

also need to ensure that any changes to the process do not impinge 

on a free and frank deliberation within the FSOC as this is an important part of an effective designation process. The publicly available basis for the FSOC’s determination contains an extensive explanation of the analysis the Council took into account when considering whether to designate a nonbank financial company for supervision by the Board. 

Finally, while the Office of Financial Research did not request 

comment on its asset manager study, the Securities and Exchange 

Commission received and published comments on the study that 

have been reviewed by staff at member agencies. 

Q.5. In the July FSOC meeting, the Council directed staff to undertake a more focused analysis of industrywide products and activities to assess potential risks associated with the asset management 

industry. 

Does the decision to focus on ‘‘products and activities’’ mean that 

the FSOC is no longer pursuing designations of asset management 

firms? 

Did the FSOC vote on whether to advance the two asset management companies to Stage 3? If so, why was this not reported? If 

not, why was such a vote not taken in order to provide clarity to 

the two entities as well as the industry? 

104 

A.5. At its July 2014 meeting, the FSOC discussed its ongoing evaluation of the potential systemic threats posed by asset management firms and their activities. At the conclusion of that discussion, the FSOC directed staff to undertake a more focused analysis 

of these issues and, at its December public meeting, the FSOC 

issued a notice published in the Federal Register seeking public 

comment on potential risks to U.S. financial stability from asset 

management products and activities. The FSOC’s work in this area 

is ongoing but still preliminary. The Board is committed to helping 

ensure that the Council updates the public about its work in this 

important area as it becomes possible to do so. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM DANIEL K. TARULLO 

Q.1. With the Volcker Rule, we finally learned the lessons from the 

bailout of Long-Term Capital Management and then the 2008 financial crisis that we simply cannot afford to have big, systemically significant firms making big bets on the ups and downs of 

the market. Casino banking is over—if you stick to your guns and 

enforce the Rule. 

I deeply appreciate the hard work you did to getting to a final 

rule last December, and I recognize the hard work you are doing 

now to implement it. However, we are still at the beginning legs 

of the journey, and I believe in ‘‘trust but verify’’—which requires 

full, continued cooperation by our regulators and engagement with 

the public. 

During the financial crisis, we all saw the horrific results when 

different regulators saw only parts of the risks to some firms. 

There were too many regulatory silos, which do not work because 

firms do not function that way. You also need a complete picture 

of what is going on in any one institution and across different 

firms. Indeed, one of the least recognized benefits of the Volcker 

Rule is to force the regulators to pay attention, together, to trading 

activities, which have become so important at so many banks. But 

critically, this means all the regulators need full access to all collected data and information. 

In addition, accountability to the public through disclosure provides another layer of outside oversight and analysis, as well as 

equally importantly, public confidence that Wall Street reform is 

real. 

Based on the track record of various public disclosure mechanisms out there already—including for example, the CFTC’s positions of traders—there is significant space for reasonably delayed 

disclosures of metrics data to enhance Volcker Rule accountability 

and public confidence. Now Treasury Deputy Secretary and thenFederal Reserve Governor Sarah Bloom Raskin highlighted disclosure in her statement on adoption of the final rule, and financial 

markets expert Nick Dunbar has similarly called for disclosure as 

a key tool. (See Nick Dunbar, ‘‘Volcker Sunlights Should Be the 

Best Disinfectant’’, July 25, 2014, http://www.nickdunbar.net/articles/volcker-sunlight-should-be-the-best-disinfectant/.) The OCC’s 

Quarterly Trading Activity Report may be a perfect venue to enVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00108 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
105 

1See http://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm#2. 

gage in this type of disclosure, provided it is expanded to cover the 

entire banking group. 

First, will each of you commit to working to ensure that each of 

your agencies has a complete picture of an entire firm’s trading and 

compliance with the Volcker Rule, which can best be accomplished 

by having all data in one place so that all regulators have access 

to it? 

A.1. Section 13 of the Bank Holding Company Act (BHC Act) allocates authority among the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Federal Reserve, Securities and Exchange Commission (SEC) and 

Commodity Futures Trading Commission (CFTC) (the Agencies) 

with respect to banking entities for which each Agency is the primary Federal regulator. In light of how the statute allocates authority among the Agencies, the final rule implementing section 13 

requires that each banking entity provide periodic reports of certain quantitative measurements to its primary Federal regulator. 

A frequently asked question issued by the Agencies in June 2014, 

explained that a trading desk that spans multiple legal entities 

must report the quantitative measurements to each of the Agencies 

with jurisdiction under section 13 of the BHC Act over any of the 

entities. 1 The Agencies have been and continue to cooperate in reviewing the data submitted by firms. 

While the Agencies do not currently have plans to have all the 

data in one place, the Federal Reserve intends to work with the 

other Agencies to coordinate supervision and enforcement of section 

13 and implementing regulations. This coordination includes sharing the metrics data provided by banking entities under the final 

rule as appropriate. 

Q.2. Second, are you committed to using disclosure to help advance 

compliance with and public trust from the Volcker Rule? 

A.2. In the preamble of the final rule, the Agencies emphasized 

that the purpose of the quantitative measurements is not as a dispositive tool for determining compliance with the rule but rather 

would be used to monitor patterns and identify activity that may 

warrant further review. Banking entities that are subject to 

metrics reporting as of September 2014, generally have requested 

confidential treatment of the metrics data under the Freedom of Information Act as trade secrets and commercial or financial information obtained from a person that is privileged or confidential. 

The Agencies also indicated in the final rule that they intended 

to revisit the quantitative measurements in September 2015, after 

having gained experience with the data. At that time, the Federal 

Reserve will consult with the other Agencies regarding the potential for release of aggregated data on a delayed basis that would 

not identify the trading positions of any individual firm. 

Q.3. The success of the Volcker Rule over the long term will depend upon the commitment of regulators to the vision of a firewall 

between high risk, proprietary trading and private fund activities, 

on the one hand, and traditional banking and client-oriented investment services on the other hand. One of the most important 

106 

parts of ensuring that vision is meaningfully implemented is the 

December 2013 final rule’s application of its provisions at the 

‘‘trading desk’’ level, defined as the ‘‘smallest discrete unit of organization’’ that engages in trading. 

Unfortunately, reports have emerged suggesting that banks are 

already attempting to combine and reorganize what had been separate trading desks into one ‘‘trading desk’’ for Volcker Rule purposes, as a way to game the metrics-based reporting essential to effective monitoring by regulators of each institution’s compliance 

with the Volcker Rule. The OCC has already identified this risk in 

its Interim Examination Procedures, and attempted to limit such 

actions to instances where the desks were engaged in ‘‘similar 

strategies,’’ the combination has a ‘‘legitimate business purpose,’’ 

and the combination assists the firm to ‘‘more accurately reflect the 

positions and fluctuations’’ of its trading. I feel that the OCC’s interim protections may not, however, be enough ensure compliance 

with the final rule. 

I am deeply concerned that combining or reorganizing trading 

desks would undermine the strength of the metrics-based oversight, particularly related to whether market-making is truly to 

serve near-term customer demand and whether hedging is truly 

that. To avoid obscuring evasion by changing the mixture and volume of the ‘‘flow’’ of trading that is reported by the ‘‘trading desk’’ 

unit, I would suggest that examiners ought to strictly apply the 

final rule’s approach to ‘‘trading desk’’ and apply the guidance set 

out by the OCC extremely narrowly, along with additional protections. For instance, ‘‘similar strategies’’ would need to include both 

the type of the trading (e.g., market-making) but also the same or 

nearly identical products, as well as be serving the same customer 

base, among other standards. As an example, if two desks traded 

in U.S. technology stocks and technology stock index futures, combining those into one desk might make sense, depending on other 

factors, such as where the desks were located and what customers 

they were serving. But combining, for example, various industryspecific U.S. equities desks that today are separate would not pass 

muster for complex dealer banks. 

It is also important to remember that an important supervisory 

benefit from implementing the Volcker Rule at a genuine trading 

desk level is that regulators will gain a much deeper, more granular understanding of the risks emanating the large banks’ many 

different trading desks—the kind of risks that led one particular 

trading desk to become famous as the London Whale. 

When confronted with attempts to reorganize trading desks, regulators should look carefully at whether submanagement structures, bonus structures, or other indicia exist that would suggest 

that the reorganized ‘‘trading desk’’ is not actually the smallest discrete unit of organization contemplated by the final rule and essential to the metrics-based oversight system being developed. 

Will you commit to scrutinizing, for the purposes of the Volcker 

Rule, any reorganizations of trading desks as posing risks of evasion and will you commit to working jointly to clarify any guidance 

on the definition of trading desk for market participants? 

A.3. The final rule implementing section 13 of the BHC Act applies 

various requirements to a trading desk of a banking entity and reVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00110 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
107 

2See 12 CFR 248.3(e)(13). 

3See 76 FR 5536 at 5591. 

quires banking entities subject to quantitative measurements reporting under Appendix A of the final rule to report the required 

metrics for each trading desk. As you note, the final rule defines 

a ‘‘trading desk’’ to mean the smallest discrete unit of organization 

of a banking entity that purchases or sells financial instruments 

for the trading account of the banking entity or an affiliate thereof. 2 In issuing the final rules, the Agencies explained that adopting 

an approach focused on the trading desk level would allow banking 

entities and the Agencies to better distinguish between permitted 

market making-related activities and trading that is prohibited by 

section 13 of the BHC Act and will thus prevent evasion of the 

statutory requirements. 3

As part of the supervisory process, the Federal Reserve intends 

to monitor how banking entities define a trading desk and to monitor any reorganizations of trading desks in order to avoid evasion 

of the requirements of section 13 and the final rule. The Federal 

Reserve will work with the other Agencies to clarify any guidance 

on the definition of trading desk if needed to address concerns 

about such reorganizations and evasion. 

Q.4. Ensuring speedy compliance with the provisions of the 

Merkley-Levin Volcker Rule is a top priority for strong implementation. It has already been 4 years since adoption, and banks 

should be well on their way to conforming their trading and fund 

operations. 

However, as you know, we also provided for an additional 5 years 

of extended transition for investments in ‘‘illiquid funds,’’ which 

were expected to include some types of private equity funds. We 

did this because some private equity funds, such as venture capital 

funds, do not usually permit investors to enter or exit during the 

fund’s lifetime (usually 10 years or so) because of the illiquidity of 

those investments. 

As you know, the Federal Reserve Board’s rule on the ‘‘illiquid 

funds’’ extended transition interprets the statutory provision of a 

‘‘contractual commitment’’ to invest as requiring a banking entity, 

where a contract permits divestment from a fund, to seek a fund 

manager’s and the limited partners’ consent to exit a fund. The 

rule, however, provides for the Board to consider whether the banking entity used reasonable best efforts to seek such consent but 

that an unaffiliated third party general partner or investors made 

unreasonable demands. 

I strongly support the Board’s desire to implement the Volcker 

Rule in a speedy manner. In addition, the Board’s approach in the 

final conformance rule goes a long way to ensuring that the illiquid 

funds extended transition only be available for investments in truly 

illiquid funds, and not a way to avoid divestment of hedge funds 

and private equity funds. 

At the same time, we designed the provision to provide for a 

smooth wind-down for illiquid funds. Indeed, I am sensitive to the 

legitimate business needs of firms seeking to comply with the 

Volcker Rule while maintaining relationships with important cusVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00111 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
108 

tomers to whom they may seek to provide traditional banking services. 

Accordingly, I would urge the Board to clarify that a banking entity’s requirement to make ‘‘reasonable efforts’’ to exercise its contractual rights to terminate its investment in an illiquid fund could 

be satisfied, for example, by a certification by the banking entity 

(a) that the banking entity’s exit from the fund would be extraordinary from the perspective of how most investors enter or exit the 

fund (i.e., the investment contract does not routinely or ordinarily 

contemplate entry or exit, and/or such other indicia as are necessary to help distinguish between illiquid private equity funds and 

other funds, like hedge funds, that ordinarily and routinely permit 

investor redemptions), (b) that inquiring with third-party fund 

managers and limited partners regarding termination would result 

in a significant detriment to the business of the banking entity and 

(c) that the banking entity believes that the divestment would result in losses, extraordinary costs, or otherwise raise unreasonable 

demands from the third-party manager relating to divestment (or 

the de facto equivalent thereto). 

Such a certification from the banking entity, along with the language of the relevant fund agreements and such other requirements as the Board determines appropriate, would obviate the 

need to seek consent from third-party fund managers. Have you 

considered clarifying this in a FAQ? 

A.4. A number of commenters have requested that the Federal Reserve modify the meaning of what is ‘‘necessary to fulfill a contractual obligation’’ of the banking entity under the Board’s 2011 conformance rule. The Federal Reserve is considering these comments 

in light of the requirements of section 13. The Federal Reserve will 

consider your comments regarding a potential certification for illiquid funds in determining what next steps to take on these matters. 

Q.5. We’ve recently seen reports that the largest Wall Street banks 

are nominally ‘‘deguaranteeing’’ their foreign affiliates in order to 

avoid coverage under U.S. regulatory rules, especially those related 

to derivatives. This ‘‘deguaranteeing’’ appears to be based on a fiction that U.S. banks do not actually guarantee the trading conducted by foreign subsidiaries, and hence would not be exposed to 

any failure by the foreign subsidiary. 

Can you comment on that, and specifically, whether you believe 

that U.S. bank or bank holding company could be exposed to losses 

from—or otherwise incur liability related to—a foreign affiliate’s 

trading even when no explicit guarantee to third parties exists. 

Please specifically address whether an arrangement, commonly 

known as a ‘‘keepwell,’’ provided by the U.S. parent or affiliate to 

the foreign affiliate potentially could create such exposure—and 

specifically, liability—for the U.S. entity. 

A.5. As a general matter, the Federal Reserve engages in consolidated supervision and regulation of bank holding companies 

(BHCs) and banks. Most of the Federal Reserve’s BHC regulations 

apply on a consolidated basis; accordingly, removal of any BHC 

parent guarantees of, or keepwell arrangements with, foreign subsidiaries have little or no effect on the BHC’s consolidated riskVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00112 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
109 

based capital, leverage, and liquidity requirements. In other words, 

for most of our key BHC regulations, we generally treat the assets, 

liabilities, and exposures of a BHC’s foreign subsidiaries as owned 

by the BHC, whether or not there is an explicit guarantee by the 

BHC parent of the assets, liabilities, or exposures of the foreign 

subsidiary. Our basic supervisory stance is to require a BHC to 

manage its own risks as well as the risks of all of its domestic and 

foreign consolidated subsidiaries. 

With respect to rules related to derivatives transactions, in September 2014, the prudential regulators (including the OCC, the 

Federal Reserve, the FDIC, the Farm Credit Administration, and 

the Federal Housing Finance Agency) released a proposed rule for 

margin requirements for covered swap entities. Covered swap entities are defined to mean entities registered as swap dealers or 

major swap participants with the CFTC, or registered as securitybased swap dealers or major security-based swap participants with 

the SEC and that are regulated by one of the prudential regulators. 

The proposed rule addressed the cross-border application of the 

margin requirements, including the treatment of guarantees. In 

particular, the proposal stated that the requirements would not 

apply to any foreign noncleared swap of a foreign covered swap entity. To qualify as a foreign noncleared swap eligible for this exclusion, no guarantor of either party’s obligations under the swap 

could be a U.S. entity. Moreover, the proposed rule also provided 

that certain covered swap entities may be eligible for substituted 

compliance, whereby they could comply with the swap margin rules 

of another jurisdiction instead of the U.S. rule if the prudential 

regulators made a comparability determination. The proposal explicitly provided that a covered swap entity was eligible for substituted compliance only if the covered swap entity’s obligations 

under the swap were not guaranteed by a U.S. entity. 

Q.6. Moreover, please comment on whether the size and importance to the U.S. parent or affiliate of the foreign affiliate’s activities could itself create an implied guarantee such that the U.S. firm 

would have major reputational or systemic risk reasons to prevent 

the foreign affiliate from incurring significant losses or even failing—similar to rescues that occurred during the financial crisis of 

entities that were supposed to be bankruptcy remote. 

A.6. Please see response to Question 5 above. As noted above, the 

Federal Reserve generally takes a consolidated approach to supervision regardless of the size or importance of the U.S. entity. 

Q.7. Finally, many of these foreign bank subsidiaries are so-called 

‘‘Edge Act’’ corporations, which I understand are consolidated with 

the insured depository subsidiary for many purposes. Please comment on whether there is any chance that losses in these Edge Act 

corporations, particularly losses in their derivatives operations, 

could impact the deposit insurance fund. 

A.7. The potential for losses at subsidiaries to affect the operations 

of a parent BHC or bank, and in turn affect the deposit insurance 

fund, is one of the important reasons why the Federal Reserve 

takes a consolidated approach to supervision and regulation of 

BHCs and banks. Elimination of guarantees and keepwell arrangements between a bank and its Edge Act subsidiary would not affect 

110 

our supervision of the BHC, the bank, or the Edge Act corporation, 

nor would it change the bank’s capital or liquidity requirements. 

Q.8. There have been several recent stories in Reuters that highlight how some large bank holding companies continue to be engaged deeply in the investment and trading in physical commodities—ownership of oil trains and natural gas plants businesses. 

Are you concerned about the continued expansion by some of our 

largest bank holding companies into activities? Can you provide an 

update on the status of your physical commodities review, and 

whether you intend to at least ensure that short term trading in 

physical commodities are covered by appropriate limits, protections, 

and prohibitions against conflicts of interest? 

A.8. In January 2014, the Federal Reserve Board (Board) invited 

public comment through an advance notice of proposed rulemaking 

(ANPR) on a range of issues related to the commodities activities 

of financial holding companies. The scope of our ongoing review 

covers commodities activities and investments under section 4(k) 

complementary authority, merchant banking authority, and section 

4(o) grandfather authority. Recently, some of the financial holding 

companies engaged in physical commodities activities have publicly 

indicated that they are reducing or terminating some of these activities. 

As the ANPR explains, we are exploring what further prudential 

restrictions or limitations on the ability of financial holding companies to engage in commodities-related activities are warranted to 

mitigate the risks associated with these activities. Such additional 

restrictions could include reductions in the maximum amount of assets or revenue attributable to such activities, increased capital or 

insurance requirements on such activities, and prohibitions on 

holding specific types of physical commodities that pose undue risk 

to the company. We also are exploring what restrictions or limitations on investments made through the merchant banking authority would appropriately address those or similar risks. 

In response to the notice, the Board received 184 unique comments and more than 16,900 form letters. Commenters included 

Members of Congress, individuals, public interest groups, academics, end users, banks, and trade associations. The comments 

present a range of views and suggested Board actions—from no action to prohibiting trading or ownership of commodities associated 

with catastrophic risk, strengthening prudential safeguards (such 

as reducing caps on the amount of permitted activities), strengthening risk-management practices, enhancing public disclosure, requiring additional capital, increasing regulatory coordination, and 

developing risk-management best practices. The Board has been reviewing the comments and considering what steps would be appropriate to address the risks posed by physical commodities activities. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM DANIEL K. TARULLO 

Q.1. In June 2013, the FSOC voted to designate AIG, GE Capital, 

and Prudential as nonbank SIFIs. Shortly thereafter, in July 2013, 

the Financial Stability Board, of which the Federal Reserve is an 

influential member, voted to designate AIG, Prudential, and 

111 

MetLife as systemically important. What warranted the immediate 

designation of AIG and Prudential and the substantial delay in 

designating MetLife? 

A.1. Under the Dodd-Frank Wall Street and Consumer Protection 

Act (Dodd-Frank Act), the Financial Stability Oversight Council 

(FSOC) may only designate financial companies that are not bank 

holding companies. MetLife was a U.S. bank holding company until 

February 14, 2013. On that date, it received the required approvals 

from both the Federal Deposit Insurance Corporation and the Federal Reserve Board (Board) to deregister as a bank holding company. These approvals followed the completed sale of MetLife 

Bank’s depository business to General Electric Capital Corporation 

(GECC) on January 11, 2013. 

Because MetLife—unlike AIG, GECC, and Prudential—was a 

bank holding company until February 2013, FSOC’s designation 

process for MetLife trailed that of AIG, GECC, and Prudential. 

Q.2. It makes logical sense for national Governments to conduct 

their own reviews of potentially systemically important firms within their countries before voting to designate them as such at an 

international body. However, this was not the case with MetLife. 

Why did the Fed vote first to designate MetLife as a SIFI at the 

FSB before voting to designate MetLife as a domestic nonbank 

SIFI? 

A.2. As noted in the prior response, because MetLife was a bank 

holding company until February 2013, the FSOC designation process for MetLife was delayed. Moreover, it is important to note that 

the Financial Stability Board’s (FSB) process for identifying global 

systemically important insurers (G–SIIs) is independent from the 

FSOC’s designation process. Among other differences, the FSB and 

FSOC have different designation frameworks and standards. In addition, any standards adopted by the FSB, including designation of 

an entity as a global systemically important financial institution 

(G–SIFI), are not binding on the Board or any other agency of the 

U.S. Government, or any U.S. companies. Thus, FSB designation of 

an entity as a nonbank SIFI does not automatically result in the 

Board becoming the entity’s prudential regulator. Under the DoddFrank Act, the FSOC is responsible for deciding whether a 

nonbank financial company should be regulated and supervised by 

the Board, based on its assessment of the extent to which the failure, material distress, or ongoing activities of that entity could pose 

a risk to the U.S. financial system. 

Q.3. What analysis and review did the Federal Reserve conduct 

prior to supporting the FSB’s July 2013 designation of MetLife, 

AIG, and Prudential? 

A.3. The methodology for identifying G–SIIs was developed by the 

International Association of Insurance Supervisors (IAIS). The 

IAIS’ assessment methodology identifies five categories to measure 

relative systemic importance: (1) nontraditional insurance and noninsurance activities, (2) interconnectedness, (3) substitutability, (4) 

size, and (5) global activity. Within these five categories, there are 

20 indicators, including: intrafinancial assets and liabilities, gross 

notional amount of derivatives, Level 3 assets, nonpolicyholder liabilities and noninsurance revenues, derivatives trading, short 

112 

1See paragraph 70 of the G20 Leaders’ Declaration from the St. Petersburg Summit, September 2013: https://www.g20.org/sites/default/files/g20lresources/library/Saintl 

PetersburglDeclarationlENGl0.pdf. 2The consultation paper is available for download at: http://www.financialstabilityboard.org/ 

wp-content/uploads/rl140108.pdf. 

term funding and variable insurance products with minimum guarantees. The initial assessment methodology involved three steps: 

(1) the collection of data, (2) a methodical assessment of that data, 

and (3) a supervisory judgment and validation process. Documents 

associated with the development of the methodology were reviewed 

by Board staff. 

Q.4. What analysis and review did the Federal Reserve conduct on 

MetLife after July 2013 but before the recent FSOC vote on designation? 

A.4. The FSOC’s analysis is based on a broad range of quantitative 

and qualitative information available to the FSOC through existing 

public and regulatory sources, and information submitted by 

MetLife. The analysis is tailored, as appropriate, to address company-specific risk factors, including but not limited to, the nature, 

scope, size, scale, concentration, interconnectedness, and mix of the 

activities of MetLife. Board staff, along with the staffs other FSOC 

member agencies and offices, contributed to this analysis. 

Q.5. What kind of contact have you or your colleagues at the Federal Reserve had with the FSB as it relates to reviewing asset 

managers? 

A.5. The FSB, in consultation with the International Organization 

of Securities Commissions (IOSCO), is currently developing methodologies to identify systemically important nonbank noninsurer 

(NBNI) firms. The purpose of this exercise is to fulfill a request by 

the G20 Leaders to identify threats to global financial stability that 

could arise from the material financial distress or failure of NBNI 

firms, mirroring a process for identifying global systemically important banks and insurers. 1 The Board is participating in this process, along with other U.S. agencies. 

Earlier this year, the FSB issued a consultative document on 

‘‘Assessment Methodologies for Identifying Non-Bank Non-Insurer 

(NBNI) Global Systemically Important Financial Institutions.’’ 2 It 

proposed assessing the systemic importance of NBNI firms with 

reference to a set of five factors: size; interconnectedness; substitutability; complexity and global activities. These factors are broadly 

consistent with those that have been used in the identification of 

globally significant banks and insurers. For practical reasons, the 

FSB also proposed using a ‘‘materiality threshold’’ of $100 billion 

in net assets under management (AUM) to limit the set of firms 

for which detailed data on these five factors would be collected. 

(Hedge funds would be subject to an additional threshold of $400 

to $600 billion in gross notional exposure.) NBNI firms that are 

considered potentially systemically important by their national supervisors could be added to the assessment pool, even when they 

fall below this threshold. 

In its consultation paper, the FSB sought comments on the merits of the proposed threshold, and solicited proposals for alternative 

practicable screening mechanisms. The comments received, includVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00116 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
113 

3 Responses to the consultation paper are available for download at: http://www.iosco.org/library/index.cfm?section=pubdocs&publicDocID=435. 

ing those from many U.S. firms and industry associations, will be 

an important input that will help refine the assessment methodologies. 3 Moreover, there will continue to be significant input from 

U.S. agencies before an assessment methodology is approved by the 

FSB. U.S. agencies are also active participants in IOSCO. This 

work is ongoing and has yet to reach any conclusions. 

It is important to note that any standards adopted by the FSB, 

including designation of an entity as a G–SIFI, are not binding on 

the Board or any other agency of the U.S. Government, or any U.S. 

companies. Under the Dodd-Frank Act, the FSOC is responsible for 

deciding whether a nonbank financial company should be regulated 

and supervised by the Board, based on its assessment of the extent 

to which the failure, material distress, or ongoing activities of that 

entity could pose a risk to the U.S. financial system. Moreover, the 

Board would only adopt FSB regulatory standards after following 

the well-established rulemaking protocols under U.S. law, which 

include a transparent process for proposal issuance, solicitation of 

public comments, and rule finalization. 

As stated above, the purpose of the FSB exercise is to identify 

threats to global financial stability that could arise from the material financial distress or failure of NBNI firms. It is possible that 

the FSB may decide that, at present, none of these firms poses 

such a threat. However, in the event that financial stability risks 

are identified by the FSB, and U.S. authorities agree with this 

identification, the FSOC has a range of policies options at its disposal. These include communicating such risks in its annual report 

to Congress; recommending that existing primary regulators apply 

heightened standards and safeguards; and designating individual 

firms as ‘‘systemically important financial institutions,’’ thereby 

subjecting them to supervision and regulation by the Board. The 

appropriate response will depend upon the nature of the risks identified, and will seek to maximize net benefits to the economy. 

This past July, the FSOC directed staff to ‘‘undertake a more focused analysis of industrywide products and activities to assess potential risks associated with the asset management industry.’’ The 

FSOC’s work program is complementary to that of the FSB—in 

both cases, the purpose is to identify metrics that can be used 

across the industry to feed into an assessment of financial stability 

risks generated by asset management funds and activities. There 

is ample opportunity for mutually beneficial information sharing in 

these processes. 

Q.6. How does the FSOC’s new approach with respect to asset 

managers affect the United States’ input into the same process 

with respect to the FSB? 

A.6. Please see the response to Question 5. 

Q.7. The FSB has proposed a ‘‘materiality threshold’’ of $100 billion 

in assets under management (AUM), which would capture only 

U.S. mutual funds, and no funds from other countries. Did you and 

do you continue to support a $100 billion AUM test for materiality? 

A.7. Please see the response to Question 5. 

114 

Q.8. Because this test disproportionately affects U.S. funds, doesn’t 

it put them at a disadvantage vis-a-vis their international competitors? 

A.8. Please see the response to Question 5. 

Q.9. Does it seem at all inconsistent to you that the FSOC went 

ahead with designating nonbank firms as SIFIs before knowing 

what regulatory framework would be applied once designated? 

A.9. The Dodd-Frank Act authorizes the FSOC to make a determination as to whether the material financial distress of a nonbank 

financial company could pose a threat to U.S. financial stability; 

the nature of the enhanced prudential standards to be applied to 

a company if the FSOC determines that the company could pose 

such a threat is a separate process conducted by the Board. Under 

section 113 of the Dodd-Frank Act, the FSOC is required to consider a specific set of factors when determining whether a nonbank 

financial company should be designated by the FSOC for supervision by the Board. There is no requirement in section 113 or elsewhere for the FSOC to consider the standards to be applied to 

nonbank financial companies designated for supervision by the 

Board (designated firms). The FSOC has not found that its conclusion of whether a company’s material financial risk could pose a 

threat to U.S. financial stability required a determination beforehand as to how enhanced prudential standards would apply to the 

company. 

Section 165 of the Dodd-Frank Act establishes mandated enhanced prudential standards that must be applied to any nonbank 

financial company designated by the FSOC. Section 165(a)(2) requires the Board to tailor prudential standards for a designated 

firm as appropriate in light of any predominant line of business 

and activities of the firm, among other factors. Consistent with section 165, the Board has chosen not to adopt a universal, one-sizefits-all regulation governing all designated firms. Instead, the 

Board has chosen to apply enhanced prudential standards to designated firms individually through an order or rule following an 

evaluation of the business model, capital structure, and risk profile 

of each designated firm. This individualized approach allows the 

Board to tailor its supervision and adapt standards as appropriate 

to each designated firm. 

Q.10. How do we know if the systemic risks perceived by the FSOC 

can be effectively addressed through designation, if the Federal Reserve and the FSOC don’t currently know how they plan to regulate these entities? 

A.10. The application of enhanced prudential standards by the 

Board to designated firms will mean that these firms must meet 

new capital and liquidity standards which aim to decrease the risk 

they may pose to U.S. financial stability. As described in response 

to Question 9 above, the Board is committed to tailoring the application of such standards to designated firms to best address the 

unique business model, capital structure, risk profile, and systemic 

footprint of each designated firm before crafting the applicable enhanced prudential standards. We believe this individualized approach will allow us to best address and ameliorate any risks they 

pose to the financial system. 

115 

Q.11. Has the Federal Reserve already thought about how to regulate nonbank SIFIs? If so, when will the Fed articulate this framework to the public and the entities subject to regulation? 

A.11. As described in response to Questions 9 and 10 above, the 

precise details of the frameworks for nonbank SIFIs will be informed by analysis of the capital structures, financial activities, 

riskiness, and complexity of these firms, along with other relevant 

risk-related factors. For example, with regard to the development 

of enhanced prudential standards for designated firms that are insurance companies, the Board began a quantitative impact study 

(QIS) to evaluate the potential effects of its capital framework on 

designated firms that are substantially engaged in insurance underwriting activities. We will use the results of the QIS to inform 

the design of an appropriate framework for these firms that respects the realities of insurance activities. 

With regard to GECC, the remaining designated firm, the Board 

proposed for public comment in November 2014, a comprehensive 

set of enhanced prudential standards for the firm. The comment 

period closed in February, and staff is analyzing comments received. We expect to have these frameworks in place as soon as 

practicable. 

Q.12. Given the recent decision by FSOC to take a new approach 

with respect to asset managers, should Congress expect the FSOC 

to take a similar approach with respect to insurance companies? 

If so, what impact will this have on insurance companies already 

designated by FSOC? 

If not, doesn’t this exemplify quite a bit of methodological inconsistency, subjecting some nonbank firms to certain kinds of reviews, while subjecting other firms to different reviews? 

A.12. Under the Dodd-Frank Act, the FSOC has a variety of authorities to address risks to financial stability from the nonbanking 

firms. These authorities include designating nonbank financial 

companies for supervision by the Federal Reserve Board as well as 

making recommendations to existing primary regulators to apply 

new or heightened standards and safeguards to the financial activities or practices of such firms. 

In exercising this authority, the FSOC, to date, has designated 

four nonbank financial companies based on a consideration of the 

statutory factors as applied to each individual company’s unique 

business model as well as its leverage, liabilities, activities, and 

interconnectedness to the financial system, among other factors. In 

the event that the material financial distress of a nonbank financial company would pose a threat to U.S. financial stability, it is 

appropriate for the FSOC to designate that firm as systemically 

important, as FSOC has determined in the case of three insurance 

companies—AIG, Prudential, and MetLife. 

With regard to asset managers, the FSOC is currently studying 

the relationship of the asset management industry generally to 

U.S. financial stability, including analysis of potential risks such as 

the transmission of the material financial distress of an asset manager to the broader financial system. At its December 2014 public 

meeting, the FSOC issued a notice published in the Federal Register seeking public comment on potential risks to U.S. financial 

116 

stability from asset management products and activities. The 

FSOC’s work in this area is ongoing and no determinations have 

been made at this time. 

Q.13. A number of ABS classes, including securitized auto and 

credit card loans, were denied any HQLA status in the recently finalized LCR rule. What was your reasoning for this? 

A.13. The banking agencies that issued the liquidity coverage ratio 

(LCR) rule analyzed and considered many asset classes for treatment as high-quality liquid assets (HQLA) in the LCR. Evidence 

from the 2007 to 2009 financial crisis and the period following indicates that the market demand for securitization issuances can decline rapidly during a period of stress and may not rapidly recover. 

The ability to monetize these securitization issuances through or in 

the repurchase market may be limited in a period of stress. Ultimately, a number of types of asset-backed securities (ABS), including securitized auto and credit card loans, were not treated as 

HQLA under the final rule because the banking agencies concluded 

that as an asset class, they are not sufficiently liquid, particularly 

during times of stress. 

Q.14. Because many of the banks that need to comply with the 

LCR comprise a significant number of the investors in these ABS, 

will denying HQLA status to ABS increase borrowing costs for consumers and small businesses? Was a cost-benefit analysis conducted on this particular provision of the rule? Would you be open 

to sharing that analysis, on this provision or on the rule as a 

whole, with Congress? 

A.14. We do not believe that demand for private label ABS will be 

materially affected by the LCR; nor do we believe that the borrowing costs to consumers and small businesses will be materially 

affected by the non-HQ LA status of private label ABS in the LCR. 

In this regard, it is important to note that the LCR contains provisions that provide favorable treatment to borrowings from retail 

and small business customers as compared to borrowings from 

large businesses. In addition, the banking agencies reviewed investments in ABS by banking organizations subject to the LCR 

final rule and found that ABS holdings by these firms comprise a 

limited amount of the total ABS market. 

In developing and finalizing the LCR rule, the banking agencies 

considered the various benefits and costs associated with the LCR, 

including the potential economic impact of asset classes being 

treated or not treated as HQLA and the potential impact of the 

rule as a whole on mitigating systemic risk. We also took into account a 2010 study by the Bank for International Settlements, 

which was contributed to by the U.S. banking agencies, on the 

long-term economic impact of stronger liquidity and capital requirements for banks. The study suggested that over time and on average, credit availability would increase and credit would be less 

costly due to the likelihood that such regulations will make future 

financial crisis less likely and less severe. 

Q.15. Additionally, the finalized LCR rule confers no HQLA status 

to private-label mortgage-backed securities while conferring GSEguaranteed mortgage-backed securities Level 2A HQLA status. ReVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00120 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
117 

publicans and Democrats are committed to attracting more private 

capital to housing finance. To what extent did you consider the 

ramifications of this decision as it relates to broader housing finance reform? 

A.15. Data indicates that Government-sponsored enterprise (GSE) 

guaranteed mortgage-backed securities (MBS) have been and continue to be very liquid instruments, which is the basis for their 

treatment as Level 2A HQLA (subject to operational and other requirements) in the LCR issued by the banking agencies. In contrast, evidence from the 2007 to 2009 financial crisis and the period 

following indicates that the market demand for a variety of private 

label securitization issuances can decline rapidly during a period of 

stress, and that such demand may not rapidly recover. The banking agencies determined that private-label MBS do not exhibit the 

through-the-cycle liquidity characteristics necessary to be included 

as HQLA under the final rule, and as noted in response to Question 14 above, we considered the costs and benefits of treating 

privatelabel MBS as HQLA in developing and finalizing the LCR. 

Like other assets not treated as HQLA that are nevertheless permissible investments, we believe banking organizations will continue to invest in these types of assets in order to meet the demands of their customers and benefit from the yields these investments offer. 

Q.16. Doesn’t the disparate treatment of PLMBS and GSE MBS direct more funding into GSE-guaranteed mortgages and make it 

harder for private capital (without Government guarantees from 

the GSEs, FHA, VA, or USDA) to re-enter the market? 

A.16. We recognize the importance of private capital as a source of 

funding to the U.S. residential mortgage markets and note that the 

LCR rule does not prohibit banking organizations from continuing 

to invest in private label MBS. In recognition of the fact that many 

types of permissible investments for banking organizations may not 

be readily liquid during times of financial stress, the LCR requires 

banking organizations to meet the proposed liquidity requirements 

with assets that have historically been a reliable source of liquidity 

in the United States during times of stress. As discussed above, the 

banking agencies determined that private label MBS did not meet 

this standard. The agencies do not anticipate, however, that the exclusion of this asset class from HQLA will significantly deter investment by banking organizations in these assets. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM DANIEL K. TARULLO 

Q.1. The Federal Reserve’s earliest regulatory proposals setting requirements for Savings and Loan Holding Companies recognized a 

difference between top-tier holding companies that are insurance 

companies themselves and shell-holding companies carrying out a 

broad range of financial activities outside of the regulated insurance umbrella, such as AIG. This distinction seems appropriate. 

Do you see any compelling reason to change capital rules for toptier insurance SLHCs in the U.S. from those currently utilized 

under State law? 

118 

A.1. Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) requires, in part, that 

the Federal Reserve Board (Board) establish consolidated minimum 

risk-based and leverage requirements for depository institution 

holding companies, which includes Savings and Loan Holding Companies (SLHCs), and nonbank financial companies supervised by 

the Board. Thus, section 171 of the Dodd-Frank Act requires the 

Board to establish consolidated requirements for these firms at the 

holding company level, in contrast to the capital requirements that 

are imposed under individual State insurance laws on insurance 

companies on a stand-alone, legal entity basis. 

In June 2012, the Board proposed changes to its regulatory capital framework that would, in part, establish consolidated capital 

requirements for savings and loan holding companies, including 

those with substantial insurance underwriting activity (insurance 

SLHCs). In finalizing the framework in July 2013, the Board excluded insurance SLHCs from application of the revised capital 

rule pending further consideration of whether and how the proposed requirements should be modified for these companies. The 

Board has been working to develop a revised regulatory capital 

framework for insurance SLHCs that appropriately addresses the 

risks to capital adequacy on a consolidated level, not just at the 

level covered by the State insurance laws. In October 2014, the 

Federal Reserve began a quantitative impact study (QIS) to evaluate the potential effects of its revised regulatory capital framework 

on insurance SLHCs and nonbank financial companies supervised 

by the Board that engage substantially in insurance underwriting 

activity. The Board is conducting the QIS to inform the design of 

an appropriate capital framework for these firms. 

Q.2. The Fed is tasked with developing capital rules for both insurance-based SLHCs and SIFIs. What differences do you see between 

SLHCs and SIFIs, and how will the capital rules reflect these differences? Do your international efforts for globally systemic firms 

have any influence on your development of capital rules for insurance-based SLHCs? 

A.2. While the capital standards applied to insurance-based SLHCs 

and nonbank financial companies supervised by the Board will respect the realities of insurance activities, the precise details of the 

standards will be informed by analysis of the capital structures, financial activities, riskiness, and complexity of these two sets of 

firms, along with other relevant risk-related factors. To the extent 

that there are similarities in these areas between insurance-based 

SLHCs and nonbank financial companies, elements of the capital 

standards applied to them would likely be similar. Where differences exist, the standards would be tailored to take into account 

the unique characteristics of these firms’ insurance operations. 

The Board’s understanding of these two sets of firms has been 

informed by work in a number of different areas, including what 

has been learned through the Board’s supervision of insurancebased SLHCs over the past 3 years, the Board’s membership in the 

International Association of Insurance Supervisors, the Board’s discussions with State insurance commissioners, and the QIS described in response to Question 1. We are committed to developing 

119 

capital requirements that are appropriate for the business mixes, 

risk profiles, and systemic footprints of these two sets of firms. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM THOMAS J. CURRY 

Q.1. The issue of FSOC accountability and transparency is one that 

I have raised numerous times. Given the magnitude of the regulatory burden and other costs imposed by a SIFI designation, it is 

imperative that the designation process be as transparent and objective as possible. 

Do you object to the public disclosure of your individual votes, including an explanation of why you support or oppose such designation? 

Will you commit to pushing for greater accountability and transparency reforms for FSOC? Specifically, will you commit to push 

the FSOC to allow more interaction with companies involved in the 

designation process, greater public disclosure of what occurs in 

FSOC principal and deputy meetings, publish for notice and comment any OFR report used for evaluating industries and companies, and publish for notice and comment data analysis used to determine SIFI designations? If you do not agree with these proposed 

reforms, what transparency and accountability reforms would you 

be willing to support? 

A.1. I am committed to a designation process that is fair, that provides appropriate levels of transparency, and that is based on an 

objective analysis and consideration of the statutory factors set 

forth by Congress in the Dodd-Frank Act. The current designations 

process, which the Council published for notice and comment, includes various mechanisms to promote accountability and to provide companies the ability to interact and respond to a proposed 

designation prior to any final action by the Council. In particular, 

the Stage 3 phase of the designation process is iterative providing 

extensive opportunities for the company to interact with staff conducting the analysis and to present information and data that the 

company believes is relevant for FSOC’s analysis. For example, for 

one of the companies that has been designated, the FSOC spent almost a year conducting its analysis after beginning its engagement 

with the company, and the Council considered more than 200 data 

submissions from the company that totaled over 6,000 pages. Staff 

of FSOC members and member agencies had contact with the company at least 20 times, including seven meetings with senior management and numerous other telephone meetings. The FSOC’s 

evaluation, which considered the company’s views and information, 

culminated in a detailed and lengthy analysis (over 200 pages) that 

the FSOC shared with the company following the proposed designation and before a vote by the Council on a final designation. 

The Council’s public basis document, which is part of the record 

whenever the Council decides to designate a company, provides a 

public record of the views of Council members. Specifically, the 

public basis document, which is posted to the Council’s Web site, 

reflects the views by the assenting Council members for the designation, with any dissenting views recorded as part of the public 

record. 

120 

The FSOC recently issued responses to frequently asked questions about the designation process to provide greater clarity and 

transparency on the current process. The Council has also discussed various changes proposed by stakeholders, Members of Congress, and other interested parties that could enhance the current 

process. Such changes could include, for example, earlier notification of companies that they are under review. At the Council’s direction, the FSOC’s Deputies Committee has recently held meetings with various stakeholders to solicit their views and feedback 

on steps that the Council could take to provide additional transparency and engagement during the various phases of the designation process. The Council intends to have further discussions on 

this issue at its upcoming meetings. 

More broadly, the Council has taken steps to increase the overall 

transparency of Council actions, including providing more detail in 

Council minutes and publishing Council meeting agendas a week 

in advance, except in exigent circumstances. 

Q.2. In the July FSOC meeting, the Council directed staff to undertake a more focused analysis of industrywide products and activities to assess potential risks associated with the asset management 

industry. 

Does the decision to focus on ‘‘products and activities’’ mean that 

the FSOC is no longer pursuing designations of asset management 

firms? 

Did the FSOC vote on whether to advance the two asset management companies to Stage 3? If so, why was this not reported? If 

not, why was such a vote not taken in order to provide clarity to 

the two entities as well as the industry? 

A.2. At its recent meetings, the FSOC discussed the Council’s various work streams related to asset managers, including its work related to analyzing industrywide and firm-specific risks. Based on 

those discussions, the Council has agreed to undertake a more focused analysis of industrywide products and activities. The objective of this work is to inform the Council, about what, if any, additional policy actions by FSOC or its members may be appropriate. 

The Dodd-Frank Act provides FSOC with a range of policy tools, 

including making recommendations to regulators and the industry 

in the FSOC’s annual report, issuing formal recommendations to 

primary financial regulatory agencies to apply new or heightened 

standards or safeguards, designating a nonbank financial company 

to be supervised by the Federal Reserve, or designating payment, 

clearing, or settlement activities as systemically important. It 

would be premature to determine which, if any, of these policy tools 

may be most appropriate until the Council’s more in-depth analysis 

of the industry and its activities are completed. In light of these decisions, and pending the completion of these work streams, the 

Council has not voted on any action with respect to specific asset 

management firms. 

Q.3. There has been much attention surrounding Operation Choke 

Point, a DOJ-led effort with your agencies participating. Unfortunately, this Operation has resulted in numerous legitimate small 

businesses losing access to basic banking services. I appreciate that 

your agencies have issued new guidance last month to address 

121 

market uncertainty. It is my understanding that your agencies, as 

part of this Operation, refer cases to DOJ if you suspect a violation 

of the Financial Institutions Reform, Recovery, and Enforcement 

Act (FIRREA). 

Please provide the number of FIRREA referrals each of your 

agencies has made to DOJ as a part of Operation Choke Point. 

A.3. The OCC is not a part of Operation Choke Point and has not 

made any referrals to DOJ as a part of Operation Choke Point. 

Q.4. If your agency did not provide any FIRREA referrals to DOJ 

directly in connection with Operation Choke Point, how many 

FIRREA referrals has your agency provided to DOJ since DOJ commenced its Operation Choke Point? 

A.4. The OCC expects that potential criminal violations and suspicious transactions that are indicative of money laundering or terrorist financing would be referred to the DOJ through the Suspicious Activity Reporting (SAR) system maintained by FinCEN. 

Most SARs are filed by the institutions themselves, although the 

OCC may also file SARs, e.g., where a bank fails to file, or files an 

incomplete or inaccurate SAR. Since December 2012, the OCC has 

filed nine SARs. 

The OCC may also reach out directly to DOJ to bring priority 

SARs to their attention. In addition, under the Equal Credit Opportunity Act (ECOA), the OCC is also required to make a referral to 

DOJ when it has a ‘‘reason to believe’’ that a bank has engaged in 

a pattern or practice of discrimination on a prohibited basis. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM THOMAS J. CURRY 

Q.1. With the Volcker Rule, we finally learned the lessons from the 

bailout of Long-Term Capital Management and then the 2008 financial crisis that we simply cannot afford to have big, systemically significant firms making big bets on the ups and downs of 

the market. Casino banking is over—if you stick to your guns and 

enforce the Rule. 

I deeply appreciate the hard work you did to getting to a final 

rule last December, and I recognize the hard work you are doing 

now to implement it. However, we are still at the beginning legs 

of the journey, and I believe in ‘‘trust but verify’’—which requires 

full, continued cooperation by our regulators and engagement with 

the public. 

During the financial crisis, we all saw the horrific results when 

different regulators saw only parts of the risks to some firms. 

There were too many regulatory silos, which do not work because 

firms do not function that way. You also need a complete picture 

of what is going on in any one institution and across different 

firms. Indeed, one of the least recognized benefits of the Volcker 

Rule is to force the regulators to pay attention, together, to trading 

activities, which have become so important at so many banks. But 

critically, this means all the regulators need full access to all collected data and information. 

In addition, accountability to the public through disclosure provides another layer of outside oversight and analysis, as well as 

122 

equally importantly, public confidence that Wall Street reform is 

real. 

Based on the track record of various public disclosure mechanisms out there already—including for example, the CFTC’s positions of traders—there is significant space for reasonably delayed 

disclosures of metrics data to enhance Volcker Rule accountability 

and public confidence. Now Treasury Deputy Secretary and thenFederal Reserve Governor Sarah Bloom Raskin highlighted disclosure in her statement on adoption of the final rule, and financial 

markets expert Nick Dunbar has similarly called for disclosure as 

a key tool. (See Nick Dunbar, ‘‘Volcker Sunlights Should Be the 

Best Disinfectant’’, July 25, 2014, http://www.nickdunbar.net/articles/volcker-sunlight-should-be-the-best-disinfectant/.) The OCC’s 

Quarterly Trading Activity Report may be a perfect venue to engage in this type of disclosure, provided it is expanded to cover the 

entire banking group. 

First, will you commit to working to ensure that each of your 

agencies has a complete picture of an entire firm’s trading and 

compliance with the Volcker Rule, which can best be accomplished 

by having all data in one place so that all regulators have access 

to it? 

A.1. We agree that it is important for regulators to have a complete 

picture of a firm’s trading activities and Volcker compliance efforts. 

Toward this end, we are working closely with the other Volcker 

rulewriting agencies to coordinate our oversight across multiple 

legal entities. Coordinated oversight requires information sharing 

which in turn may require the agencies to enter into memoranda 

of understanding that will govern the sharing. We are currently 

working to put such memoranda in place where needed. 

Q.2. Second, are you committed to using disclosure to help advance 

compliance with and public trust from the Volcker Rule? 

A.2. We support appropriate public disclosures. For example, the 

revised market risk capital rule requires banks to publish data on 

their trading activities. We note that public disclosure must be consistent with the Trade Secrets Act and the Freedom of Information 

Act. Moreover, as we noted in the final rule, the purpose of the 

metrics is to flag activity that warrants further supervisory scrutiny. The metrics alone are not necessarily indicative of proprietary 

trading. As a result, the metrics data may not provide sufficient information to help the public identify proprietary trading. 

Q.3. The success of the Volcker Rule over the long term will depend upon the commitment of regulators to the vision of a firewall 

between high risk, proprietary trading and private fund activities, 

on the one hand, and traditional banking and client-oriented investment services on the other hand. One of the most important 

parts of ensuring that vision is meaningfully implemented is the 

December 2013 final rule’s application of its provisions at the 

‘‘trading desk’’ level, defined as the ‘‘smallest discrete unit of organization’’ that engages in trading. Unfortunately, reports have 

emerged suggesting that banks are already attempting to combine 

and reorganize what had been separate trading desks into one 

‘‘trading desk’’ for Volcker Rule purposes, as a way to game the 

metrics-based reporting essential to effective monitoring by reguVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00126 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
123 

lators of each institution’s compliance with the Volcker Rule. The 

OCC has already identified this risk in its Interim Examination 

Procedures, and attempted to limit such actions to instances where 

the desks were engaged in ‘‘similar strategies,’’ the combination has 

a ‘‘legitimate business purpose,’’ and the combination assists the 

firm to ‘‘more accurately reflect the positions and fluctuations’’ of 

its trading. I feel the OCC’s interim protections may not, however, 

be enough to ensure compliance with the final rule. I am deeply 

concerned that combining or reorganizing trading desks would undermine the strength of the metrics-based oversight, particularly 

related to whether market-making is truly to serve near-term customer demand and whether hedging is truly that. To avoid obscuring evasion by changing the mixture and volume of the ‘‘flow’’ of 

trading that is reported by the ‘‘trading desk’’ unit, I would suggest 

that examiners ought to strictly apply the final rule’s approach to 

‘‘trading desk’’ and apply the guidance set out by the OCC extremely narrowly, along with additional protections. For instance, 

‘‘similar strategies’’ would need to include both the type of the trading (e.g., market-making) but also the same or nearly identical 

products, as well as by serving the same customer base, among 

other standards. As an example, if two desks traded in U.S. technology stocks and technology stock index futures, combining those 

into one desk might make sense, depending on other factors, such 

as where the desks were located and what customers they were 

serving. But combining, for example, various industry-specific U.S. 

equities desks that today are separate would not pass muster for 

complex dealer banks. 

It is also important to remember that an important supervisory 

benefit from implementing the Volcker Rule at a genuine trading 

desk level is that regulators will gain a much deeper, more granular understanding of the risks emanating the large banks’ many 

different trading desks the kind of risks that led one particular 

trading desk to become famous as the London Whale. When confronted with attempts to reorganize trading desks, regulators 

should look carefully at whether submanagement structures, bonus 

structures, or other indicia exist that would suggest that the reorganized ‘‘trading desk’’ is not actually the smallest discrete unit of 

organization contemplated by the final rule and essential to the 

metrics-based oversight system being developed. 

Will you commit to scrutinizing, for the purposes of the Volcker 

Rule, any reorganizations of trading desks as posing risks of evasion and will you commit to working jointly to clarify any guidance 

on the definition of trading desk for market participants? 

A.3. Yes. As you noted, the OCC has been proactive on this issue, 

and we will continue to closely scrutinize any conduct that could 

indicate an attempt to evade the requirements of the Volcker Rule. 

Q.4. Ensuring speedy compliance with the provisions of the 

Merkley-Levin Volcker Rule is a top priority for strong implementation. It has already been 4 years since adoption, and banks 

should be well on their way to conforming their trading and fund 

operations. However, as you know, we also provided for an additional 5 years of extended transition for investments in ‘‘illiquid 

funds,’’ which were expected to include some types of private equity 

124 

funds. We did this because some private equity funds, such as venture capital funds, do not usually permit investors to enter or exit 

during the fund’s lifetime (usually 10 years or so) because of the 

illiquidity of those investments. 

As you know, the Federal Reserve Board’s rule on the ‘‘illiquid 

funds’’ extended transition interprets the statutory provision of a 

‘‘contractual commitment’’ to invest as requiring a banking entity, 

where a contract permits divestment from a fund, to seek a fund 

manager’s and the limited partners’ consent to exit a fund. The 

rule, however, provides for the Board to consider whether the banking entity used reasonable best efforts to seek such consent but 

that an unaffiliated third party general partner or investors made 

unreasonable demands. I strongly support the Board’s desire to implement the Volcker Rule in a speedy manner. In addition, the 

Board’s approach in the final conformance rule goes a long way to 

ensuring that the illiquid funds extended transition only be available for investments in truly illiquid funds, and not a way to avoid 

divestment of hedge funds and private equity funds. 

At the same time, we designed the provision to provide for a 

smooth wind-down for illiquid funds. Indeed, I am sensitive to the 

legitimate business needs of firms seeking to comply with the 

Volcker Rule while maintaining relationships with important customers to whom they may seek to provide traditional banking services. 

Accordingly, I would urge the Board to clarify that a banking entity’s requirement to make ‘‘reasonable efforts’’ to exercise its contractual rights to terminate its investment in an illiquid fund could 

be satisfied, for example, by a certification by the banking entity 

(a) that the banking entity’s exit from the fund would be extraordinary from the perspective of how most investors enter or exit the 

fund (i.e., the investment contract does not routinely or ordinarily 

contemplate entry or exit, and/or such other indicia as are necessary to help distinguish between illiquid private equity funds and 

other funds, like hedge funds, that ordinarily and routinely permit 

investor redemptions), (b) that inquiring with third-party fund 

managers and limited partners regarding termination would result 

in a significant detriment to the business of the banking entity and 

(c) that the banking entity believes that the divestment would result in losses, extraordinary costs, or otherwise raise unreasonable 

demands from the third-party manager relating to divestment (or 

the de facto equivalent thereto). 

Such a certification from the banking entity, along with the language of the relevant fund agreements and such other requirements as the Board determines appropriate, would obviate the 

need to seek consent from third-party fund managers. 

Have you considered clarifying this in a FAQ? 

A.4. By statute, the Board of Governors of the Federal Reserve System has sole authority to grant the special conformance period for 

illiquid funds, and, accordingly, we defer to the Board on this issue. 

Q.5. We’ve recently seen reports that the largest Wall Street banks 

are nominally ‘‘deguaranteeing’’ their foreign affiliates in order to 

avoid coverage under U.S. regulatory rules, especially those related 

to derivatives. This ‘‘deguaranteeing’’ appears to be based on a ficVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00128 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
125 

tion that U.S. banks do not actually guarantee the trading conducted by foreign subsidiaries, and hence would not be exposed to 

any failure by the foreign subsidiary. 

Can you comment on that, and specifically, whether you believe 

that U.S. bank or bank holding company could be exposed to losses 

from—or otherwise incur liability related to—a foreign affiliate’s 

trading even when no explicit guarantee to third parties exists. 

Please specifically address whether an arrangement, commonly 

known as a ‘‘keepwell,’’ provided by the U.S. parent or affiliate to 

the foreign affiliate potentially could create such exposure—and 

specifically, liability—for the U.S. entity. 

A.5. There are a number of transactions and arrangements that 

could expose a U.S. bank or a bank holding company to losses from 

a foreign affiliate’s trading activities. For example, as the OCC, the 

Federal Reserve Board, FDIC and Federal Housing Finance Agency 

noted in the joint proposed swaps margin rule, many swaps agreements contain cross-default provisions that give swaps counterparties legal rights against certain ‘‘specified entities,’’ even when no 

explicit guarantee to a third party exists. See ‘‘Margin and Capital 

Requirements for Covered Swaps Entities’’, 79 FR 57348 (Sept. 24, 

2014). In these arrangements, a swaps counterparty of a foreign 

subsidiary of a U.S. covered swap entity may have a contractual 

right to close out and settle its swaps positions with the U.S. entity 

if the foreign subsidiary of the U.S. entity defaults on its own 

swaps positions with the counterparty. While not technically a 

guarantee of the foreign subsidiary’s swaps, these provisions may 

be viewed as reassuring counterparties to foreign subsidiaries that 

the U.S. bank stands behind its foreign subsidiaries’ swaps. Other 

similar arrangements may include liquidity puts or keepwell agreements. 

In a keepwell agreement between a bank and an affiliate, a bank 

or holding company typically commits to maintain the capital levels 

or solvency of the affiliate. To the extent a foreign affiliate’s trading 

activity reduces its capital or threatens its solvency, a keepwell 

agreement issued by a U.S. member bank could potentially expose 

the bank to losses. 

In addition, the Federal Reserve generally views a keepwell 

agreement between a member bank and its affiliate as similar in 

terms of credit risk to issuing a guarantee on behalf of an affiliate. 

See 67 Federal Register 76560, 76569 (Dec. 12, 2002). 23A does not 

hinge on credit risk. Such an agreement would generally be subject 

to the quantitative and collateral restrictions in section 23A of the 

Federal Reserve Act. Under section 23A’s quantitative limits, the 

maximum amount of covered transactions that a member bank 

may enter into with an affiliate, including guarantees issued on behalf of the affiliate, is 10 percent of the bank’s capital. Accordingly, 

the quantitative limits would prohibit a keepwell agreement that 

is unlimited in amount. Even if the bank’s obligations under the 

keepwell agreement is limited to less than 10 percent of the bank’s 

capital, the collateral requirements in section 23A, as amended by 

section 608 of Dodd-Frank, require that a bank’s guarantee be secured by eligible collateral at all times the guarantee is in place. 

126 

Q.6. Moreover, please comment on whether the size and importance to the U.S. parent or affiliate of the foreign affiliate’s activities could itself create an implied guarantee such that the U.S. firm 

would have major reputational or systemic risk reasons to prevent 

the foreign affiliate from incurring significant losses or even failing—similar to rescues that occurred during the financial crisis of 

entities that were supposed to be bankruptcy remote. 

A.6. In the absence of an explicit guarantee, a U.S. bank or bank 

holding company ordinarily would not have a legal obligation to 

step in. Moreover, a bank’s ability to provide assistance to a foreign 

affiliate would be limited under various laws including sections 

23A and 23B of the Federal Reserve Act. For example, under section 23B, a member bank could not provide assistance to a foreign 

affiliate unless that assistance was provided to the affiliate on 

terms and under circumstances, including credit standards, that 

are substantially the same as a comparable transaction between a 

bank and a nonaffiliate. In addition, the requirement under section 

23B also applies to certain transactions in which a member bank 

engages with an unaffiliated party where the transaction benefits 

an affiliate. It also applies to transactions with an unaffiliated 

party if an affiliate has a financial interest in the unaffiliated party 

or is a participant in the transaction. 

Q.7. Finally, many of these foreign bank subsidiaries are so-called 

‘‘Edge Act’’ corporations, which I understand are consolidated with 

the insured depository subsidiary for many purposes. Please comment on whether there is any chance that losses in these Edge Act 

corporations, particularly losses in their derivatives operations, 

could impact the deposit insurance fund. 

A.7. A bank’s Edge Act subsidiaries are consolidated with the bank 

for financial reporting purposes under GAAP. However, accounting 

consolidation does not affect the bank’s legal liability for its subsidiaries. Absent a guarantee or similar arrangement, the bank is 

not ordinarily liable for an Edge Act subsidiary’s losses. See 12 

U.S.C. 621 (shareholders in an Edge Act corporation are liable for 

the amount of their unpaid stock subscriptions). If an Edge Act 

subsidiary incurred losses in excess of the bank’s equity investment, then the bank could place the subsidiary in bankruptcy (or 

a similar proceeding). Under GAAP, this would deconsolidate the 

subsidiary from the bank’s balance sheet. In addition, Edge Act corporations generally may not take deposits in the United States, 

and the FDIC only insures U.S. deposits. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGAN 

FROM THOMAS J. CURRY 

Q.1. During the July 15th Semiannual Monetary Policy Report 

hearing with Chair Yellen, I outlined the importance for State and 

local governments of including municipal securities as ‘‘High Quality Liquid Assets’’ in the Liquidity Coverage Ratio (LCR) rule proposed by the Federal Reserve, FDIC, and OCC. I was therefore disappointed to learn that municipal securities were excluded from eligibility when the rule was recently finalized, in spite of comments 

by the Federal Reserve suggesting municipal securities are suffiVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00130 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
127 

ciently liquid and their inclusion as HQLA should be given additional consideration. I was also pleased to hear your responses during the hearing indicating you would be open to revising the inclusion of municipal securities as HQLA if additional analysis showed 

they had similar liquidity levels. As banks are now beginning the 

process of optimizing their balance sheets around the final LCR 

rule, it is important that the issue of municipal securities is addressed expeditiously to avoid an impact on this market. 

What is the timeline for issuing a proposal specific to municipal 

securities and the LCR, given that Federal Reserve Board staff 

analysis has demonstrated that some municipal securities are at 

least as liquid as corporate bonds that are included as HQLA? 

A.1. The OCC looks forward to discussing with the Federal Reserve 

Board any additional research or specific proposals on the possibility of calibrating an LCR standard that differentiates certain 

municipal securities from others with broader illiquid characteristics. If such a standard is identified that is consistent with the liquidity risk management goals of the LCR rule, the OCC will work 

with the Federal Reserve Board and the Federal Deposit Insurance 

Corporation (FDIC) to adjust the rule accordingly. The OCC generally regards banks’ investments in municipal securities as a prudent activity, in which banks have historically engaged for purposes of yield and community support, not for liquidity risk management. In fact, banks covered by the LCR rule have substantially 

increased their investments in municipal securities since the agencies issued the LCR proposal and final rule that did not include 

municipal securities as HQLA. Over the past year, LCR banks’ percent increase in holdings of municipal securities is nearly double 

the percent increase in such holdings for the overall banking industry. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM THOMAS J. CURRY 

Q.1. On the Liquidity Coverage Ratio (LCR) Rule: A number of 

ABS classes, including securitized auto and credit card loans, were 

denied any HQLA status in the recently finalized LCR rule. What 

was your reasoning for this? 

A.1. Evidence from the 2007–2009 financial crisis and the period 

following indicates that the market demand for a variety of 

securitization issuances can decline rapidly during a period of 

stress and may not rapidly recover. ABS may be dependent on a 

diverse range of underlying asset classes, each of which may suffer 

from adverse effects during a period of significant stress. Furthermore, the characteristics of ABS securitization structures may be 

tailored to a limited range of investors. The ability to monetize 

these securitization issuances and whole loans through or in the repurchase market may be limited in a period of stress. 

Moreover, although certain ABS issuances, such as ABS backed 

by loans under the Federal Family Education Loan Program and 

residential mortgage-backed securities (RMBS) backed solely by 

securitized ‘‘qualified mortgages’’ or mortgages guaranteed by the 

Federal Housing Authority or the Department of Veterans Affairs, 

may have lower credit risk, the liquidity risk profile of such securiVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00131 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
128 

ties, including the inability to monetize the issuance during a period of stress, does not warrant treatment as HQLA. The ace notes 

that ABS and RMBS issuances have substantially lower trading 

volumes than MBS that are guaranteed by U.S. GSEs and demand 

for such securities has decreased, as shown by the substantial decline in the number of issuances since the recent financial crisis. 

Q.2. Because many of the banks that need to comply with the LCR 

comprise a significant number of the investors in these ABS, will 

denying HQLA status to ABS increase borrowing costs for consumers and small businesses? Was a cost-benefit analysis conducted on this particular provision of the rule? Would you be open 

to sharing that analysis, on this provision or on the rule as a 

whole, with Congress? 

A.2. The OCC reviewed investments in ABS by banks that need to 

comply with the LCR final rule and notes that holdings by these 

banks comprise less than 10 percent of the total ABS market as of 

the second quarter of 2014. Furthermore, the final rule does not 

prohibit covered companies from continuing to invest in ABS. 

Banks covered by the LCR rule generally have already adjusted 

their funding profile and assets in anticipation of the LCR requirement with little impact on the overall market. Moreover, because 

the LCR rule applies to a limited number of U.S. financial institutions, we do not expect a significant general increase in costs or 

prices for consumers. Therefore, we do not believe the final rule 

will have a significant impact on overall demand for ABS and increase the cost of funding. 

The OCC has analyzed the final rule, as a whole, under the factors set forth in the Unfunded Mandates Reform Act of 1995 

(UMRA) (2 U.S.C. 1532). For purposes of this analysis, the ace considered whether the final rule includes a Federal mandate that 

may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million 

or more (adjusted annually for inflation) in any 1 year. The OCC’s 

UMRA written statement is available at: http:// 

www.regulations.gov, Docket ID OCC-20130016. 

Q.3. Additionally, the finalized LCR rule confers no HQLA status 

to private-label mortgage-backed securities while conferring GSEguaranteed mortgage-backed securities Level 2A HQLA status. Republicans and Democrats are committed to attracting more private 

capital to housing finance. To what extent did you consider the 

ramifications of this decision as it relates to broader housing finance reform? 

A.3. In identifying the types of assets that would qualify as HQLA 

in the final rule, the agencies considered the following categories 

of liquidity characteristics, which are generally consistent with 

those of the Basel III Revised Liquidity Framework: (a) risk profile; 

(b) market-based characteristics; and (c) central bank eligibility. 

The agencies continue to believe that private-label mortgagebacked securities do not meet the liquid and readily marketable 

standard in U.S. markets, and thus do not exhibit the liquidity 

characteristics necessary to be included as HQLA under the final 

rule. Evidence from the 2007–2009 financial crisis and the period 

following indicates that the market demand for a variety of 

129 

securitization issuances can decline rapidly during a period of 

stress, and that such demand may not rapidly recover. In contrast, 

the OCC recognizes that some securities issued and guaranteed by 

U.S. GSEs consistently trade in very large volumes and generally 

have been highly liquid, including during times of stress. 

Q.4. Doesn’t the disparate treatment of PLMBS and GSE MBS direct more funding into GSE-guaranteed mortgages and make it 

harder for private capital (without Government guarantees from 

the GSEs, FHA, VA, or USDA) to reenter the market? 

A.4. The agencies recognize the importance of capital funding to 

the U.S. residential mortgage markets and highlight that the final 

rule does not prohibit covered companies from continuing to invest 

in private label MBS. The agencies do not expect, and have not observed, that banking organizations base their investment decisions 

solely on regulatory considerations and do not anticipate that exclusion of this asset class from HQLA will significantly deter investment in these assets. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM THOMAS J. CURRY 

Q.1. As we examine Wall Street regulation and soundness, it is 

critical that we be alert to outside threats as well. Over the past 

year, there have been a number of extensive cyberattacks on American companies, including large financial institutions. Combatting 

these transnational crimes requires cooperation across Government 

and industry. 

As I have previously asked both Secretary Lew and Chair 

Yellen—Do you pledge to make cybersecurity a priority? 

Do you believe FSOC can fulfill its statutory mandate to identify 

risks and respond to emerging threats to financial stability without 

making cybersecurity a priority? 

As a member of FSOC, can you identify any deficiencies in the 

U.S.’s ability to prevent cyberattacks that require Congressional action? 

What steps has FSOC taken to address the prevention of future 

cyberattacks on financial institutions, such as the recent breach at 

JPMorgan Chase? 

A.1. As noted in my written testimony, the operational risks posed 

by cyberattacks is one of the most pressing concerns facing the financial services industry today. It is a priority that FSOC members 

share and is one of the emerging threats that the FSOC identified 

and discussed in its annual reports. FSOC provides a mechanism 

to achieve collaborative efforts to address emerging cyberthreats 

and has set forth specific recommendations to advance efforts on 

cybersecurity. For example, in its 2014 annual report, FSOC recommended that Treasury continue to work with regulators, other 

appropriate Government agencies and private sector financial entities to develop the ability to leverage insights from across the Government and other sources to inform oversight of the financial sector and to assist institutions, market utilities, and service providers 

that may be targeted by cyberincidents. The Council also recommended that financial regulators continue their efforts to assess 

130 

cyber-related vulnerabilities facing their regulated entities, identify 

gaps in oversight that may need to be addressed, and to inform and 

raise awareness of cyber threats and incidents. 

Shoring up the industry’s defenses against cyberthreats also is 

one of my key priorities as Comptroller and as chairman of the 

Federal Financial Institutions Examination Council (FFIEC). Combating the threats posed by such attacks requires ongoing vigilance 

and close cooperation and collaboration by regulators, law enforcement, and industry participants. To help foster such coordination, 

one of my first actions as chairman of the FFIEC was to call for 

the creation of the Cybersecurity and Critical Infrastructure Working Group (CCIWG). This group coordinates with intelligence, law 

enforcement, the Department of Homeland Security, and industry 

officials to provide member agencies with accurate and timely 

threat information. 

The FFIEC’s CCIWG work is consistent with the FSOC’s recommendations. A key activity of the working group is to monitor 

and issue alerts to the industry about emerging threats. Within its 

first year, this working group released joint statements on the risks 

associated with ‘‘distributed denial of service’’ attacks, automated 

teller machine ‘‘cashouts,’’ and the wide-scale ‘‘Heartbleed’’ vulnerability. Last month, the group prepared and issued an alert to institutions about a material security vulnerability in Bourne-again 

shell (Bash) system software widely used in servers and other computing devices that could allow attackers to access and gain control 

of operating systems. The joint statements and alerts outline the 

risks associated with the threats and vulnerabilities, the risk mitigation steps that financial institutions are expected to take, and 

additional resources to help institutions mitigate the risks. In addition to these actions, OCC staff and other CCIWG members work 

closely with law enforcement, Treasury, and other Government officials to share information about emerging threats on both a classified and unclassified basis. The threat of cyberattacks is not limited to large institutions. Earlier this year, the CCIWG hosted an 

industry webinar for over 5,000 community bankers to help raise 

the awareness of cybersecurity issues and steps that smaller banks 

can take to guard against such threats. The group recently conducted a cybersecurity assessment of over 500 community institutions. The information from this assessment will help FFIEC members identify and prioritize actions that can enhance the effectiveness of cybersecurity-related guidance to community financial institutions. 

The CCIWG is also working to identify any gaps in the regulators’ legal authorities, examination procedures and examiner 

training in connection with our supervision of the banking industry’s cybersecurity readiness and its ability to address the evolving 

and increasing cyberthreats. If our work identifies gaps in our legal 

authorities that require Congressional action, we will be happy to 

share those with the Committee. 

131 

1 In general, a lender may accept a private flood insurance policy that meets the criteria for 

a standard flood insurance policy (SFIP) set forth by FEMA in its former Mandatory Purchase 

of Flood Insurance Guidelines. To the extent a policy differs from a SFIP, a lender should carefully examine the differences before accepting the policy. See ‘‘Loans in Areas Having Special 

Flood Hazards; Interagency Questions and Answers Regarding Flood Insurance’’, 74 FR 35914 

(July 21, 2009). See also OCC regulations at 12 CFR 22.3, which require that a designated loan 

be covered by ‘‘flood insurance’’ without specifying that it be flood insurance provided under the 

NFIP or a private policy. Furthermore, the sample flood insurance notice included in Appendix 

A of part 22 includes language informing the borrower that flood insurance coverage may be 

available from private insurers that do not participate in the NFIP. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM THOMAS J. CURRY 

Q.1. Last year, I wrote to the Office of the Comptroller of the Currency (OCC) regarding the implementation of rules and guidance 

regarding private flood insurance policies, as required under the 

Biggert-Waters Flood Insurance Reform Act. In passing that legislation, it was the intent of Congress to reaffirm existing law that 

lenders accept private flood insurance policies to provide more 

choices for consumers. The OCC, Federal Reserve, FDIC and several other agencies issued a guidance memo claiming private insurance provisions in Biggert-Waters are not effective until final rulemaking. This has caused confusion among lenders who now routinely reject all private flood insurance policies. 

In response to my letter, the OCC wrote back explaining, ‘‘We expect to issue a proposed rule within the next several months.’’ That 

was over a year ago I received that response and there is still no 

progress on this issue. 

I would like to receive a status update on the details about this 

proposed rule on private flood insurance and receive a timeline of 

when it will be issued. 

If there is not going to be regulations anytime soon, is there any 

way the OCC, FDIC, Federal Reserve can allow lenders to accept 

private flood insurance at their discretion without penalty until 

there is a final rule? 

Senator Tester and I have introduced legislation that would solve 

this problem by allowing private flood insurance to be sold if approved by State regulators. Would the OCC, FDIC, or Federal Reserve consider supporting a legislative solution to this problem instead of rulemaking? 

A.1. Agency staffs are meeting regularly to draft rules that take 

into account the public comments received from our notice of proposed rulemaking implementing the Biggert-Waters Act and the 

many issues they raised. With respect to private flood insurance, 

commenters generally supported adding a provision to the final 

rule specifically permitting the discretionary acceptance of private 

flood insurance, and requested more guidance as to the statute’s 

definition of private flood insurance. The agencies are working to 

determine the best way to provide this guidance in our rule. 

Until the agencies issue final rules, current law applicable to private insurance will continue to apply. Under current law, banks 

and thrifts may continue to accept private flood insurance in satisfaction of the National Flood Insurance Program (NFIP) requirements, without penalty, if certain conditions are met. 1 The BiggertWaters Act did not change the discretionary acceptance of private 

flood insurance, but merely mandated the acceptance of certain priVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00135 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
132 

2See 78 FR 65108, at 65110 and 65114. (Oct. 30, 2013). 

vate policies that meet the statutory definition of ‘‘private flood insurance.’’ The agencies have consistently advised institutions that 

they may continue to accept such private flood insurance at this 

time, and that the requirement to accept private flood insurance 

that meets the Biggert-Waters definition is not effective until our 

final rule is issued. We specifically made these points in the preamble to our notice of proposed rulemaking. 2

We believe that a regulatory solution regarding private flood insurance is possible and that it is premature to pursue legislation 

such as the Heller-Tester bill. 

Q.2. Recently, the Treasury Department indicated that the Financial Stability Oversight Council was switching the focus of its asset 

management examination toward activities and products rather 

than individual entities. 

Will you confirm that individual asset management companies 

are no longer being considered for possible systemically important 

designation? 

A.2. At its recent meetings, the FSOC discussed the Council’s various work streams related to asset managers, including its work related to analyzing industrywide and firm-specific risks. Based on 

those discussions, the Council agreed to undertake a more focused 

and fuller analysis of industrywide products and activities. The objective of this work is to inform the Council about what, if any, additional policy actions by FSOC or its members may be appropriate. The Dodd-Frank Act provides FSOC with a range of policy 

tools, including making recommendations to regulators and the industry in the FSOC’s annual report, issuing formal recommendations to primary financial regulatory agencies to apply new or 

heightened standards or safeguards to an activity, designating a 

nonbank financial company to be supervised by the Federal Reserve, or designating payment, clearing, or settlement activities as 

systemically important. It would be premature to determine which, 

if any, of these policy tools may be most appropriate until the 

Council’s more in-depth analysis of the industry and its activities 

is completed. 

RESPONSES TO WRITTEN QUESTIONS OF 

CHAIRMAN JOHNSON FROM RICHARD CORDRAY 

Q.1. In your testimony before this Committee in June, you discussed the progress being made on coming up with a rural definition for the Bureau’s mortgage rules. Can you provide an update 

on that process? 

A.1. The Consumer Financial Protection Bureau (Bureau) has received extensive feedback on its definitions of ‘‘underserved’’ and 

‘‘rural’’ since it first interpreted the statutory term ‘‘rural or underserved areas’’ for purposes of its mortgage rules under Title XIV of 

the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act. As you know, the Bureau amended the Ability-to-Repay 

Rule last year to provide a 2-year transition period, during which 

balloon loans made by small creditors and held in portfolio will be 

treated as Qualified Mortgages regardless of where a particular 

133 

creditor originates mortgage loans. During this transition period, 

the Bureau committed to reviewing whether its definitions of 

‘‘rural’’ and ‘‘underserved’’ should be adjusted. We committed to 

such a review to ensure that the Bureau’s definitions reflect significant differences among geographic areas, to calibrate access to 

credit concerns, and to facilitate implementation and consumer protection as mandated by Congress. The Bureau expects to release in 

early 2015 a notice of proposed rulemaking in connection with certain provisions that modify general requirements for small creditors that operate predominantly in ‘‘rural or underserved’’ areas, 

while it continues to assess possible additional guidance that would 

facilitate the development of automated underwriting systems for 

purposes of calculating debt-to-income ratios in connection with 

qualified mortgage determinations and other topics. 

Q.2. Although the CFPB does not have examination authority over 

financial institutions with total assets of less than $10 billion, its 

rules can have an impact on smaller institutions. Can you describe 

what you have done to ensure that the needs and concerns of community banks and credit unions are considered at the Bureau? 

A.2. Community banks and credit unions play critical roles in ensuring a fair, transparent, and competitive marketplace for consumer financial products and services. They generally base their 

businesses on building personal, long-term customer relationships, 

and can be a lifeline to hard-working families. 

As you note, the Consumer Financial Protection Bureau (Bureau) 

has supervisory authority over depository institutions and credit 

unions with total assets of more than $10 billion and their respective affiliates, but other than the limited authority under the DoddFrank Wall Street Reform and Consumer Protection Act (the DoddFrank Act), the Bureau does not have supervisory authority regarding credit unions and depository institutions with total assets 

of $10 billion or less. Although the Bureau does not have regular 

contact with these institutions in its supervisory capacity, the Bureau takes steps to ensure that the agency considers the needs and 

concerns of community banks and credit unions. 

Before proposing certain rules that may have a significant impact on a substantial number of small entities, the Bureau convenes a Small Business Review Panel pursuant to the Small Business Regulatory Enforcement Fairness Act and meets with and 

gathers input from community banks and credit unions under $550 

million in assets. The Bureau also engages in other outreach efforts 

to gather feedback from community banks and credit unions, including holding roundtables and other outreach meetings and consulting with the financial regulatory agencies that have primary 

examination authority over such entities. In fact, the Bureau has 

met with representatives from community banks and credit unions 

in all 50 States. 

After issuing significant substantive regulations, the Bureau continues to support community banks and credit unions with their 

regulatory implementation and compliance efforts. For example, in 

connection with the new mortgage rules recently issued pursuant 

to Title XIV of the Dodd-Frank Act, the Bureau published small entity compliance guides and other support materials on its Web site, 

134 

held educational webinars, and participated in numerous presentations and speaking events attended by community banks and 

credit unions. 

As you know, the Bureau also created the Community Bank Advisory Council and the Credit Union Advisory Council, at your and 

others’ urging. Those councils, which consist of community bankers 

and credit union leaders from across the country, advise the Bureau on regulating consumer financial products or services and specifically share their unique perspectives and provide feedback on 

the Bureau’s activities. The Bureau also established the Office of 

Financial Institutions and Business Liaison to ensure that the Bureau understands the needs and concerns of financial institutions, 

including community banks and credit unions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM RICHARD CORDRAY 

Q.1. The issue of FSOC accountability and transparency is one that 

I have raised numerous times. Given the magnitude of the regulatory burden and other costs imposed by a SIFI designation, it is 

imperative that the designation process be as transparent and objective as possible. 

Do you object to the public disclosure of your individual votes, including an explanation of why you support or oppose such designation? 

Will you commit to pushing for greater accountability and transparency reforms for FSOC? Specifically, will you commit to push 

the FSOC to allow more interaction with companies involved in the 

designation process, greater public disclosure of what occurs in 

FSOC principal and deputy meetings, publish for notice and comment any OFR report used for evaluating industries and companies, and publish for notice and comment data analysis used to determine SIFI designations? If you do not agree with these proposed 

reforms, what transparency and accountability reforms would you 

be willing to support? 

A.1. The Financial Stability Oversight Council (Council) is firmly 

committed to conducting its business openly and transparently. For 

example, consistent with this commitment, the Council voluntarily 

solicited public comment three separate times on its process for 

designating nonbank financial companies. The Council published a 

final rule and interpretive guidance in 2012. As described in the 

rule and interpretive guidance, firms under review have extensive 

opportunities to engage with staff representing the Council members before any vote on a proposed designation. Before the Council 

votes on whether to make a proposed designation, the company is 

invited to submit information and meet with staff, and the Council 

carefully considers the submitted information and the views of the 

company. For example, for one of the companies that has been designated, the Council spent over a year conducting its analysis and 

considered more than 200 data submissions from the company that 

totaled over 6,000 pages. Council staff engaged with this company 

at least 20 times, including seven meetings with senior management and numerous other telephone meetings. 

135 

After the Council votes to make a proposed designation, it provides the company with a detailed written explanation of the Council’s basis. Before any decision to designate becomes final, the company has a right to a hearing to contest the proposed designation, 

for which the company can submit written materials. The company 

may also request an oral hearing. These procedures provide the 

company with an opportunity to respond directly to the specific information that the Council has considered. Of the three companies 

that the Council has designated, only one firm requested a hearing, 

and the Council heard directly from the company’s representatives. 

The Council considered the information presented during this hearing in its evaluation of the company before a final designation was 

made. 

Although the Council is not subject to the Sunshine Act, it has 

voluntarily adopted nearly all of the statute’s transparency-related 

provisions in its own transparency policy. For example, the Council 

opens meetings to the public whenever possible, publicly announces 

meetings and information about meeting agendas 1 week in advance, and publishes minutes that include a record of all votes. The 

minutes of the meetings describing the vote also detail the votes 

of individual members of the Council. 

Regarding the information used by the Council in its analysis, it 

is critical to recognize that much of this information contains supervisory and other market-sensitive data, including information 

about individual firms, transactions, and markets that may only be 

obtained if maintained on a confidential basis. Protection of this information is necessary in order to, among other things, prevent the 

disclosure of trade secrets and commercial or financial information 

obtained from the firm and to prevent potential destabilizing market speculation that could occur if that information were to be disclosed. 

Q.2. In the July FSOC meeting, the Council directed staff to undertake a more focused analysis of industrywide products and activities to assess potential risks associated with the asset management 

industry. 

Does the decision to focus on ‘‘products and activities’’ mean that 

the FSOC is no longer pursuing designations of asset management 

firms? 

Did the FSOC vote on whether to advance the two asset management companies to Stage 3? If so, why was this not reported? If 

not, why was such a vote not taken in order to provide clarity to 

the two entities as well as the industry? 

A.2. At its meeting on July 31, 2014, the Council discussed its ongoing assessment of potential industrywide and firm-specific risks 

to the United States’ financial stability arising from the asset management industry and its activities. At that meeting, the Council 

directed staff to undertake a more focused analysis of industrywide 

products and activities to assess potential risks associated with the 

asset management industry. At its meeting on September 4, 2014, 

after discussing Council members’ views of priorities for the analysis of potential risks associated with the asset management industry, the Council directed staff to further develop their detailed work 

plan for carrying out the analysis of industrywide products and acVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00139 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
136 

1https://www.fdic.gov/news/news/press/2012/pr12092.html 

2http://www.federalreserve.gov/newsevents/press/enforcement/20140701b.htm 

tivities. As the Council continues to review this industry, it is important to note that there are no predetermined outcomes. There 

are a number of options available if the Council identifies meaningful risks to United States’ financial stability. 

Q.3. I understand that the Department of Education (DOE) has 

been collaborating with the CFPB on a rulemaking for student 

bank accounts so I want to raise the same concerns with you that 

I raise in a letter to Secretary Duncan last month. Specifically, I 

am concerned that a final DOE rule that fails to take into account 

existing prudential and consumer finance regulations for the underlying banking products will create regulatory confusion and 

cause some financial institution to exit this market to the detriment of students. 

Please explain the scope and extent of CFPB’s collaboration with 

the DOE on this rulemaking. Specifically, please explain how the 

CFPB has advised the DOE on ensuring that DOE’s regulations 

are not in conflict with existing laws and guidance. 

Has the CFPB conducted any analysis on the cost and availability of credit and banking products to students as a result of the 

DOE’s proposed rules? If not, why not and will the CFPB undertake such analysis at a future date? 

A.3. The Consumer Financial Protection Bureau (Bureau) shares 

many of the concerns raised by the Government Accountability Office and the Department of Education’s Inspector General, among 

others, about challenges in the market for student banking products, particularly financial products used to access Federal grants 

and scholarships. 

In 2012, the Federal Deposit Insurance Corporation (FDIC) 

reached a settlement with one of the largest participants in this 

market. Among other things, the FDIC found that Higher One was: 

charging student account holders multiple nonsufficient fund (NSF) 

fees from a single merchant transaction; allowing these accounts to 

remain in overdrawn status over long periods of time, thus allowing NSF fees to continue accruing; and collecting the fees from subsequent deposits to the students’ accounts, typically funds for tuition and other college expenses. The settlement provides for $11 

million in refunds to approximately 60,000 student victims, in addition to civil money penalties. 1

In July of this year, the Federal Reserve Board of Governors 

(Board) also issued a consent order to Cole Taylor Bank to address 

illegal conduct related to its partnership with Higher One. The 

order requires Cole Taylor Bank to cease its illegal conduct and 

pay a civil money penalty of approximately $3.5 million. The Board 

is also pursuing remedial actions against Higher One, including the 

payment of restitution for its past practices. Actions are also being 

pursued against another State member bank that has a similar arrangement with Higher One. 2

On March 26, 2014, at the invitation of the Department of Education, the Bureau provided a technical presentation to the negotiated rulemaking committee established to consider regulations related to third-party disbursement of Federal student aid. The presVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00140 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
137 

3http://www.consumerfinance.gov/f/201403lcfpblpresentation-to-department-educationrulemaking-committee.pdf 

entation was conducted at a public meeting hosted by the Department of Education. Written materials are available on both the Department of Education’s and the Bureau’s Web sites. 3

One of the primary purposes of the Department of Education’s 

consultation with the Bureau is to ensure that any potential regulations do not overlap or conflict with Federal consumer financial 

laws. As the Secretary considers any potential regulations, Department of Education staff solicited feedback from the Bureau on the 

applicability of certain Federal consumer financial laws on products 

heavily used in this marketplace, such as debit and prepaid cards. 

To date, the Department of Education has not proposed any regulations related to third-party disbursement of Federal student aid. 

However, in the Bureau’s presentation to the Department of 

Education’s negotiated rulemaking committee on March 26, 2014, 

Bureau staff shared relevant analysis at the request of the Department of Education to assess whether marketing partnerships between institutions of higher education and financial institutions increase availability of banking products to enrolled students. 

The Bureau, in coordination with the FDIC, analyzed the 2011 

National Survey of Unbanked and Underbanked Households, a 

supplement to the Census Bureau’s Current Population Survey. 

The analysis suggests that almost all students without bank accounts have the ability to access one outside of any school marketing partnership, but have not yet done so or have chosen not to 

open one. Very few students (< 0.5 percent) are unable to open a 

bank account. Reasons include: 

• Negative reporting to specialty credit bureaus due to past 

issues (e.g., Chex Systems) 

• Undocumented students who are unable or have not obtained 

Individual Taxpayer Identification Numbers 

• Suspicion of being a threat to national security or engaging in 

money laundering 

The Bureau also looked at the student banking product offerings 

for many financial institutions with a national reach. Many of 

these financial institutions offer products to students at schools 

which do not have a marketing arrangement with a financial institution. 

This preliminary analysis suggests that students currently have 

choice in a competitive marketplace, even when their institution of 

higher education is not being paid to market a product for a particular financial institution. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM RICHARD CORDRAY 

Q.1. On Data Gathering: In questions for the record following the 

Senate Committee on Banking, Housing, and Urban Affairs hearing on ‘‘The Consumer Financial Protection Bureau’s Semi-Annual 

Report to Congress’’, I noted that both the CFPB and the OCC had 

each gathered similar data from nine credit card issuers. I also 

138 

noted that gathering data from ten issuers would have triggered an 

OMB review and a period for public comment. It would appear that 

the decision to gather data from nine issuers each and then share 

that data, as agreed to in a memorandum of understanding, was 

made to circumvent the important safeguards of OMB review and 

public comment. 

My question to you was ‘‘With a data mining exercise of this size 

and scope, shouldn’t it be reviewed and shouldn’t the public have 

the opportunity to express their opinions on what is happening 

with their data?’’ Unfortunately, your response that the ‘‘Bureau 

made the determination that the PRA does not apply . . . ’’ did not 

directly address my question. Can you please provide a more thorough answer to my question? Does the CFPB believe that there is 

no value in being transparent and gathering public comment before 

a large-scale data collection effort begins? 

A.1. The Consumer Financial Protection Bureau (Bureau) values 

transparency in its work. We have been open about the fact that 

we collect information on the credit card industry, and have been 

responsive to inquiries from Members of Congress and other oversight bodies about the nature of our credit card data collection. 

Please note that the Bureau’s credit card database does not contain 

any directly identifying personal information such as name, address, social security number, or credit card account numbers. 

The Bureau has a robust Paperwork Reduction Act (PRA) program designed to ensure the transparency, quality, and economy of 

information gathered by the Bureau. This program includes reviewing potential data collections with the Office of Management and 

Budget (OMB), and providing public notice and seeking comment 

on the Bureau’s proposed information collections as defined by the 

PRA. 

The Bureau, through its PRA Officer, recently consulted again 

with the OMB regarding the applicability of the PRA to the Bureau’s ongoing collection of credit card information, and the Bureau’s credit card data information-sharing agreement with the Office of the Comptroller of the Currency (OCC). Following its consultation with the Bureau, OMB has confirmed that the Bureau’s 

data collection, including its information-sharing agreement with 

the OCC, is in compliance with the PRA. In its written response 

to the Bureau, OMB states that the Bureau’s credit card data collection effort ‘‘is not covered by the Paperwork Reduction Act 

(PRA)’’ (emphasis in original) and therefore does not require any 

additional action by the Bureau. 

Q.2. In questions for the record following the Senate Committee on 

Banking, Housing, and Urban Affairs hearing on ‘‘The Consumer 

Financial Protection Bureau’s Semi-Annual Report to Congress, I 

asked the question, ‘‘When the Bureau decides to publish a Bulletin, does it follow an established process?’’ The answer I received 

stated that the Administrative Procedure Act does not apply to bulletins and that the CFPB values public input. Setting aside the 

APA, could you please elaborate on what process (either established or ad-hoc) the CFPB goes through when putting out a bulletin? 

139 

A.2. The Administrative Procedure Act (APA) sets out certain procedures that Federal agencies must follow when they take agency 

actions. When an agency promulgates a rule in certain cases, the 

APA requires the agency to issue a notice and solicit comments 

from the public about the proposed rule. The APA, however, does 

not impose a notice and comment requirement for a general statement of policy, an interpretive rule, or actions that do not constitute rules. 

Whether or not required by statute, the Bureau values public 

input in our formulation of policy, and engages stakeholders using 

a variety of mechanisms. For example, our staff engages in informal consultations with industry and other interested parties. The 

Bureau has also voluntarily provided notice and sought comment 

for various rules for which notice-and-comment rulemaking were 

not required under the APA. We sometimes find, however, that a 

notice-and-comment process may not be the optimal process for a 

particular type of action we are considering. For example, in October 2013 the Bureau issued a bulletin explaining the meaning of 

certain provisions in its mortgage servicing rules. The Bureau 

issued that bulletin in response to requests from various stakeholders that we provide additional information about certain topics 

before the mortgage rules came into effect. Seeking notice and comment in that circumstance could have impaired our ability to provide needed information to the industry in sufficient time for them 

to use the information to comply with the mortgage rules that were 

about to take effect. In that situation, we determined that issuing 

a bulletin was the best option to address the industry’s concerns. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM RICHARD CORDRAY 

Q.1. As we examine Wall Street regulation and soundness, it is 

critical that we be alert to outside threats as well. Over the past 

year, there have been a number of extensive cyberattacks on American companies, including large financial institutions. Combatting 

these transnational crimes requires cooperation across Government 

and industry. 

As I have previously asked both Secretary Lew and Chair 

Yellen—Do you pledge to make cybersecurity a priority? 

A.1. Yes, the Consumer Financial Protection Bureau (Bureau) continues to be committed to cybersecurity in its operations and as cybersecurity relates to the Bureau’s mission and purview. We also 

carry that commitment to our work with the Financial Stability 

Oversight Council and the Federal Financial Institutions Examinations Council. 

Q.2. Do you believe FSOC can fulfill its statutory mandate to identify risks and respond to emerging threats to financial stability 

without making cybersecurity a priority? 

A.2. The Financial Stability Oversight Council (Council) recognizes 

the importance of cybersecurity as a priority in the means and 

methods by which the Council meets its statutory mandates to 

identify and monitor risks to the United States’ financial system. 

In the Council’s 2014 Annual Report, the Council reported that the 

140 

1http://www.nist.gov/cyberframework/ 

vulnerabilities posed by cross-sector dependencies and interconnected systems across firms, markets, and service providers can 

lead to significant cybersecurity risks. The Council recommended in 

the report that Treasury continue to work with the public and private sector, as appropriate, to work toward developing methods to 

manage risk. The Council also recommended that regulatory agencies continue to promote awareness and assess the use by regulated 

entities of both regulatory as well as nonregulatory methods to support risk management, including the National Institute of Standards and Technology (NIST) Cybersecurity Framework. 1 While the 

report recommends that financial regulators continue to assess 

cyber-related vulnerabilities facing regulated entities and identify 

gaps in oversight that need to be addressed, the Council also noted 

the role that the private sector plays in supporting the cybersecurity posture of the national infrastructure. 

Q.3. As a member of FSOC, can you identify any deficiencies in the 

U.S.’s ability to prevent cyberattacks that require Congressional action? 

A.3. The Council has recognized the importance of removing legal 

barriers to information sharing between public and private sector 

partners to enhance overall awareness of cyberthreats, 

vulnerabilities, and attacks, including through Congress’ passage of 

comprehensive cybersecurity legislation. 

Q.4. What steps has FSOC taken to address the prevention of future cyberattacks on financial institutions, such as the recent 

breach at JPMorgan Chase? 

A.4. The vulnerabilities posed by cross-sector dependencies and 

interconnected systems across firms, markets, and service providers can lead to significant cybersecurity risks. These risks could 

impact economic security, demanding a coordinated and collaborative Governmentwide commitment and partnership with the private sector to promote infrastructure security and resilience. 

The Council has recommended that the Treasury continue to 

work with regulators, other appropriate Government agencies, and 

private sector financial entities to develop the ability to leverage insights from across the Government and other sources to inform 

oversight of the financial sector and to assist institutions, market 

utilities, and service providers that may be targeted by cyber incidents. The Council has recommended that regulators continue to 

undertake awareness initiatives to inform institutions, market utilities, service providers, and other key stakeholders of the risks associated with cyber incidents, and assess the extent to which regulated entities are using applicable existing regulatory requirements 

and nonregulatory principles, including the National Institute of 

Standards and Technology (NIST) Cybersecurity Framework. 

The Council has recommended that financial regulators continue 

their efforts to assess cyber-related vulnerabilities facing their regulated entities and identify gaps in oversight that need to be addressed. The Council has also recognized the overarching contribution the private sector makes to infrastructure cybersecurity and 

141 

urges continued expansion of this work to engage institutions of all 

sizes and their service providers. 

The Council has recommended that the Finance and Banking Information Infrastructure Committee, financial institutions, and financial sector coordinating bodies establish, update, and test their 

crisis communication protocols to account for cyber incidents and 

enable coordination, and with international regulators where warranted, to assess and share information. 

As previously noted, the Council has recognized the importance 

of removing legal barriers to information sharing between public 

and private sector partners to enhance overall awareness of 

cyberthreats, vulnerabilities, and attacks, including through Congress’ passage of comprehensive cybersecurity legislation. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM RICHARD CORDRAY 

Q.1. Recently, the Treasury Department indicated that the Financial Stability Oversight Council was switching the focus of its asset 

management examination toward activities and products rather 

than individual entities. 

Will you confirm that individual asset management companies 

are no longer being considered for possible systemically important 

designation? 

A.1. At its meeting on July 31, 2014, the Financial Stability Oversight Council (Council) discussed its ongoing assessment of potential industrywide and firm-specific risks to the United States’ financial stability arising from the asset management industry and 

its activities. At that meeting, the Council directed staff to undertake a more focused analysis of industrywide products and activities to assess potential risks associated with the asset management 

industry. At its meeting on September 4, 2014, after discussing 

Council members’ views of priorities for the analysis of potential 

risks associated with the asset management industry, the Council 

directed staff to further develop their detailed work plan for carrying out the analysis of industrywide products and activities. As 

the Council continues to review this industry, it is important to 

note that there are no predetermined outcomes. There are a number of options available if the Council identifies meaningful risks 

to the United States’ financial stability. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM MARY JO WHITE 

Q.1. The issue of FSOC accountability and transparency is one that 

I have raised numerous times. Given the magnitude of the regulatory burden and other costs imposed by a SIFI designation, it is 

imperative that the designation process be as transparent and objective as possible. 

Do you object to the public disclosure of your individual votes, including an explanation of why you support or oppose such designation? 

A.1. As I have previously stated publicly, I support FSOC’s efforts 

to enhance transparency surrounding the nonbanking designation 

142 

process. These efforts are ongoing. In addition, as discussed in the 

meeting minutes from the October 6, 2014, FSOC meeting, the 

Council has asked staff to review and evaluate certain potential 

process changes to the nonbanks designation process. See http:// 

www.treasury.gov/initiatives/fsoc/council-meetings/Documents/ 

October%206,%202014%20(Meeting%20Minutes).pdf. We are actively engaged in these discussions and look forward to considering 

the staff’s recommendations. 

Q.2. Will you commit to pushing for greater accountability and 

transparency reforms for FSOC? Specifically, will you commit to 

push the FSOC to allow more interaction with companies involved 

in the designation process, greater public disclosure of what occurs 

in FSOC principal and deputy meetings, publish for notice and 

comment any OFR report used for evaluating industries and companies, and publish for notice and comment data analysis used to 

determine SIFI designations? If you do not agree with these proposed reforms, what transparency and accountability reforms 

would you be willing to support? 

A.2. As discussed above, FSOC staff is in the midst of a process 

to review and evaluate changes to the nonbanks designation process. The process includes continuing to reach out to the financial 

industry, the advocacy community, and others for input. See 

http://www.treasury.gov/initiatives/fsoc/council-meetings/Documents/November%2012,%202014,%20Outreach%20Engagement.pdf. 

As I have previously said publicly, I support the effort on enhancing the Council’s transparency, public disclosures, and engagement 

with nonbank companies under consideration for designation. At 

the same time, the nonbank designation process requires consideration of sensitive company information. Any approach must balance these competing interests. 

Q.3. In the July FSOC meeting, the Council directed staff to undertake a more focused analysis of industrywide products and activities to assess potential risks associated with the asset management 

industry. 

Does the decision to focus on ‘‘products and activities’’ mean that 

the FSOC is no longer pursuing designations of asset management 

firms? 

A.3. Although the FSOC has not designated any investment adviser as systemically important, it has not stated that it will no 

longer consider asset management companies for designation. However, as your question notes, the FSOC did state in the readout of 

the July 31, 2014, FSOC meeting available at http:// 

www.treasury.gov/initiatives/fsoc/council-meetings/Documents/ 

July%2031%202014.pdf that the FSOC has directed staff to undertake a more focused analysis of industrywide products and activities to assess potential risks associated with the asset management 

industry. On December 18, 2014, FSOC released a notice seeking 

public comment regarding potential risks to U.S. financial stability 

from asset management products and activities. 

Q.4. Did the FSOC vote on whether to advance the two asset management companies to Stage 3? If so, why was this not reported? 

143 

If not, why was such a vote not taken in order to provide clarity 

to the two entities as well as the industry? 

A.4. All Council votes are announced publicly. See, e.g., http:// 

www.treasury.gov/initiatives/fsoc/council-meetings/Documents/ 

August%2019,%202014,%20Notational%20Vote.pdf. Under its current guidance, the Council does not disclose the identities of firms 

under consideration for designation unless and until a final designation is made. 

Q.5. At a Senate Banking Committee hearing in July about the 

role of regulation in shaping equity market structure, market participants expressed concerns regarding the stability, resiliency and 

undue complexity of the equity markets resulting from the SEC’s 

‘‘one size fits all’’ set of regulations. 

Given your June speech as well as the comments made by other 

Commissioners, what does the SEC plan to do to address such concerns and when can we expect such SEC action? 

A.5. I agree that one market structure does not fit all. I have emphasized the importance of accounting for the varying nature of 

companies and products, with a particular sensitivity to the needs 

of smaller companies. To this end, the SEC published an order in 

June 2014 directing the exchanges and FINRA to submit a tick size 

pilot plan that is designed to gather and evaluate data related to 

whether wider tick sizes would benefit small capitalization companies and their investors. At the conclusion of the pilot, the exchanges and FINRA would complete and submit a data driven impact assessment to the Commission. The exchanges and FINRA 

have filed a plan in response to the June 2014 order that was published for public comment in November 2014. The comment period 

has now closed and we have received several thoughtful and substantive letters from commenters. We are actively considering 

these comments in evaluating how to proceed with this initiative. 

I also have directed the staff to develop recommendations for the 

Commission to address a range of market structure issues, including potential initiatives to address disruptive trading practices and 

to enhance transparency of institutional order routing practices 

and ATS operations. In addition, I have directed the staff to explore whether changes to the current market structure are warranted for smaller companies, such as affording more flexibility to 

exchanges that are targeted specifically toward the needs of smaller companies. In developing rulemaking initiatives, I anticipate 

that the staff and Commission will carefully consider the varying 

nature of companies and markets and whether any potential regulatory requirements should be tailored to reflect these differences. 

Q.6. Additionally, what does the SEC expect to accomplish in this 

space by the end of the year and what review is the SEC undertaking in terms of the fixed income market, specifically municipal 

and corporate debt market? 

A.6. The staff is advancing all of the equity market structure 

rulemakings I directed in my June speech, with a focus in the 

near-term on enhancements to our core regulatory tools of registration and firm oversight. In particular, we are making significant 

progress on rules to clarify the status of unregistered active proprietary traders to subject them to our rules as dealers and to elimiVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00147 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
144 

nate an exception from FINRA membership requirements for dealers that trade in off-exchange venues. In addition, we recently have 

established the Market Structure Advisory Committee to aid us in 

evaluating more fundamental questions in equity market structure. 

As you know, the U.S. regulatory regime also assigns important 

responsibilities to the SROs, which work in close coordination with 

the Commission to determine the optimal market structure for the 

equity markets. Since my speech in June, the SROs have made significant progress in addressing equity market structure concerns. 

These steps include: (i) enhancing the technological resilience of the 

consolidated market data systems and other critical market infrastructure; (ii) publicly disclosing how and for what purpose the 

SROs are using consolidated and direct market data feeds; (iii) improving the consolidated market data feeds by adding new time 

stamps for when a trading venue processed the display of an order 

or execution of a trade; (iv) providing greater public disclosure of 

trading volume by alternative trading systems; and (v) comprehensively reviewing exchange order types and how they operate in 

practice. SEC staff is now reviewing the results of SRO order type 

audits. 

With respect to fixed income, the Commission recently approved 

a new MSRB rule to require municipal securities dealers to seek 

best execution of retail customer orders for municipal securities. 

We also are committed to working closely with FINRA and the 

MSRB to encourage their development of further guidance on best 

execution of trades in both the municipal and corporate debt markets. In addition, FINRA and the MSRB recently published regulatory notices requiring better disclosures of pricing information for 

certain same-day principal trades. 

These steps are related to a broader initiative that I have asked 

the staff to undertake to enhance the public availability of pretrade pricing information in the fixed income markets. This initiative would potentially require the public dissemination of the best 

prices generated by electronic systems, such as alternative trading 

systems and other electronic dealer networks, in the corporate and 

municipal bond markets. This potentially transformative change 

would broaden access to pricing information that today is available 

only to select parties. 

Q.7. It was reported in the press the week of September 8th that 

the SEC is preparing additional disclosure rules as well as stress 

test rules for asset managers. What is the expected timeline for 

such new rules and how would they work together with the recent 

money market fund rules that the SEC adopted this summer? 

A.7. Staff from the Division of Investment Management has been 

developing a set of rulemaking recommendations for Commission 

consideration to strengthen our efforts to address the increasingly 

complex portfolio composition and operations of today’s asset management industry. The recommendations will include reporting and 

disclosure enhancements and new stress testing requirements, as 

well as several additional initiatives. I outlined these initiatives in 

a recent speech. See http://www.sec.gov/News/Speech/Detail/ 

Speech/1370543677722. 

145 

The Commission regularly evaluates and enhances its regulations to address risks, such as the money market fund reforms that 

required enhanced reporting and provided new tools to address certain risks of those funds. The new staff recommendations the staff 

is considering would complement the Commission’s money market 

fund reforms, but it is not expected that they would include 

changes specific to money market funds. 

Q.8. Chair White, I have repeatedly stated that the SEC and CFTC 

need to move in a more coordinated fashion with respect to DoddFrank implementation and cross-border initiatives for derivatives. 

In a hearing in February, I asked you and then-Acting Chairman 

Mark Wetjen about their efforts to ensure coordination on the remaining Title VII rulemakings, and they responded that the two 

agencies are continually in discussions and that coordination is a 

priority for both agencies. What specific progress has your agency 

made in this venue since February, and what key obstacles still 

exist? 

A.8. Since I became Chair in April 2013, I have prioritized the coordination between the SEC and CFTC at both the senior staff 

level and principal level. In addition to numerous staff consultations, Chairman Massad and I frequently consult on a range of 

issues, including implementation under the Dodd-Frank Act of the 

rules governing derivatives. Our close coordination with the CFTC 

is not new. In particular, the SEC has been consulting over the 

past several years with the CFTC on our respective approaches to 

the application of Title VII. For our part, since February, the SEC 

has proposed rules relating to books and records and proposed 

rules to enhance the oversight of clearing agencies deemed to be 

systemically important or that are involved in complex transactions, such as security-based swaps. In June of this year, we 

adopted a critical, initial set of cross-border rules and guidance, focusing on the swap dealer and major swap participant definitions. 

Most recently, on January 14, we adopted 21 new rules that would 

increase transparency and provide enhanced reporting requirements in the security-based swap market. In connection with all of 

these actions, we have benefited greatly from our consultations and 

coordination with the CFTC. 

For example, in connection with our final cross-border rules 

adopted in June, we and the CFTC discussed and compared our respective approaches to the registration and regulation of foreign entities engaged in cross-border swap and security-based swap transactions involving U.S. persons to determine where those approaches converge and diverge. The results are reflected in the 

final rules we adopted in June, which brought the Commission’s 

cross-border framework to the same place as the CFTC in key respects. As those final rules illustrate, we recognize the importance 

of consistency. At the same time, the Dodd-Frank Act gave the 

CFTC and the SEC different statutory authority for addressing activity that occurs outside the United States. In particular, DoddFrank included in the Commodity Exchange Act a focus on activities outside the United States that ‘‘have a direct and significant 

connection with activities in, or effect on, commerce of the United 

146 

States.’’ The Dodd-Frank Act did not include a similar focus in the 

Securities Exchange Act. 

As the Commission proceeds with finalizing the Title VII rules, 

including the cross-border application of those rules, I and my staff 

intend to continue working closely with the CFTC to reduce divergence where possible, where reasonable in light of our different 

markets, and where consistent with our statutory authority. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM MARY JO WHITE 

Q.1. Chair White, investor protection was one of the most significant issues contemplated in Dodd-Frank, including the direction 

given to the SEC to examine the standards of care for broker-dealers and investment advisors in providing investors advice. I know 

we’ve had many conversations about the importance of the SEC 

and the DOL harmonizing a Fiduciary standard for broker-dealers. 

Can you provide us with an update on where the SEC is in regards to a fiduciary duty rule? 

A.1. As you know, the question of whether and, if so, how to use 

the authority provided under Section 913 of the Dodd-Frank Act is 

very important to investors and the Commission. Whenever you 

have substantially similar services regulated differently, I believe 

you should carefully consider whether the distinctions make sense 

from both the perspective of investors and strong or optimal regulation, and if not, what to do about it. I have directed the staff to 

evaluate all of the potential options available to the Commission on 

this matter, including whether to impose a uniform fiduciary standard on broker-dealers and investment advisers when providing personalized investment advice to retail customers. 

At the same time, the staff continues to provide regulatory expertise to Department of Labor (DOL) staff as they consider potential 

changes to the definition of ‘‘fiduciary’’ under the Employee Retirement Income Security Act (ERISA). While we are separate and distinct agencies, I understand the importance of consistency and the 

impact the DOL’s rulemaking may have on SEC registrants, particularly broker-dealers. Accordingly, the staff and I are committed 

to continuing these conversations with the DOL, both to provide 

technical assistance and information with respect to the Commission’s regulatory approach and to discuss the practical effect on retail investors, and investor choice, of DOL’s potential amendments 

to the definition of ‘‘fiduciary’’ for purposes of ERISA. 

Q.2. One other quick question and I apologize that it’s JOBS Act 

related, not Dodd-Frank related: Do you have a timeframe for finalizing Reg A+ rules? 

A.2. While we are unable to provide a specific date for the adoption 

of final rules, the Commission has included the adoption of the 

Regulation A+ rules on its most recent Regulatory Flexibility Act 

agenda, which covers the period from November 2014 to October 

2015. Finalizing the rules mandated by the Dodd-Frank and JOBS 

Acts, including Regulation A+, remains a top priority for the Commission. 

147 

To date, the Commission has received more than 100 comment 

letters on the Regulation A+ rule proposal. These commenters have 

expressed a variety of different views on how the Commission 

should implement Regulation A+, including the proposed approach 

to state securities law registration and qualification requirements 

and other important aspects of the rulemaking. The staff is carefully reviewing the comments as it works to develop recommendations for final rules for the Commission’s consideration. In addition, 

the staff is closely monitoring the development and implementation 

of the North American Securities Administrators Association’s 

multistate coordinated review program for Regulation A offerings. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM MARY JO WHITE 

Q.1. With the Volcker Rule, we finally learned the lessons from the 

bailout of Long-Term Capital Management and then the 2008 financial crisis that we simply cannot afford to have big, systemically significant firms making big bets on the ups and downs of 

the market. Casino banking is over—if you stick to your guns and 

enforce the Rule. 

I deeply appreciate the hard work you did to getting to a final 

rule last December, and I recognize the hard work you are doing 

now to implement it. However, we are still at the beginning legs 

of the journey, and I believe in ‘‘trust but verify’’—which requires 

full, continued cooperation by our regulators and engagement with 

the public. 

During the financial crisis, we all saw the horrific results when 

different regulators saw only parts of the risks to some firms. 

There were too many regulatory silos, which do not work because 

firms do not function that way. You also need a complete picture 

of what is going on in any one institution and across different 

firms. Indeed, one of the least recognized benefits of the Volcker 

Rule is to force the regulators to pay attention, together, to trading 

activities, which have become so important at so many banks. But 

critically, this means all the regulators need full access to all collected data and information. 

In addition, accountability to the public through disclosure provides another layer of outside oversight and analysis, as well as 

equally importantly, public confidence that Wall Street reform is 

real. 

Based on the track record of various public disclosure mechanisms out there already—including for example, the CFTC’s positions of traders—there is significant space for reasonably delayed 

disclosures of metrics data to enhance Volcker Rule accountability 

and public confidence. Now Treasury Deputy Secretary and thenFederal Reserve Governor Sarah Bloom Raskin highlighted disclosure in her statement on adoption of the final rule, and financial 

markets expert Nick Dunbar has similarly called for disclosure as 

a key tool. (See Nick Dunbar, ‘‘Volcker Sunlights Should Be the 

Best Disinfectant’’, July 25, 2014, http://www.nickdunbar.net/articles/volcker-sunlight-should-be-the-best-disinfectant/.) The OCC’s 

Quarterly Trading Activity Report may be a perfect venue to enVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00151 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
148 

gage in this type of disclosure, provided it is expanded to cover the 

entire banking group. 

First, will each of you commit to working to ensure that each of 

your agencies has a complete picture of an entire firm’s trading and 

compliance with the Volcker Rule, which can best be accomplished 

by having all data in one place so that all regulators have access 

to it? 

A.1. The final rule is largely constructed around the trading desk, 

with many of the rule’s requirements applying at that level. Importantly, the definition of trading desk is based on the operational 

functionality of banking entities’ trading activities, and the final 

rule recognizes that a trading desk may book positions in different 

affiliated legal entities. Under the final rule, if a trading desk 

spans more than one affiliated legal entity, each agency with regulatory authority over a relevant legal entity under section 

13(b)(2)(B) of the Bank Holding Company Act will have access to 

records and data regarding the trading desk. For example, if a 

market-making desk manages positions booked in two affiliated entities, a banking entity must be able to provide supervisors or examiners of any agency that has regulatory authority over the banking entity pursuant to section 13(b)(2)(B) of the Bank Holding Company Act with records, promptly upon request, that identify any related positions held at an affiliated entity that are being included 

in the trading desk’s financial exposure for purposes of the marketmaking exemption. Similarly, metrics data for a trading desk is 

generally provided to each agency with regulatory authority over 

any legal entity in which the trading desk books trades, although 

a few firms have determined to provide all metrics data to all relevant agencies. As a result, in most cases, metrics data for a particular trading desk is provided to multiple agencies. 

Given the rule’s focus on activity at the trading desk level, the 

metrics are designed to help identify activity that may warrant further review to determine whether an individual trading desk is 

complying with the rule. As discussed in the preamble to the final 

rule, the agencies will be revisiting the metrics requirement based 

on data collected by September 30, 2015. This review process will 

enable us to assess the utility of the metrics, including how they 

can better foster compliance with the final rule and support agency 

monitoring and enforcement efforts. 

Q.2. Are you committed to using disclosure to help advance compliance with and public trust from the Volcker Rule? 

A.2. Metrics data required under the rule is not intended alone to 

show compliance with the prohibition on proprietary trading or related exemptions. Instead, this data is intended to be used to identify activities that may warrant further review by examiners. The 

agencies have committed to review the metrics reporting requirement, based on data received through September 30, 2015. As part 

of that process, we should consider whether there is any aggregate 

information derived from the metrics that might be meaningfully 

disclosed to the public. 

Q.3. The success of the Volcker Rule over the long term will depend upon the commitment of regulators to the vision of a firewall 

between high risk, proprietary trading and private fund activities, 

149 

on the one hand, and traditional banking and client-oriented investment services on the other hand. One of the most important 

parts of ensuring that vision is meaningfully implemented is the 

December 2013 final rule’s application of its provisions at the 

‘‘trading desk’’ level, defined as the ‘‘smallest discrete unit of organization’’ that engages in trading. 

Unfortunately, reports have emerged suggesting that banks are 

already attempting to combine and reorganize what had been separate trading desks into one ‘‘trading desk’’ for Volcker Rule purposes, as a way to game the metrics-based reporting essential to effective monitoring by regulators of each institution’s compliance 

with the Volcker Rule. The OCC has already identified this risk in 

its Interim Examination Procedures, and attempted to limit such 

actions to instances where the desks were engaged in ‘‘similar 

strategies,’’ the combination has a ‘‘legitimate business purpose,’’ 

and the combination assists the firm to ‘‘more accurately reflect the 

positions and fluctuations’’ of its trading. I feel that the OCC’s interim protections may not, however, be enough ensure compliance 

with the final rule. 

I am deeply concerned that combining or reorganizing trading 

desks would undermine the strength of the metrics-based oversight, particularly related to whether market-making is truly to 

serve near-term customer demand and whether hedging is truly 

that. To avoid obscuring evasion by changing the mixture and volume of the ‘‘flow’’ of trading that is reported by the ‘‘trading desk’’ 

unit, I would suggest that examiners ought to strictly apply the 

final rule’s approach to ‘‘trading desk’’ and apply the guidance set 

out by the OCC extremely narrowly, along with additional protections. For instance, ‘‘similar strategies’’ would need to include both 

the type of the trading (e.g., market-making) but also the same or 

nearly identical products, as well as be serving the same customer 

base, among other standards. As an example, if two desks traded 

in U.S. technology stocks and technology stock index futures, combining those into one desk might make sense, depending on other 

factors, such as where the desks were located and what customers 

they were serving. But combining, for example, various industryspecific U.S. equities desks that today are separate would not pass 

muster for complex dealer banks. 

It also is important to remember that an important supervisory 

benefit from implementing the Volcker Rule at a genuine trading 

desk level is that regulators will gain a much deeper, more granular understanding of the risks emanating the large banks’ many 

different trading desks—the kind of risks that led one particular 

trading desk to become famous as the London Whale. 

When confronted with attempts to reorganize trading desks, regulators should look carefully at whether submanagement structures, bonus structures, or other indicia exist that would suggest 

that the reorganized ‘‘trading desk’’ is not actually the smallest discrete unit of organization contemplated by the final rule and essential to the metrics-based oversight system being developed. 

Will you commit to scrutinizing, for the purposes of the Volcker 

Rule, any reorganizations of trading desks as posing risks of evasion and will you commit to working jointly to clarify any guidance 

on the definition of trading desk for market participants? 

150 

A.3. Yes, I agree that the trading desk structure is a core component of the final rule, and preventing evasion in this area is critical. Since many of the rule’s proprietary trading and compliance 

provisions are built around the trading desk, improperly constructed trading desks could lead to outcomes that are counter to 

the goals of section 13 of the Bank Holding Company Act and the 

final rule. As a result, we will closely focus on potentially unsuitable interpretations of the definition of trading desk. To the extent 

additional guidance on the definition of trading desk is needed, we 

will work together with our fellow regulators to develop and implement that guidance. 

Q.4. Ensuring speedy compliance with the provisions of the 

Merkley-Levin Volcker Rule is a top priority for strong implementation. It has already been four years since adoption, and banks 

should be well on their way to conforming their trading and fund 

operations. 

However, as you know, we also provided for an additional five 

years of extended transition for investments in ‘‘illiquid funds,’’ 

which were expected to include some types of private equity funds. 

We did this because some private equity funds, such as venture 

capital funds, do not usually permit investors to enter or exit during the fund’s lifetime (usually 10 years or so) because of the 

illiquidity of those investments. 

As you know, the Federal Reserve Board’s rule on the ‘‘illiquid 

funds’’ extended transition interprets the statutory provision of a 

‘‘contractual commitment’’ to invest as requiring a banking entity, 

where a contract permits divestment from a fund, to seek a fund 

manager’s and the limited partners’ consent to exit a fund. The 

rule, however, provides for the Board to consider whether the banking entity used reasonable best efforts to seek such consent but 

that an unaffiliated third party general partner or investors made 

unreasonable demands. 

I strongly support the Board’s desire to implement the Volcker 

Rule in a speedy manner. In addition, the Board’s approach in the 

final conformance rule goes a long way to ensuring that the illiquid 

funds extended transition only be available for investments in truly 

illiquid funds, and not a way to avoid divestment of hedge funds 

and private equity funds. 

At the same time, we designed the provision to provide for a 

smooth wind-down for illiquid funds. Indeed, I am sensitive to the 

legitimate business needs of firms seeking to comply with the 

Volcker Rule while maintaining relationships with important customers to whom they may seek to provide traditional banking services. 

Accordingly, I would urge the Board to clarify that a banking entity’s requirement to make ‘‘reasonable efforts’’ to exercise its contractual rights to terminate its investment in an illiquid fund could 

be satisfied, for example, by a certification by the banking entity 

(a) that the banking entity’s exit from the fund would be extraordinary from the perspective of how most investors enter or exit the 

fund (i.e., the investment contract does not routinely or ordinarily 

contemplate entry or exit, and/or such other indicia as are necessary to help distinguish between illiquid private equity funds and 

other funds, like hedge funds, that ordinarily and routinely permit 

151 

investor redemptions), (b) that inquiring with third-party fund 

managers and limited partners regarding termination would result 

in a significant detriment to the business of the banking entity and 

(c) that the banking entity believes that the divestment would result in losses, extraordinary costs, or otherwise raise unreasonable 

demands from the third-party manager relating to divestment (or 

the de facto equivalent thereto). 

Such a certification from the banking entity, along with the language of the relevant fund agreements and such other requirements as the Board determines appropriate, would obviate the 

need to seek consent from third-party fund managers. Have you 

considered clarifying this in a FAQ? 

A.4. While the Agencies acted together in adopting the final rule 

and are continuing to work closely together with regard to the implementation of the Volcker Rule, the Federal Reserve Board alone 

is authorized under section 13 of the Bank Holding Company Act 

to grant extensions to the conformance period provided by section 

13. 

Q.5. We’ve recently seen reports that the largest Wall Street banks 

are nominally ‘‘deguaranteeing’’ their foreign affiliates in order to 

avoid coverage under U.S. regulatory rules, especially those related 

to derivatives. This ‘‘deguaranteeing’’ appears to be based on a fiction that U.S. banks do not actually guarantee the trading conducted by foreign subsidiaries, and hence would not be exposed to 

any failure by the foreign subsidiary. 

Can you comment on that, and specifically, whether you believe 

that U.S. bank or bank holding company could be exposed to losses 

from—or otherwise incur liability related to—a foreign affiliate’s 

trading even when no explicit guarantee to third parties exists. 

Please specifically address whether an arrangement, commonly 

known as a ‘‘keepwell,’’ provided by the U.S. parent or affiliate to 

the foreign affiliate potentially could create such exposure—and 

specifically, liability—for the U.S. entity. 

Moreover, please comment on whether the size and importance 

to the U.S. parent or affiliate of the foreign affiliate’s activities 

could itself create an implied guarantee such that the U.S. firm 

would have major reputational or systemic risk reasons to prevent 

the foreign affiliate from incurring significant losses or even failing—similar to rescues that occurred during the financial crisis of 

entities that were supposed to be bankruptcy remote. 

Finally, many of these foreign bank subsidiaries are so-called 

‘‘Edge Act’’ corporations, which I understand are consolidated with 

the insured depository subsidiary for many purposes. Please comment on whether there is any chance that losses in these Edge Act 

corporations, particularly losses in their derivatives operations, 

could impact the deposit insurance fund. 

A.5. We and our fellow regulators have been following closely the 

reports that at least some U.S. financial institutions have begun removing guarantees from some swap transactions of their foreign affiliates. The reports I have seen attribute the change, at least in 

part, to the cross-border guidance issued in July 2013 by the 

CFTC. 

152 

The CFTC has apprised us of its efforts to monitor this shift in 

the marketplace, and we plan to continue discussions with the 

CFTC as they continue their efforts. We also are coordinating with 

the CFTC and other authorities in the U.S. and overseas to monitor changes to industry practices as regulations are implemented. 

More generally, as we move forward with the further adoption and 

implementation of the SEC’s Title VII-related rules, we will pay 

close attention to the changing state of the OTC derivatives markets. 

With respect to your question regarding keepwells, the Commission’s focus is on the substance of the agreement. The Commission’s final rules require the foreign affiliate of a U.S. person to include in its de minimis calculation any security-based swap transaction arising out of its dealing activity to the extent that the 

transaction is subject to a recourse guarantee. This final rule clarifies that for these purposes a counterparty would have rights of recourse against the U.S. person ‘‘if the counterparty has a conditional or unconditional legally enforceable right, in whole or in 

part, to receive payments from, or otherwise collect from, the U.S. 

person in connection with the security-based swap.’’ To the extent 

that an agreement, such as a keepwell, gives rise to this type of 

conditional or unconditional legally enforceable right under a security-based swap against the U.S. person, the Commission would 

treat that agreement as a recourse guarantee. 

At the same time, the Commission recognizes that more general 

financial support arrangements, including certain keepwells (depending on their terms), also may pose risks to U.S. persons and 

potentially to the U.S. financial system, even if all recourse guarantees are removed from the foreign affiliate’s transactions. U.S. entities that are affiliated with non-U.S. persons for reputational reasons may determine to support their non-U.S. affiliates at times of 

crisis. As reflected in your question, this reputational concern may 

be particularly strong in the case of a non-U.S. affiliate that holds 

significant assets or is otherwise important to the financial institution as a whole. To the extent that these new financial arrangements do not include a legally enforceable right of recourse against 

a U.S. person, our rules may not bring these affiliates within the 

SEC’s regulatory oversight due to the limits of our statutory authority. 

Notwithstanding these limits, I believe that the risks to U.S. financial firms associated with the activities of these deguaranteed 

foreign affiliates should be addressed. While the SEC will continue 

to look into these developments and act where necessary and authorized to do so, these risks can also be addressed through other 

tools established by Congress, such as holding company oversight. 

By accounting for risks at the consolidated level, these tools address risks posed by guaranteed and nonguaranteed subsidiaries 

within U.S.-based financial groups, regardless of whether the subsidiaries are based in the United States or outside the United 

States. I and my staff recognize the need for continued close coordination across regulators, both in the U.S. and overseas, to address 

regulatory issues in this market. 

With respect to your question on ‘‘Edge Act’’ corporations, I 

would note that the Edge Act is administered by our colleagues at 

153 

the Federal Reserve, and thus they would be in a better position 

to provide a definitive response, including how the Edge Act addresses any potential risks to domestic operations of insured depository institutions from the international operations of ‘‘Edge Act’’ 

corporations. However, to the extent that arrangements between 

‘‘Edge Act’’ corporations and their affiliates give rise to legally enforceable rights of the type described above, the Commission would 

treat the arrangement as a recourse guarantee. 

Q.6. The banking regulators made important progress in the past 

year in completing Dodd-Frank Wall Street reforms, especially in 

the realm of prudential banking oversight, but the pace of SEC 

rulemaking has not kept up. 

Can you please provide a rough timeframe for when you plan on 

completing the following rulemakings, all of which were due years 

ago: 

• Section 621’s prohibitions on designing asset-backed securities 

and betting on their failure, 

• All compensation provisions, 

• All security-based swaps reforms, 

• Crowdfunding, Regulation A+, and investor protection provisions of the JOBS Act, and 

• Risk retention rules. 

A.6. Since April 2013, the Commission has proposed or adopted 

over 25 substantive rules called for by the Dodd-Frank Act and 

other rules directly responding to the financial crisis. These actions 

include the Volcker rule and major reforms addressing money market funds, credit rating agencies, asset-backed securities, and security-based swaps, among others. Most recently, we adopted rules 

that would increase transparency and provide enhanced reporting 

requirements in the security-based swap market, and also adopted 

final rules for risk retention jointly with our fellow regulators. 

With these efforts, we have completed our rulemaking mandates 

in many of the central areas targeted by the Dodd-Frank Act. And 

we have finalized nearly all of the more than two dozen studies 

and reports that it was directed to complete under these Acts. 

Some areas remain to complete—in security-based swaps and executive compensation in particular—and I expect that we will soon 

be making significant progress in both areas. It is important to finish these rules, as well as those required under Section 621, but 

we must take the time necessary to carefully consider all of the 

issues raised by commenters and perform rigorous economic analysis, which is critically important and helps inform and guide our 

rulemaking decisions. 

With respect to the JOBS Act, we have, since April 2013, either 

adopted or proposed all of the required rules, and we will soon be 

moving to adopt the most critical that remain to be finalized. 

Q.7. In addition, the SEC’s capital framework for broker-dealers 

has remained unchanged after the financial crisis, despite its catastrophic failure and despite significant progress by other regulators 

on capital, leverage, and liquidity. 

When will your agency begin work on this important task? 

154 

1See ‘‘Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and 

Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers’’, Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70213 (Nov. 23, 2012). 2 Id. at 70252-70253. 

3 Id. 

4See, e.g., Chair Mary Jo White, Chairman’s Address at SEC Speaks (Feb. 2014), available 

at http://www.sec.gov/News/Speech/Detail/Speech/1370540822127 (‘‘We will also increase our 

oversight of broker-dealers with initiatives that will strengthen and enhance their capital and 

liquidity, as well as providing more robust protections and safeguards for customer assets’’); Office of Management and Budget, Office of Information and Regulatory Affairs, Broker-Dealer Leverage Ratio, available at http://www.reginfo.gov/public/do/ 

eAgendaViewRule?pubId=201404&RIN=3235-AL50. 5See ‘‘Financial Responsibility Rules for Broker-Dealers, Exchange Act Release No. 70072’’ 

(July 30, 2013), 78 FR 51824 (Aug. 21, 2013). 6See ‘‘Broker-Dealer Reports, Exchange Act Release No. 70073’’ (July 30, 2013), 78 FR 70073 

(Aug. 21, 2013). 7 Id. at 51916-51920. 

A.7. Since the financial crisis, the Commission has taken a number 

of actions to strengthen broker-dealer financial responsibility requirements, including capital requirements. For example, in response to the crisis, the Commission staff began targeting the 

short-term funding activities of the larger broker-dealers, and in 

general these firms have extended the terms of their repurchase 

transactions under that enhanced focus. They also are required to 

apply greater capital charges for certain structured finance products. 

In addition, in 2012, the Commission proposed additional liquidity requirements for certain of the largest broker-dealers as well as 

raising their minimum net capital requirements as part of its rulemaking to establish financial responsibility requirements for security-based swap dealers. 1 Under the proposal, these broker-dealers 

would be required, among other things, to conduct a liquidity stress 

test at least monthly that takes into account certain assumed conditions lasting for thirty consecutive days and to establish a written contingency funding plan. 2 Based on the results of the monthly 

liquidity stress test, the broker-dealers also would need to maintain 

at all times liquidity reserves comprised of unencumbered cash or 

U.S. Government securities. 3 In addition to these proposals, the 

Commission staff is actively working on recommendations that 

would apply the proposed liquidity requirements to a broader range 

of broker-dealers and would impose a leverage ratio requirement 

for broker-dealers to complement existing leverage constraints in 

the rule. 4

In addition, in July 2013, the Commission adopted a set of 

amendments to the broker-dealer financial responsibility rules (including the broker-dealer net capital rule). 5 Among other things, 

these amendments require broker-dealers to document their risk 

management procedures, report on secured financing transactions, 

and take 100 percent capital charges relating to nonpermanent 

capital infusions. Also, in July 2013, the Commission adopted 

amendments to the broker-dealer reporting rule that, among other 

things, promote capital compliance. 6 In particular, broker-dealers 

that carry customer securities and/or cash (which includes the largest broker-dealers) are required to annually file a ‘‘compliance report’’ in which they must state whether their internal controls over 

compliance with the financial responsibility rules (including the 

broker-dealer net capital rule) were effective during the most recently ended fiscal year. 7 They cannot state that their internal conVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00158 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
155 

8 Id. at 51928-51937. 

trols were effective if there was a material weakness in the internal controls. In addition, the statements in the compliance report 

must be examined by an independent public accountant registered 

with the Public Company Accounting Oversight Board. 8

These activities reflect the Commission’s ongoing efforts to ensure that the broker-dealer financial responsibility rules continue 

to achieve their objectives. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN 

FROM MARY JO WHITE 

Q.1. As you know, during your nomination process, we discussed 

how you would handle potential conflicts of interest—or the appearance of conflicts of interest—between your responsibilities as 

Chair of the SEC and your husband’s ongoing work as a partner 

representing financial institutions at the law firm of Cravath, 

Swaine & Moore LLP. I believe that conflicts of interest, or the appearance thereof, should not undermine the SEC’s critical work enforcing our securities laws and regulating and supervising the securities industry. 

Now that you have been Chair for over a year, I’d like to revisit 

that discussion. 

Is there a written policy in place that governs when you must 

recuse yourself in any matter—enforcement, regulatory, supervisory, or otherwise—in which Cravath, Swaine & Moore is involved? If so, can you provide a copy of it? If not, do you have an 

informal policy in place, and can you describe it? 

Since you were confirmed as Chair of the SEC, have you recused 

yourself from any matter in which Cravath, Swaine & Moore was 

involved? If so, how many times have you recused yourself? Please 

categorize those recusals by the type of matter—enforcement, regulatory, supervisory, or other. 

A.1. As part of my confirmation as Chair, I entered into an Ethics 

Agreement that governs my recusal from matters in which the law 

firm that employs my spouse, Cravath, Swaine & Moore LLP, represents a party. Such ethics agreements are entered into by all 

Commissioners to address a variety of potential conflicts of interest 

or other issues. My Ethics Agreement is public and was provided 

to the Senate Banking Committee as part of my confirmation, and 

is publicly available on the Office of Government Ethics Web site. 

My staff and I also follow procedures (which contain nonpublic and/ 

or confidential client information) to determine whether recusals 

are appropriate. Out of the over a thousand Enforcement matters 

in which I have participated since becoming Chair, I have been 

recused from approximately 10 matters, as well as one nonenforcement matter, as a result of the participation of Cravath on behalf 

of a party. I have not been recused from any rulemakings. 

Q.2. Last June, you announced that the SEC would seek more admissions of fault in its settlement agreements, rather than allowing 

settling parties to ‘‘neither admit nor deny’’ liability. Since that announcement, how many settlement agreements has the SEC entered into? In how many of those agreements did the SEC require 

156 

1This figure is an approximation. It excludes follow-on administrative proceedings (e.g., where 

someone is barred from the industry following the imposition of an injunction by a district court 

in an action brought by the Commission, which action would be counted separately). It also excludes cases against issuers who are delinquent in their filing obligations. 2Two of these occasions arose from the same matter, but occurred approximately 1 year 

apart. 

an admission of fault? If those agreements including admissions of 

fault are not confidential, can you provide copies to my office? 

A.2. As you indicate, in 2013 we made an important modification 

to our settlement practices, and we now demand an additional 

measure of public accountability through an acknowledgement of 

wrongdoing in certain of our cases, including from major financial 

institutions and senior executives. Under this policy, the Division 

of Enforcement now considers requiring admissions in cases where 

the violation of the securities laws includes particularly egregious 

conduct; where large numbers of investors were harmed; where the 

markets or investors were placed at significant risk; where the conduct obstructs the Commission’s investigation; where an admission 

can send a particularly important message to the markets; or 

where the wrongdoer poses a particular future threat to investors 

or the markets. 

Additionally, we do not accept ‘‘no admit, no deny’’ settlements 

where a defendant has admitted relevant facts in a settlement with 

other criminal or civil authorities. This regularly occurs in connection with guilty pleas that arise from a parallel criminal investigation, which frequently are matters that we referred to a criminal 

prosecutor in which our own investigation assisted in securing a favorable resolution on the criminal side as well. Often in such cases 

a person allocutes to certain facts as part of a guilty plea, or is 

found guilty after trial, and the involvement of the criminal authorities in such cases may indicate that these cases involve particularly egregious misconduct. In such cases, our practice is to remove the ‘‘no admit, no deny’’ language from our settlement documents and incorporate a reference to the guilty plea or other resolution. 

In other cases, we have determined that it is appropriate to continue to settle on a ‘‘no admit, no deny’’ basis, as do other Federal 

agencies and regulators with civil enforcement powers. We made 

this decision because the practice allows us to get significant relief, 

eliminate litigation risk, return money to victims more expeditiously, and conserve our enforcement resources for other matters. 

That protocol too is a very important tool in a strong enforcement 

regime. 

From the time we instituted the admissions policy change 

through the end of September, the Commission settled approximately 520 enforcement actions. 1 During that period, the Commission entered into settlements requiring admissions on a dozen occasions, including cases involving JPMorgan Chase and Bank of 

America, among others, as defendants. 2 More recently, the Commission has entered into settlements requiring admissions in four 

additional cases, bringing the total to 16. Those settlement documents are public, and I have instructed my staff to contact your 

staff to provide copies of them to you. In addition, there have been 

dozens of SEC settlements in that period that settled without perVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00160 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
157 

3Scott Higham, and Kaley Belval, ‘‘Workplace Secrecy Agreements Appear To Violate Federal 

Whistleblower Laws’’ (June 29, 2014), available at http://www.washingtonpost.com/investigations/workplace-secrecy-agreements-appear-to-violate-federal-whistleblower-laws/2014/06/29/ 

d22c8f02-f7ba-11e3-8aa9-dad2ec039789lstory.html. 

mitting defendants to include ‘‘no admit no deny’’ language and 

that incorporated a reference to guilty pleas or other admissions 

made in non-SEC criminal or civil cases. 

Q.3. In Section 922 of Dodd-Frank, Congress directed the SEC to 

provide awards to whistleblowers whose assistance helped the SEC 

obtain monetary sanctions against a private party. The SEC, 

through its new Office of the Whistleblower, has already furnished 

several awards to whistleblowers. However, according to a recent 

Washington Post story, 3 companies are using nondisclosure agreements and other tools to limit the ability of employees to go to the 

SEC after they have reported purported misconduct internally. 

Under SEC Rule 21F-6 (17 CFR §240.21F-6), a whistleblower’s 

‘‘participation in internal compliance systems’’ is a ‘‘factor that may 

increase the amount of a whistleblower’s award.’’ Given concerns 

about companies using internal compliance systems to deter whistleblowing activity, why does the SEC give potential whistleblowers 

a financial incentive to report internally before coming to the SEC? 

More broadly, if the SEC believes that whistleblowers play an important enforcement role, why does it encourage employees not to 

blow the whistle and to instead report concerns internally? 

A.3. Our whistleblower program is making significant contributions 

to the enforcement work of the Commission. In this past fiscal 

year, among other accomplishments, our program awarded nine 

whistleblowers approximately $35 million in the aggregate. In addition, the Commission made the first use of its authority to bring 

antiretaliation enforcement actions. As a result of the Commission’s issuance of significant whistleblower awards, enforcement of 

the antiretaliation provisions, and protection of whistleblower confidentiality, the agency has continued to receive an increasing number of whistleblower tips. In Fiscal Year 2014, our whistleblower office received over 3,600 whistleblower tips, a more than 20 percent 

increase in the number of whistleblower tips in just 2 years. The 

program has thus been an early success, and as awareness of the 

program increases, it should continue to be an important part of 

our enforcement efforts. 

With respect to your question regarding corporate compliance 

programs, as you note, Rule 21F-6 provides that, in determining 

the size of a whistleblower award, the Commission will assess 

whether, and the extent to which, the whistleblower participated in 

internal compliance systems. Among other considerations, internal 

reporting may increase the size of an award, while interfering with 

established compliance procedures may decrease the size of an 

award. However, Rule 21F-5 states that discretion remains with 

the Commission, and Rule 21F-6 states in part that the Commission ‘‘may consider [the enumerated factors] in relation to the 

unique facts and circumstances of each case’’ (emphases added). 

The Commission’s rules give discretion to each whistleblower to 

decide how best to report suspected wrongdoing: he or she may report internally before going to the Commission, may go directly to 

158 

4 In its Adopting Release, the Commission stated: 

[A] whistleblower would not be penalized for not satisfying any one of the positive factors. 

For example, a whistleblower who provides the Commission with significant information about 

a possible securities violation and provides substantial assistance in the Commission action or 

related action could receive the maximum award regardless of whether the whistleblower satisfied other factors such as participating in internal compliance programs. In the end, we anticipate that the determination of the appropriate percentage of a whistleblower award will involve 

a highly individualized review of the facts and circumstances surrounding each award using the 

analytical framework set forth in the final rule. 

Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act 

of 1934, at 124, available at http://www.sec.gov/rules/final/2011/34-64545.pdf. 

the Commission right away, or may report to both simultaneously. 

In other words, he or she does not lose eligibility for an award by 

reporting internally. And it is not the case that anyone who first 

comes directly to the Commission necessarily will receive a lower 

award as a result of not having participated in his or her employer’s internal compliance systems. 4

This rule was passed in 2011 following a robust debate over the 

question of whether an SEC whistleblower should be required to 

first report internally to be eligible for an award. The Commission 

declined to require an internal report, but did provide that making 

an internal report could be weighed as a factor to potentially increase the size of an award. This decision was driven by several 

considerations. It is a simple fact that, as an agency with limited 

resources, the SEC needs to leverage its resources by promoting 

stronger internal compliance. That has long been an emphasis and 

priority of the SEC, as it has with other Federal agencies. The 

Commission concluded that a strong whistleblower program can 

and should coexist with credible, robust internal reporting mechanisms. The objective was to support effective internal controls 

while not requiring a whistleblower to choose between internal and 

external reporting. This rule should create an incentive for companies to take a fresh look at their compliance systems to make them 

as strong and transparent as possible. Had the Commission not 

provided some incentive for internal compliance reporting, companies might not have thought it worth the time and expense to bolster their internal functions under the assumption that their employees would never report internally. 

With respect to your reference to nondisclosure agreements, I 

share your concerns about any misuse of employee confidentiality, 

severance, and other kinds of agreements to hinder an employee’s 

ability to report potential wrongdoing to the Commission. To address issues such as this, the Commission adopted Rule 21F-17(a), 

which makes it an independent violation of the Commission’s rules 

for any person to ‘‘take any action to impede an individual from 

communicating directly with the Commission staff about a possible 

securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.’’ This rule provides the Commission with express authority to take action whenever we find that otherwise legitimate employment agreements are being used in a manner that discourages 

or curtails employee whistleblowing. 

Commission staff is focused on cases in which the use of confidentiality or other agreements may violate this Commission rule, 

and will continue to concentrate on practices that may result in silencing employees from reporting securities violations to the ComVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00162 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
159 

mission by threatening liability or employee discipline. In appropriate cases, I expect the Commission will bring enforcement actions under Rule 21F-17(a). 

Q.4. Additionally, do you believe the SEC has sufficient authority 

to issue a rule banning efforts to curtail evidentiary disclosures to 

the Commission, as undertaken through job perquisites, personnel 

actions such as termination, lawsuits seeking damages, or any 

other form of retaliation? If so, please cite and describe those 

sources of authority. If not, please describe what additional statutory authority is needed. 

A.4. Yes, at this time we believe we have sufficient authority, and 

we have implemented that authority by passing Rule 21F-17(a). It 

provides in part as follows (emphasis added): 

No person may take any action to impede an individual 

from communicating directly with the Commission staff 

about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement 

. . . with respect to such communications. 

By prohibiting ‘‘any action’’ that could curtail evidentiary disclosures to the Commission, this rule provides the Commission with 

the broadest authority and most effective tool possible to deter the 

kinds of conduct described in your question. Although I cannot 

comment on any specific ongoing investigation, enforcing this provision is a high priority for our whistleblower program. 

Q.5. Large brokers and other financial intermediaries are taking 

advantage of individual mutual fund investors by charging them 

excessive fees for administrative and distribution activities. Rule 

12b-1 fees, account management charges, and revenue-sharing payments are extracting billions of dollars each year out of the pockets 

of the 96 million individual investors who rely on mutual funds for 

their savings goals. I understand that the SEC is gathering information about some or all of these mutual fund administrative and 

distribution fees. What is the status of this investigation and does 

the SEC plan on taking action to reduce these fees? 

A.5. The staff of the Commission currently is engaged in a series 

of risk-targeted examinations of investment companies, advisers, 

and intermediaries designed to gather information on current fee 

practices related to distribution and administrative services provided to funds. These examinations are ongoing, with more than a 

dozen major market participants already examined. The staff has 

reviewed the size and purpose of administrative, distribution, and 

revenue sharing payments at these firms, how they were negotiated, and how they are disclosed to investors as well as the funds’ 

directors, among many other issues. These exams already have resulted in certain of the targeted firms changing some of their practices to the benefit of investors. This particular series of examinations is expected to be completed in the near future, and the results 

of the exams will inform any policy changes that the Commission 

may undertake to address issues with distribution and administrative fee payments made by funds and advisers to intermediaries. 

Q.6. The mutual fund industry has evolved into a ‘‘pay to play’’ 

business model in which brokers and other intermediaries are comVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00163 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
160 

pensated handsomely to sell certain funds to their customers, despite the merits of investing in these funds. As an example, revenue-sharing payments from fund management companies are 

being paid to intermediaries based on the amount of fund shares 

sold to investors. These payments are not disclosed properly to mutual fund investors because the payments are not being made directly from fund assets. Do you believe this is a problem? If so, 

what steps can the SEC take to ensure that both funds and their 

intermediaries are specifically disclosing the amount of these payments and their potential impact on fund performance? 

A.6. While not disclosed in the same way as fees deducted directly 

from fund assets, the Commission requires that the existence of 

revenue sharing payments and the nature and extent of the conflicts they present be disclosed to investors. Intermediaries can 

make these disclosures through several channels, such as fund 

prospectuses and other disclosure documents. Nonetheless, I share 

the concern about the effectiveness of such disclosure and the impact of revenue sharing on fund recommendations by intermediaries. As previously noted, the staff of the Commission currently is engaged in an ongoing series of examinations with a focus 

on revenue sharing practices, including how they are negotiated 

and disclosed. I expect that the results of these examinations will 

be used to inform policy changes that the Commission might take 

to address any problems identified, including potential disclosure 

reforms. 

Q.7. A mutual fund investor receives a prospectus that describes 

the terms and conditions of investing in each fund regulated by the 

SEC. These terms and conditions—which include a number of protections and benefits for investors—are not being applied uniformly 

to mutual fund investors because more than 50 percent of fund 

shares are traded using omnibus accounts. An intermediary holding customer shares in an omnibus account does not provide underlying investor information to a fund for prospectus compliance purposes. Mutual funds are, therefore, not able to ensure that frequent 

trading rules, sales load discounts and other investor-friendly policies in the prospectus are available to investors who invest through 

these third-party accounts. Do you believe this is a problem? If so, 

what can the SEC do to ensure that investors who purchase mutual fund shares through brokers and other intermediaries are 

treated the same as investors who invest directly, with regard to 

prospectus terms and conditions? 

A.7. Funds have a number of ways to assure themselves of compliance with prospectus terms and conditions for shareholders investing through omnibus accounts. These include third party audits of 

intermediaries, certifications, questionnaires, on-site reviews, and 

independently developed compliance tools such as the Statement on 

Standards for Attestation Engagements (SSAE) No. 16 and the Financial Intermediary Controls and Compliance Assessments 

(FICCA). 

Even with these tools, compliance in an omnibus account environment can pose difficulties for funds and their directors. As noted 

above, the staff is engaged in a series of exams on distribution and 

administration fees which have included an exploration of issues 

161 

5Lucian A. Bebchuk and Robert J. Jackson, Jr., ‘‘Shining a Light on Corporate Political 

Spending’’, 101 GEO. L.J. 923, 925 (2013). 

related to compliance through omnibus accounts. The results of 

these exams should help better inform the Commission of any 

issues in omnibus account compliance, and I expect will be used to 

inform any policy changes that the Commission might take to address any problems identified. 

Q.8. Public companies are not currently required to report their political spending to shareholders. Academics who have studied this 

issue have shown that public companies spend significant amounts 

of shareholder money on politics, but that it is impossible to know 

how much money companies are spending, or who is benefiting 

from that spending. 5 I believe that public companies should not be 

able to spend huge sums of shareholder money on political communication without informing investors, and that it is appropriate for 

the SEC, whose core mission is to protect investors, to issue a rule 

on this matter. 

To date, a petition for SEC rulemaking on corporate political 

spending disclosure has generated more than one million comments—most of which support a disclosure rule. Despite that overwhelming public support, last December, the SEC removed from its 

regulatory agenda a proposed rule to require public companies to 

disclose political spending. 

In January, I joined Senator Menendez and other Senators in a 

letter asking you when the SEC planned to move forward with a 

disclosure rule for corporate political spending. Although I appreciated the response I received from you in February, you did not 

indicate when the SEC planned to address this issue. 

Please detail what the Commission has done this year to look 

into implementing a corporate political spending disclosure rule. 

Please also state when the Commission plans to initiate a rulemaking proceeding, and when it intends to complete that rulemaking proceeding. 

A.8. As I indicated in my February 28, 2014, letter to you, I recognize the public interest in the topic of mandated corporate political 

spending disclosure. And as I noted in my testimony last September, a number of companies—including a significant percentage 

of the companies in the S&P 100—are voluntarily providing public 

disclosures for political contributions. Shareholders also can, and 

do, submit shareholder proposals on the topic for inclusion in companies’ proxy materials, and a number of these proposals have been 

voted on by shareholders. With respect to a consideration of a mandatory disclosure rule, in light of the numerous rulemakings and 

other initiatives mandated for the SEC by the Dodd-Frank Wall 

Street Reform and Consumer Protection Act and the Jumpstart 

Our Business Startups Act, as well as the need to act on pressing 

issues such as money market fund reform and strengthening the 

technology infrastructure of the U.S. securities markets, the Commission and its staff have focused on implementing these rules during the last year and have not devoted resources to a consideration 

of a corporate political spending disclosure rule. As indicated by the 

Regulatory Flexibility Act agenda published in the fall of this year, 

I expect that completion of the remaining statutorily-mandated 

162 

rulemakings and projects will continue to be a primary focus of the 

Commission’s agenda for the upcoming year, along with 

rulemakings that seek to enhance our equity market structure and 

risk monitoring and regulatory safeguards for the asset management industry. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM MARY JO WHITE 

Q.1. As we examine Wall Street regulation and soundness, it is 

critical that we be alert to outside threats as well. Over the past 

year, there have been a number of extensive cyberattacks on American companies, including large financial institutions. Combatting 

these transnational crimes requires cooperation across Government 

and industry. 

As I have previously asked both Secretary Lew and Chair 

Yellen—Do you pledge to make cybersecurity a priority? 

A.1. I fully agree with your concerns about cyber risks. Cybersecurity has been, and will continue to be, a priority for the SEC and 

for me personally. Our efforts and initiatives related to cybersecurity span multiple divisions and offices, including the Divisions of 

Trading and Markets, Investment Management, Enforcement, the 

Office of Compliance Inspections and Examination (OCIE), the Office of Credit Ratings, and the Division of Corporation Finance. 

They include the following: 

• In 2014, OCIE’s examination priorities included a focus on 

technology, including cybersecurity preparedness. As part of 

this effort, OCIE issued a Risk Alert on April 15, 2014, to provide additional information concerning its cybersecurity initiative. The initiative was designed to assess cybersecurity preparedness in the securities industry and to obtain information 

about the industry’s recent experiences with certain types of 

cyberthreats. On January 13, 2015, OCIE announced that its 

2015 Examination Priorities again include examination of 

broker-dealers’ and investment advisers’ cybersecurity compliance and controls, and also announced that it would expand 

this initiative to cover transfer agents. 

• In the spring of 2014, the SEC hosted a cybersecurity roundtable to encourage a discussion of sharing of information and 

best practices in this area. Participants included representatives from industry, law enforcement, the legal community and 

the SEC. 

• At my direction, in the summer of 2014, the staff formed a Cybersecurity Working Group to facilitate communication within 

the SEC on issues relating to cybersecurity and keep abreast 

of cybersecurity issues and trends relevant to the securities industry. This group assists the SEC’s divisions and offices by 

providing a forum for sharing information and coordinating activities relating to cybersecurity. 

• The Division of Corporation Finance issued staff cybersecurity 

guidance in 2011 setting forth the staff’s views on how existing 

disclosure requirements under the Federal securities laws 

apply to cybersecurity risks and cyber incidents. Since issuing 

163 

the guidance, the staff has routinely evaluated public company 

disclosures, including cybersecurity disclosure, and issued comments to elicit better compliance with applicable disclosure requirements when it believes material information may not 

have been provided. 

• Staff participate in interagency groups focused on cybersecurity issues, including the Financial and Banking Information 

Infrastructure Committee (FBIIC) and the Interagency Cybersecurity Forum. 

Q.2. Do you believe FSOC can fulfill its statutory mandate to identify risks and respond to emerging threats to financial stability 

without making cybersecurity a priority? 

A.2. I agree that part of FSOC’s role in identifying threats to the 

financial stability of the United States includes highlighting, identifying and analyzing the risks to cybersecurity. Each of FSOC’s 

Annual Reports has identified cybersecurity as a focus for regulators and financial institutions. In its most recent Annual Report, 

published in June 2014, the Council provided a more detailed set 

of recommendations on cybersecurity issues. Among the recommendations in the 2014 Annual Report are: 

• The Council recommends that regulators and other agencies 

work with private sector financial institutions to share insights 

from across the Government and inform institutions, market 

utilities, and service providers of the risks associated with 

cyber incidents. 

• The Council recommends that regulators assess the extent to 

which regulated entities are employing principles such as the 

National Institute of Standards and Technology’s Cybersecurity Framework. 

• The Council recognizes the overarching contribution of the private sector to cybersecurity infrastructure. 

• The Council recommends the continued use of FBIIC to establish, update, and test crisis communication protocols, as well as 

the equivalents in the private sector. 

Q.3. As a member of FSOC, can you identify any deficiencies in the 

U.S.’s ability to prevent cyberattacks that require Congressional action? 

A.3. Cybersecurity and the need to specifically address the threats 

from cyberattacks must be high priorities for both Government 

agencies and the private sector. As described above, the SEC has 

prioritized cybersecurity issues within the bounds of our jurisdictional mandate. We also are involved in interagency efforts to coordinate and share information across the Government. Similarly, 

the FSOC has made recommendations in its annual reports regarding steps that regulators and financial market participants should 

consider to improve coordination and communication about the 

threats of cyber incidents. Although there may be areas where cybersecurity legislation would be helpful—for example, in areas such 

as information sharing and data breach notification—I am not 

aware of deficiencies specific to the SEC and its jurisdiction that 

might require Congressional action at this time. 

164 

Q.4. What steps has FSOC taken to address the prevention of future cyberattacks on financial institutions, such as the recent 

breach at JPMorgan Chase? 

A.4. Certain members of FSOC, including the SEC, participate in 

FBIIC, which has been coordinating information sharing related to 

cyber incidents, including the recent breach at JPMorgan Chase. 

As a member of FBIIC, the SEC has participated in those discussions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM MARY JO WHITE 

Q.1. Recently, the Treasury Department indicated that the Financial Stability Oversight Council was switching the focus of its asset 

management examination toward activities and products rather 

than individual entities. 

Will you confirm that individual asset management companies 

are no longer being considered for possible systemically important 

designation? 

A.1. Although the FSOC has not designated any investment advisor as systemically important, it has not stated that it will no 

longer consider asset management companies for designation. However, as your question notes, FSOC did state in the readout of the 

July 31, 2014, FSOC meeting available at http:// 

www.treasury.gov/initiatives/fsoc/council-meetings/Documents/ 

July%2031%202014.pdf that the FSOC has directed staff to undertake a more focused analysis of industrywide products and activities to assess potential systemic risks associated with the asset 

management industry. And on December 18, 2014, FSOC released 

a notice seeking public comment regarding potential risks to U.S. 

financial stability from asset management products and activities. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM TIMOTHY G. MASSAD 

Q.1. The issue of FSOC accountability and transparency is one that 

I have raised numerous times. Given the magnitude of the regulatory burden and other costs imposed by a SIFI designation, it is 

imperative that the designation process be as transparent and objective as possible. 

Do you object to the public disclosure of your individual votes, including an explanation of why you support or oppose such designation? 

Will you commit to pushing for greater accountability and transparency reforms for FSOC? Specifically, will you commit to push 

the FSOC to allow more interaction with companies involved in the 

designation process, greater public disclosure of what occurs in 

FSOC principal and deputy meetings, publish for notice and comment any OFR report used for evaluating industries and companies, and publish for notice and comment data analysis used to determine SIFI designations? If you do not agree with these proposed 

reforms, what transparency and accountability reforms would you 

be willing to support? 

165 

A.1. The Council releases the minutes of its meetings, and I think 

that process is working well. In practice, the votes of the individual 

Council members are disclosed, and I have no objection to the disclosure. These are collective decisions of the Council, however, just 

as the decisions of the Federal Reserve Board, FDIC, SEC, and 

CFTC are decisions of those collective bodies. 

Regarding your second question, in the Dodd-Frank Act, the 

Council was required to assess potential risks to financial stability. 

The Council also was given authority to designate nonbank financial companies for supervision by the Federal Reserve if the material financial distress or activities of the company could pose risks 

to U.S. financial stability. These responsibilities involve information and deliberations that can be very market sensitive. Due to 

the sensitive nature of its mission, the Council must carefully balance confidentiality with transparency. While I understand that 

some may see it differently, I believe that the Council generally has 

done a good job of reaching the right balance. In practice, there 

have been no limits on the amount of materials companies have 

been able to submit, and it is carefully reviewed and considered. 

It’s also fair to say that we’re open to suggestions on how the 

Council can do better in any of its activities, and I pledge to be 

vigilant in this regard. Staff and principals of the agencies have an 

ongoing dialogue about possible improvements to the process, including whether to make official any the practices the Council has 

been following that provide greater access to the process. 

Q.2. In the July FSOC meeting, the Council directed staff to undertake a more focused analysis of industrywide products and activities to assess potential risks associated with the asset management 

industry. 

Does the decision to focus on ‘‘products and activities’’ mean that 

the FSOC is no longer pursuing designations of asset management 

firms? 

Did the FSOC vote on whether to advance the two asset management companies to Stage 3? If so, why was this not reported? If 

not, why was such a vote not taken in order to provide clarity to 

the two entities as well as the industry? 

A.2. The Council continues to study the asset management industry, and I look forward to being involved in that process. In addition, the SEC has announced actions concerning asset managers 

that may have an impact on the issues. At this point, I don’t think 

any of us can say where a fuller examination of the issues will take 

us. 

I cannot comment—one way or the other—on any nonpublic matters that may or may not be pending before the Council. As stated 

above, I look forward to being actively involved as the Council 

moves forward on asset management issues. Determining the extent to which an individual company potentially may contribute to 

systemic risk is a difficult issue, and clear answers are seldom 

available. A more fulsome examination of issues in the asset management industry will help our analysis, but at this point, I cannot 

say where that analysis will lead us. 

Q.3. CFTC–SEC Coordination: Chairman Massad, I have repeatedly stated that the SEC and CFTC need to move in a more coordiVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00169 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
166 

nated fashion with respect to Dodd-Frank implementation and 

cross-border initiatives for derivatives. In a hearing in February, I 

asked Chair White and then-Acting Chairman Mark Wetjen about 

their efforts to ensure coordination on the remaining Title VII 

rulemakings, and they responded that the two agencies are continually in discussions and that coordination is a priority for both 

agencies. What specific progress has your agency made in this 

venue since February, and what key obstacles still exist? 

A.3. CFTC–SEC Coordination on Margin for Uncleared Swaps: The 

SEC and CFTC have a long history of interagency coordination in 

a wide variety of ways in terms of surveillance, enforcement, development of complementary rules, trading in security-related products, and dual-registrant issues. With the passage of the DoddFrank Act, interagency cooperation has only grown. The chairs and 

staff of the CFTC and SEC talk regularly in order to coordinate efforts. We are also working with our international counterparts to 

harmonize the rules across borders as much as possible, consistent 

with our statutory responsibilities. 

Regarding the remaining Title VII rulemakings, CFTC staff has 

been in regular contact with the SEC, sharing information and providing detailed input. The SEC also provides input to the CFTC. 

For example, in developing margin requirements for uncleared 

swap transactions for SDs and MSPs, Commission staff has continued to consult with staff of both the SEC and banking regulators. 

Section 4s(e) of the Dodd-Frank Act requires the CFTC to adopt 

rules imposing initial and variation margin on uncleared swap 

transactions entered into by SDs and MSPs that are not subject to 

regulation by a Prudential Regulator (i.e., the Federal Reserve 

Board (FRB), the Office of the Comptroller of the Currency (OCC), 

the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration, and the Federal Housing Finance Agency). Section 4s(e) further provides that the CFTC, Securities and Exchange 

Commission (SEC), and Prudential Regulators shall, to the maximum extent practicable, adopt comparable margin regulations. 

The CFTC initially proposed margin requirements for uncleared 

swap transactions in April 2011 (76 FR 23732 (Apr. 28, 2011)). 

Subsequent to the initial proposal, the Basel Committee on Banking Supervision and the International Organization of Securities 

Commissions, in consultation with the Committee on Payment and 

Settlement Systems and the Committee on Global Financial Systems, formed a working group to develop international standards 

for margin requirements for uncleared swaps. Representatives of 

more than 20 regulatory authorities participated, including from 

the United States, the CFTC, the FDIC, the FRB, the OCC, the 

Federal Reserve Bank of New York, and the SEC. 

In July 2012, the working group published a proposal for public 

comment. In addition, the group conducted a study to assess the 

potential liquidity and other quantitative impacts associated with 

margin requirements. A final report was issued in September 2013 

outlining principles for margin rules for uncleared derivative transactions. 

The CFTC considered the comments received on its initial proposal and the report issued by the international working group and 

decided to repropose margin rules for uncleared swap transactions. 

167 

The reproposal was approved by the CFTC on September 23, 2014 

(‘‘Margin Requirements for Uncleared Swaps for Swap Dealers and 

Major Swap Participants’’, 79 FR 59898 (Oct. 3, 2014)). In developing the reproposal, CFTC staff worked closely with the staff of 

the Prudential Regulators, and consulted with staff of the SEC. 

The comment period for the reproposal closed on December 2, 

2014, and staff is currently considering the comments in developing 

the final margin rules. Staff also will consult with staff of the Prudential Regulators and SEC in developing its final regulations. 

Q.4. Cross-Border: In November 2013, CFTC staff issued an advisory indicating that in certain instances U.S. rules would apply to 

a transaction between a non-U.S. swap dealer and a non-U.S. person, without the possibility of substituted compliance. As I indicated in my November 15th letter, this surprised the market, creating uncertainty and the potential for market disruptions. The 

CFTC has since solicited comments on the advisory and extended 

its effective date to December 31st of this year. Given that the effective date is rapidly approaching, is the CFTC considering extending the effective date given the continued issues implementation would cause, the concerns raised by commenters, and the need 

to provide market participants sufficient time to come into compliance with however the CFTC resolves those issues? 

A.4. As you noted, the Commission invited public comment on the 

staff advisory on cross-border, issued on November 14, 2013, and 

the staff subsequently extended time-limited no-action relief from 

the relevant provisions of the CEA and Commission rules. The relief was intended to be responsive to industry’s concerns regarding 

implementation and thereby ensure that market practices would 

not be unnecessarily disrupted. The staff has extended this relief 

through September 30, 2015. The staff has reviewed the public 

comments on the advisory and is developing recommendations. I 

can assure you that the Commission will carefully consider these 

public comments and staff recommendations. In doing so, the Commission will also consider extending appropriate relief in order to 

ensure that market participants have sufficient time to come into 

compliance with applicable provisions of the CEA and Commission 

rules. 

Q.5. Swap Dealer De Minimis: The swap dealer de minimis level is set to automatically drop to $3 billion unless the CFTC takes action. Will you commit to publish for public notice and comment any 

proposal to drop the de minimis level? As you know, many parties 

will be affected by any drop in the de minimis level, and the public 

should be afforded an opportunity to comment on any such 

changes. 

A.5. Commodity Exchange Act section 1a(49)(D) directs the Commission to exempt from designation as a swap dealer an entity that 

engages in a de minimis quantity of swap dealing. CFTC regulation 

1.3(ggg)(4) sets the de minimis level at $3 billion subject to a 

phase-in period during which the level is $8 billion until: (1) five 

years after a swap data repository first receives data pursuant to 

the Commission’s regulations at which time the level would automatically go to $3 billion, or (2) another date set by the Commission based on a study to be performed by CFTC staff. I think it will 

168 

be important to study this rule, incorporating public input and current market data into the analysis. Any changes to current rules 

would need to be data-driven and carefully considered. As of December 5, 2014, there were 105 swap dealers provisionally registered with the Commission of which approximately 60 belong to 

one of 15 corporate families that have registered from 2 to 10 affiliates as swap dealers. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM TIMOTHY G. MASSAD 

Q.1. Volcker Rule: Will you commit to working to ensure that each 

of your agencies has a complete picture of an entire firm’s trading 

and compliance with the Volcker Rule, which can best be accomplished by having all data in one place so that all regulators have 

access to it? 

A.1. Pursuant to the jurisdictional provisions of sections 2 and 619 

of the Dodd-Frank Act, banking entities covered by the Volcker 

Rule are required to report metrics data for certain of their trading 

desks to specific regulatory agencies depending on the activities of 

those desks and the legal entities in which those desks book trades. 

The CFTC is working with the other four agencies to coordinate 

oversight of the banking entities’ trading activities and to analyze 

and improve the metrics data. We believe that the agencies can 

work together to obtain a coherent, informative picture of the trading activities of each reporting firm. 

Q.2. Are you committed to using disclosure to help advance compliance with and public trust from the Volcker Rule? 

A.2. The CFTC remains committed to utilizing our oversight of certain of the banking entities’ trading operations to advance compliance with, and public trust from, the Volcker Rule. The metrics reporting required by the Volcker Rule is a critical piece of that oversight. 

Q.3. Volcker Rule: Will you commit to scrutinizing, for the purposes 

of the Volcker Rule, any reorganizations of trading desks as posing 

risks of evasion and will you commit to working jointly to clarify 

any guidance on the definition of trading desk for market participants? 

A.3. The CFTC is aware that the flexibility afforded in the Volcker 

Rule’s definition of ‘‘trading desk’’ could be misused by some banking entities in an attempt to evade detection of impermissible trading activities. We are actively monitoring the trading desk reorganizations in light of the reported metrics data and will coordinate 

with the other four agencies on any possible related guidance. 

Q.4. Volcker Rule: I would urge the Board to clarify that a banking 

entity’s requirement to make ‘‘reasonable efforts’’ to exercise its 

contractual rights to terminate its investment in an illiquid fund 

could be satisfied, for example, by a certification by the banking entity (a) that the banking entity’s exit from the fund would be extraordinary from the perspective of how most investors enter or 

exit the fund (i.e., the investment contract does not routinely or ordinarily contemplate entry or exit, and/or such other indicia as are 

169 

necessary to help distinguish between illiquid private equity funds 

and other funds, like hedge funds, that ordinarily and routinely 

permit investor redemptions), (b) that inquiring with third-party 

fund managers and limited partners regarding termination would 

result in a significant detriment to the business of the banking entity and (c) that the banking entity believes that the divestment 

would result in losses, extraordinary costs, or otherwise raise unreasonable demands from the third-party manager relating to divestment (or the de facto equivalent thereto). 

Such a certification from the banking entity, along with the language of the relevant fund agreements and such other requirements as the Board determines appropriate, would obviate the 

need to seek consent from third-party fund managers. Have you 

considered clarifying this in a FAQ? 

A.4. The CFTC supports the Board’s efforts to determine the veracity of claims of illiquidity for various covered funds and will coordinate with the other agencies on the appropriate method through 

which to clarify the issue, should the agencies choose to clarify. 

Q.5. Deguaranteeing of Wall Street Banks: We’ve recently seen reports that the largest Wall Street banks are nominally 

‘‘deguaranteeing’’ their foreign affiliates in order to avoid coverage 

under U.S. regulatory rules, especially those related to derivatives. 

This ‘‘deguaranteeing’’ appears to be based on a fiction that U.S. 

banks do not actually guarantee the trading conducted by foreign 

subsidiaries, and hence would not be exposed to any failure by the 

foreign subsidiary. Can you comment on that, and specifically, 

whether you believe that U.S. bank or bank holding company could 

be exposed to losses from—or otherwise incur liability related to— 

a foreign affiliate’s trading even when no explicit guarantee to 

third parties exists. Please specifically address whether an arrangement, commonly known as a ‘‘keepwell,’’ provided by the U.S. 

parent or affiliate to the foreign affiliate potentially could create 

such exposure—and specifically, liability—for the U.S. entity. 

A.5. The CFTC is aware of ‘‘deguaranteeing’’ activities by five registered swap dealers that have U.S. based parents. We are concerned about these activities both from the perspective of whether 

they are compliant with the CEA and CFTC regulations and the 

effect they may have on risk transfer back to the U.S. We have 

gathered detailed information from all five registrants on the how, 

what, why and when of such activities and are now assessing this 

information and consulting with prudential regulators. As stated in 

the Commission’s cross border guidance, the Commission believes 

that ‘‘it is the substance, rather than the form, of the [financial 

support] arrangement that determines whether the arrangement 

should be considered a guarantee for purposes of the application of 

section 2(i) [of the CEA].’’ 78 FR 45320 (2013). In a footnote to the 

quoted text, the Commission noted that ‘‘keepwells’’ would, in essence, be guarantees for purposes of section 2(i). 

Q.6. Please comment on whether the size and importance to the 

U.S. parent or affiliate of the foreign affiliate’s activities could itself 

create an implied guarantee such that the U.S. firm would have 

major reputational or systemic risk reasons to prevent the foreign 

affiliate from incurring significant losses or even failing—similar to 

170 

rescues that occurred during the financial crisis of entities that 

were supposed to be bankruptcy remote. 

A.6. The size and importance of an affiliate’s activities could influence a U.S. parent’s assessment of how much financial support to 

provide to that affiliate to prevent its failure. Reputational concerns could lead a parent to provide financial support to an affiliate. This is a concern that the Commission acknowledged in its 

cross border guidance when declining to identify only certain types 

of guarantees as relevant for registration purposes. 78 FR 45320. 

We note that if there is no agreement under which the parent is 

obligated to another party to provide financial support, then providing such support is not a legal requirement. Another possible 

way of addressing this issue may be through effective resolution 

plans that provide for the winding up of such an affiliate instead 

of ‘‘rescuing’’ the affiliate. 

Q.7. Many of these foreign bank subsidiaries are so-called ‘‘Edge 

Act’’ corporations, which I understand are consolidated with the insured depository subsidiary for many purposes. 

Please comment on whether there is any chance that losses in 

these Edge Act corporations, particularly losses in their derivatives 

operations, could impact the deposit insurance fund. 

A.7. The CFTC does not oversee the deposit insurance fund and 

therefore does not have the information necessary to answer this 

question. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM TIMOTHY G. MASSAD 

Q.1. Cybersecurity: As I have previously asked both Secretary Lew 

and Chair Yellen—Do you pledge to make cybersecurity a priority? 

A.1. Yes, working to improve the cyber and information security 

and the cyber-related resilience, preparedness, and mitigation capabilities of the financial sector, and of U.S. futures and swap markets and clearing organizations in particular, is and will continue 

to be a priority. 

Q.2. Do you believe FSOC can fulfill its statutory mandate to identify risks and respond to emerging threats to financial stability 

without making cybersecurity a priority? 

A.2. Cyber and information security must be a high priority for the 

financial sector. Recognizing that automated systems play a central 

and critical role in the modern, predominantly electronic financial 

marketplace, cybersecurity is a statutory and regulatory priority 

for the CFTC: the Commodity Exchange Act and CFTC regulations 

require the infrastructures that we supervise, namely designated 

contract markets, swaps execution facilities, clearing organizations, 

and swap data repositories, to have programs of risk analysis and 

oversight that address cyber and information security. In addition, 

I agree it should be a priority generally for U.S. financial regulators: the Financial and Banking Information Infrastructure Committee or FBIIC—which is chaired by the Department of the Treasury and includes the CFTC—aids U.S. financial regulators in their 

efforts to strengthen financial sector resilience, preparedness, and 

mitigation capabilities with respect to cybersecurity, business conVerDate Nov 24 2008 12:41 Jan 15, 2016 Jkt 046629 PO 00000 Frm 00174 Fmt 6602 Sfmt 6602 L:\HEARINGS 2014\09-09 WALL STREET REFORM - ASSESSING AND ENHANCING THE 
171 

tinuity, and disaster recovery. The FBIIC also has an effective 

partnership concerning cybersecurity and automated system resiliency with its private sector counterpart, the Financial Services 

Sector Coordinating Council, which includes major markets, clearing organizations, and firms across the U.S. financial sector. 

Q.3. As a member of FSOC, can you identify any deficiencies in the 

U.S.’s ability to prevent cyberattacks that require Congressional action? 

A.3. One key way to increase financial sector resiliency with respect to cybersecurity is ensuring timely information sharing concerning cyberthreats, to the greatest extent practicable. Before undertaking a legislative initiative, we should endeavor to work within existing authorities to examine ways that financial regulators, 

the Intelligence Community, and law enforcement agencies might 

facilitate timely cyberthreat information-sharing. In that connection, the Commission already has authority under the CEA to 

share information with Federal and State agencies, as well as foreign regulators, subject to assurances of confidentiality. 

Q.4. What steps has FSOC taken to address the prevention of future cyberattacks on financial institutions, such as the recent 

breach at JPMorgan Chase? 

A.4. U.S. financial regulators work closely together through the 

FBIIC to improve financial sector resiliency and preparedness with 

respect to cyberattacks. Both the FBIIC and its private sector counterpart, the FSSCC, have response protocols in place for use when 

cyberattacks occur. FBIIC and FSSCC are currently engaged in updating these protocols in light of recent experience in this area, and 

they are working to match up the protocols of the public and private sectors even more closely, to help facilitate timely coordination 

concerning cyber incidents. FBIIC and FSSCC are conducting exercises, with participation of financial regulators, the private sector, 

and law enforcement and other parts of the Government with specialized cyber expertise, to enhance our joint understanding and 

planning processes. In addition, FBIIC, FSSCC, and the Financial 

Sector Information Sharing and Analysis Center are working together, and consulting with the Intelligence Community and law 

enforcement, to identify measures and best practices for strengthening the resiliency, preparedness, and mitigation capabilities of 

the financial sector with respect to cyberthreats. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN 

FROM TIMOTHY G. MASSAD 

Q.1. Position Limits: Mr. Chairman, in a recent media appearance, 

you said that the CFTC intends to address end-user concerns with 

position limits. I have heard concerns about the aggregation of positions even where a person does not control day-to-day trading. 

Does the CFTC intend to address these types of concerns in its 

work on end-user issues? 

A.1. CFTC is now considering public comments received on a notice 

of proposed rulemaking (NPRM) that would modify the aggregation 

provisions of the position limit regime under part 150 of CFTC’s 

regulations. We are soliciting extensive input on the position limits 

172 

1Transcript available at http://www.cftc.gov/PressRoom/Events/opaeventlcftcstaff061914. 

rule—78 FR 68946 (Nov. 15, 2013), comment period extended 79 

FR 2394 (Jan. 14, 2014), comment period reopened 79 FR 30762 

(May 29, 2014), June 19, 2014, staff roundtable, 1 comment period 

extended 79 FR 37973 (July 3, 2014), comment period reopened 79 

FR 71973 (Dec. 4, 2014). In light of the language in section 4a of 

the Commodity Exchange Act (CEA), its legislative history, subsequent regulatory developments, and CFTC’s historical practices in 

this regard, CFTC noted in the NPRM that it believes CEA section 

4a requires aggregation on the basis of either ownership or control 

of an entity. The NPRM would add a new exemption, by way of notice filing, for a person seeking disaggregation relief, under specified circumstances, for positions held or controlled by a separately 

organized entity (owned entity), for ownership or equity interests 

of not more than 50 percent in the owned entity. The proposal also 

would add a new exemption, by way of application, for a person 

seeking disaggregation relief, under specified circumstances, for positions held or controlled by an owned entity, for ownership or equity interests of greater than 50 percent in the owned entity. 

Q.2. Swap Dealer De Minimis: Mr. Chairman, as you know the swap dealer de minimis level is set to automatically drop to $3 billion unless the CFTC takes action. Will any action taken by the 

CFTC to address the swap dealer de minimis issue be open to public notice and comment? 

A.2. Commodity Exchange Act section 1a(49)(D) directs the Commission to exempt from designation as a swap dealer an entity that 

engages in a de minimis quantity of swap dealing. CFTC regulation 

1.3(ggg)(4) sets the de minimis level at $3 billion subject to a 

phase-in period during which the level is $8 billion until: (1) five 

years after a swap data repository first receives data pursuant to 

the Commission’s regulations at which time the level would automatically go to $3 billion, or (2) another date set by the Commission based on a study to be performed by CFTC staff. I think it will 

be important to study this rule, incorporating public input and current market data into the analysis. Any changes to current rules 

would need to be data-driven and carefully considered. As of December 5, 2014, there were 105 swap dealers provisionally registered with the Commission of which approximately 60 belong to 

1 of 15 corporate families that have registered from two to ten affiliates as swap dealers. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM TIMOTHY G. MASSAD 

Q.1. FSOC: Recently, the Treasury Department indicated that the 

Financial Stability Oversight Council was switching the focus of its 

asset management examination toward activities and products 

rather than individual entities. Will you confirm that individual 

asset management companies are no longer being considered for 

possible systemically important designation? 

A.1. As you know, the OFR released a report on asset management 

issues a year ago, and the Council held an asset management conference last spring. This topic is an important one. The Council 

173 

continues to study issues that affect the asset management industry and the financial markets. I expect the Council will provide industry and the public ample opportunity to comment further later 

this year as it further explores these issues, and I look forward to 

being involved in that process. At this point, I do not know where 

further discussion of the issues will take us, but I hope to gain a 

better understanding of the risks surrounding this industry.